Charitable Gifting Can Help Save Estate Tax & Capital Gains

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Paul Sundin, CPA

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Everyone knows that a donation to a charity is an income tax deduction, but did you know that there are ways to save estate taxes and even capital gains taxes? Charitable gifts can be made for any number of reasons.

Some of us make donations to help a cause; some realize that we can benefit our community and our tax bills. There is a customizable way for any individual to give to charity while optimizing their tax benefits. As an added benefit, these entities can be fully creditor protected.

Charitable Lead Trusts

For individuals who have already committed to make regular charitable contributions, a Charitable Lead Trust may be ideal—generally speaking, these work by placing an asset (cash, real estate, etc.) into a Trust and designating a certain amount to be distributed to charity each year for a certain number of years. These can result in one large up-front income tax deduction and shifting an asset out of your estate to avoid estate taxes. At the end of the number of years you have chosen, the asset will be passed to your children (or held in trust for their benefit), with no tax on the appreciation.

For example, you could place $100,000 worth of assets into a Charitable Lead Trust with the provision that 5% will be paid to your charities each year for 20 years. The trust will then make your charitable gifting of $5,000 per year on your behalf. At the end of the 20 years, the funds will pass to your children.

There are three main benefits to Charitable Lead Trusts:

  1. You have the choice of taking one large immediate income tax deduction or taking smaller annual deductions for the entire 20 years.
  2. Your estate tax liability may be greatly reduced. Because you have gifted the asset to your children now (even though they have to wait 20 years to receive it), it will not be part of your taxable estate. In addition, all future appreciation will be attributed to your children and not your taxable estate.
  3. All assets that are placed in the trust are protected from potential creditors.

These terms and examples are flexible and can be customized for your needs. For example, Charitable Trusts can be funded with almost any type of asset, not just cash. Any amount may be placed in the trust, large or small. The percentage paid to charity can be any amount you designate. In addition, if your children may not be ready to receive the assets at the end of 20 years, they can be distributed to a Dynasty Trust, creating an annuity for your children and/or grandchildren.

Charitable Remainder Trusts

Many of our clients have appreciated assets they do not want to sell because they do not want to pay any capital gains taxes (usually securities or real estate). For these individuals, a Charitable Remainder Trust may be ideal. These generally work by placing the asset into a Trust for a certain number of years. During those years, you receive a certain amount per year (an annuity). When the trust ends, the charity gets the asset.

There are four main benefits to Charitable Remainder Trusts:

  1. You take one large immediate income tax deduction.
  2. There will be no capital gains tax due on an appreciated asset.
  3. Your estate tax liability may be greatly reduced because the asset passes to charity.
  4. All assets placed in the trust are protected from potential creditors.

These Trusts are also customized to give each client the desired result. The annuity paid to you is often must greater than five percent. If you choose, the amount paid may then be used to purchase life insurance, resulting in your beneficiaries getting the same amount they would have otherwise received tax-free.

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Estate CPA

Gilbert, AZ