Estate Tax Charitable Deduction

This is the final blog in the series on reducing gift and estate taxes. If your estate is larger than the estate tax exemption limit another good strategy is to give a portion to your favorite charity.

Beside doing something good for others you also do something good for you. The strategy is to do a split interest transfer where both the charity and you benefit.

Seven requirements must be met for a gift to be tax deductible:

1. Contribution must be made to a qualified charity
2. Property must be the subject of the gift
3. Contribution must be in excess of any value received in return by the donor
4. Must be paid within the tax year
5. The value, if over $5,000, must be attained through a qualified appraisal. An appraisal is not required for publicly held securities.
6. Contribution effective at death is deductible and transfer must be made by the decedent.
7. A split interest must be in the form of a trust.

This split interest trust comes in 2 forms. The first form is the Charitable Remainder Trust where you derive an annual benefit and the charity gets what is left. Secondly, is the Charitiable Lead Trust where the charity derives an annual benefit and your beneficiary get what is left.

A Charitable Remainder Trust is an irrevocable trust designed to provide a fixed amount annually to a non-charitable beneficiary, usually you the donor, with the remainder left to the charity. The annual amount must be somewhere between 5 % & 50% of the initial fair market value. Future additions to the trust are not allowed.

This works really well when a person has assets and needs more money to live. Instead of selling the asset and paying capital gains tax reducing your income, you donate the asset, increase your income through a tax deduction and you get paid an annual income. You can do something good for a charity, get an income tax deduction, have more money to live each year, and you do not have the hassle associated with disposing of the asset. A good deal for you and the charity.

A Charitable Lead Trust is an irrevocable trust design to do just the reverse. You transfer an asset's income interest for a period of time, get a tax deduction, and retain ownership of the asset. This works well for a person who has sufficient income and wants to reduce the value of the estate.

An example of how this works is a person donates $10,000,000 worth of securities that likely will appreciate with time and the charity gets 8% ($80,000) for 24 years. The value of this is calculated to be worth $9,600,000. At the end of the 24 years the trust still has a value of $10,000,000 even after the annual payments. The value of the trust from an estate tax perspective is $400,000, below the exemption limit and free of any estate tax.

This is a relatively complicated topic and professional assistance is required. It is wonderful that both you and your favorite charity can benefit so that your life can continue to have an impact into the future.