Timely Estate Planning Strategies: Part Three
Nov 01, 2021
Charitable Gift Planning Opportunities
In the third installment to our Timely Estate Planning Strategies Series, we outline how traditional income and estate planning may incorporate an individual’s desire to fulfill philanthropic goals. Giving can be done both while living (receiving current income tax deductions) and through one’s will at the time of death (garnering estate tax deductions). However, given the current ‘perfect storm’ we outlined in the first blog of the series, there is no better time to address your giving strategies.
The estate tax exclusion is currently $ 11.7 million per individual which means persons with an estate less than this will NOT benefit from charitable bequests in their wills. The emphasis for these individuals should be obtaining current income tax deductions while fulfilling their charitable intent. Individuals with taxable estates greater than $ 11.7 million can receive a double tax benefit by making lifetime charitable gifts. The donation is deductible for income tax purposes when the gift is made; the property along with any future appreciation is removed from the taxable estate.
Several opportunities to benefit from current charitable gifts are available. It is important to note, total itemized deductions including charitable deductions must exceed the standard deduction to receive a current income tax benefit. Some of your options include:
- Bunching contributions into one year to make sure you exceed the standard deduction.
- Contributing to Donor-Advised Funds (DAFs). A large contribution to the fund in year one provides the income tax deduction. After which, amounts can be paid from the fund to charities over a designated number of future years.
- Donating to Charitable Remainder Trusts. The remainder interest in a given property is donated to charity, obtaining a current income tax deduction, and retaining an annuity (income) interest in the property during the donor’s lifetime. Or the reverse of this,
- Giving to Charitable Lead Trusts. This provides a charity an annual distribution while the remainder interest passes to a Trust beneficiary in the future.
- Making Qualified Charitable Distributions (QCDs). Taxpayers over the age of 70 1/2 contribute directly from their IRA to a specified charity. The distribution is not taxable and no charitable deduction is taken. Structured properly, this can convert required minimum distributions into nontaxable withdrawals from the retirement account.
Your WVC advisor would love to meet with you and your estate planning team to see how charitable transactions could help you meet your philanthropic goals in a tax-efficient manner.
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Categories: Estate Planning
Timely Estate Planning Strategies: Part Two
Oct 21, 2021
Low-Interest Rate Opportunities
An important component of personal financial and estate planning often includes transferring assets and future growth of those assets to younger generations or to charitable organizations while reducing current income taxes and future potential estate taxes. Once properly made, appreciation of such transfers and any future income generated thereon can be free of transfer taxes.
The current low-interest-rate environment provides an excellent opportunity to shift wealth to future generations. While we cannot predict the future, we can anticipate the writing on the wall. As noted in our previous post, Estate Planning Strategies Before Year-End: Part One, recent and proposed massive spending by the federal government will likely put pressure on rates. This coupled with various proposals to modify tax laws relating to gift and estate taxation, individuals should plan on implementing any such plans sooner rather than later.
Planning techniques benefitting from lower rates include the following:
1. Charitable Lead Annuity Trust (CLAT). This trust can be set up to provide annual distributions to charity for a specified number of years. Any growth in the value of the assets above the applicable federal interest rate passes to the non-charitable remainder beneficiaries (i.e. the taxpayer’s children) free of estate or gift tax at the termination of the trust.
2. Intra-Family Loans. It’s a good time to loan money to family members or trusts for members’ benefit. Interest can be charged at very low rates; to the extent the borrowers are able to leverage the funds to generate a return greater than the stated rate, wealth will be transferred without any transfer tax.
3. “Defective” Grantor Trusts. When a taxpayer (grantor) transfers assets to fund this trust, certain rights might be retained causing the trust to be “defective”. This may include the right to substitute other assets of equal value in future years. As a result, the annual income of the trust remains taxable to the grantor even though the income inures to the benefit of the beneficiaries. The effect of this is to reduce the grantor’s taxable estate by the amount of the income taxes paid annually. These trusts are often used to sell assets expected to grow in the future to the trust in exchange for a low-interest rate promissory note. The grantor does not recognize gain from the sale, and no income is recognized on the interest payments. The appreciation in the assets will be realized by the next generation without any transfer tax.
4. Charitable Remainder Trust. If a current income tax deduction is more important than saving transfer taxes, this trust may be implemented. The trust will make annual payments to its beneficiaries for a period of time. At the termination of the trust, the principal balance goes to the specified charity. This “remainder interest” is calculated at a present value to determine the current charitable contribution income tax deduction available to the donor. Lower interest rates translate to a larger remainder interest, and thus larger income tax deduction.
5. Grantor Retained Annuity Trust (GRAT). A grantor transfers assets to the trust and retains the right to receive specified payments from the trust for a specified number of years. At the end of the trust term, the accumulated principal of the trust passes to the specified donees, often the grantor’s children.
The annual payments can be structured so that the present value of the annual payments will equal the value of the property transferred to the trust. The trust is said to be “zeroed-out” because the donees’ remainder interest has no value for gift tax purposes, thus no gift tax exemption is used and no gift tax is due. To the extent, the increase in the value of the assets exceeds the annuity stream paid to the grantor, the assets remaining in the trust pass to the beneficiaries becoming a tax-free gift.
These are just some of the planning opportunities your William Vaughan advisor can discuss with you. We encourage you to take this important step now to avoid potentially detrimental changes which have been proposed in Washington. Early adoption and implementation have perhaps never been more important.
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wvco.com | 419.891.1040
Categories: Estate Planning, Tax Planning