Estate Planning Benefits of Charitable Giving

axes may be a big concern when you are planning your estate, and charitable giving can be part of the solution.

The federal estate tax and the gift tax are unified, and there is a $5.25 million unified exclusion in 2013.  Minnesota has a $1 million exemption.  If the combination of taxable gifts that you have given throughout your life coupled with the value of your estate exceeds this amount, transfer taxes are an issue for you.

Charitable giving can effectively reduce the value of your estate for tax purposes. Gifts that you give to other people are subject to the gift tax, but charitable donations are not assuming the institution or organization that is receiving the donation is recognized as a tax exempt entity by the Internal Revenue Service.

When you make a contribution to a qualified charity, you are removing that money or those assets from your estate and lowering your estate tax responsibility in the process. Plus, you get to take a charitable deduction for the amount of the contribution or contributions.

This in itself may sound better than giving the money to the taxman. However, there are some more advanced charitable giving strategies that can be utilized which actually have more positive tax consequences.

One of these would be the creation of a charitable lead trust. This is a rather complicated strategy, but we will attempt to provide a very simple and surface explanation.

You can name a non-charitable beneficiary who would assume ownership of anything that is left in the trust after the term expires. You convey assets into the trust, and the charitable beneficiary receives payments throughout the term of the trust.

These payments are not subject to the gift tax because they are going to a qualified charity.

The non-charitable beneficiary that you named when you created the trust would be assuming ownership of any funds remaining in the trust after the conclusion of its term. The asset transfer to the beneficiary would technically be subject to the gift tax.

The IRS will use the hurdle rate to account for anticipated interest. If the assets that have been placed into the charitable lead trust perform better than this estimate, the beneficiary will wind up assuming ownership of some of the funds free of the gift tax.

Another type of trust that is used is the charitable remainder trust. These trusts can be useful if you have securities in your possession that have appreciated considerably. You or a beneficiary that you name will gain income from the trust over the course of its term, and the charitable beneficiary will receive the remainder that is left in the trust after the term expires.

Capital gains tax benefits accrue because the trust can sell appreciated securities without being taxed.