Although charitable giving can be beneficial whether you have a large or small estate, there can be significant tax savings for larger estates that would otherwise be subject to estate tax. In an effort to encourage gifts to charities, congress has established laws that reduce one’s taxes when gifts are made to a qualified charity. Gifts made to a charity qualify for an income tax charitable deduction. In addition to reducing your income tax liability through charitable giving, you can also reduce estate taxes.
Estate Taxes
Estate taxes apply to individual estates that are over $5,250,000 in the year 2013. Amounts in excess of the preceding limit can be subject to estate taxes of 40% of the total estate which includes retirement accounts, life insurance policies, and all other property.
Because of high estate tax rates, many individuals with taxable estates consider gifts to charities. Significantly, income taxes, capital gains taxes, and estate taxes can all be minimized through charitable giving. For those individuals that want to receive significant tax savings through charitable giving and continue to retain a lifetime income interest, a charitable remainder trust is a powerful estate tool.
Charitable Remainder Trust
A charitable remainder trust is a special kind of trust that has two beneficiaries. The donor of the assets receives an income interest from the contributed assets. This income interest can be a set percentage of the assets. A qualified charity receives the remainder interest at the end of the income interest. This is what is left of the trust assets at the end of the donor’s lifetime or some other set period of time.
Because the charitable remainder trust is tax exempt, appreciated assets can be contributed to the trust and then sold by the trustee without incurring a capital gains tax. This means that all of the property in the charitable remainder trust is available to pay an income interest to the donor during his or her lifetime.
Anyone that has charitable desires, appreciated assets and an estate that will be subject to estate tax should strongly consider a charitable remainder trust. In donating the appreciated property to the charitable remainder trust, the donor receives an income tax deduction for the year the donation is made. Additionally, if the donation is an appreciated asset, the asset can be sold by the trustee of the charitable remainder trust without incurring a capital gains tax. The money in the charitable remainder trust can then be invested in income-producing assets with the income being paid to the donor. Lastly, upon the donor’s death, the assets in the charitable remainder trust will not be included in the donor’s estate for estate tax purposes.
Jeffery J. McKenna is a local attorney serving clients in Nevada, Arizona and Utah. He is a shareholder at the law firm of Barney McKenna & Olmstead, PC, with offices in Mesquite and St. George. If you have questions you would like addressed in these articles, you can contact him at (435) 628-1711 or jmckenna@barney-mckenna.com.