Establish a legacy and gain tax advantages through philanthropy.
The process of estate planning naturally lends itself to thinking about values, children, grandchildren and what kind of legacy you will leave behind. Some people think that their children will inherit more than they need, and that opens the question of philanthropy. Investment News’ article, “7 tips on achieving zero-tax estate planning through charitable giving,” examines how charitable giving can be used to create a legacy and minimize estate taxes at the same time. Here are some basics about charitable giving and how it affects taxes. An estate planning attorney will be able to help with the details.
- Amounts for charity aren’t included in your taxable estate. The amounts given or left to your spouse are not subject to transfer taxes, and the amounts donated to charity are tax-deductible from your taxable income up to 50% of adjusted gross income when you give to qualified charities.
- Lifetime charitable donations. Make as many donations as possible every year to get the maximum income tax savings. This reduces your current income tax bill and, if you plan to leave the remainder of your estate to charity, you can give more to charity with the extra income saved in taxes.
- Allow your beneficiaries to disclaim in favor of a charity. Put a clause in your estate plan documents that lets each child separately disclaim all or a part of his or her inheritance in favor of charity. There’s no estate tax on the disclaimed portion that goes to charity.
- A charitable lead trust. During your lifetime, the charitable lead trust must give a certain amount to charity annually for the chosen period of time, with the remainder going to your children. If you make it a maximum zeroed-out charitable lead trust, there’s no estate or gift taxes on the remainder the children receive.
- The charitable remainder trust. You can place very low-tax-basis assets into a charitable remainder trust and sell them to defer the tax to give you more diversification and additional income. Set up the charitable remainder trust for the maximum allowed income or no income. Charities in the end must get a minimum of the present value of about 10% of the charitable remainder trust value. You get an upfront charitable income tax deduction in the year the charitable remainder trust is created.
- Annual charitable deduction donations and bequests. This can be set up in several ways, like a private family foundation, a donor-advised fund, or a charity.
- Q-TIP—Qualified Terminable Interest Property Trust. Assets are left to the spouse in a trust. He or she gets the income for life, with children receiving the remainder. Note that the spouse may not change the remainder beneficiaries. The remainder beneficiaries don’t have to be your children; it can be a charity of your choice.
Speak with an estate attorney who has experience in charitable giving to ensure that you maximize the benefits to your estate while building a legacy.
Reference: Investment News (October 30, 2016) “7 tips on achieving zero-tax estate planning through charitable giving”