How charitable should I be? What will my legacy be? What values can I teach my children and grandchildren? What do I have passion for? These are some of the questions clients start asking themselves in the autumn of their lives.
Estate planning is an intimate yet challenging process. Deciding who to entrust and bequeath your legacy to is among the largest decisions our clients will face in their lives.
Many times clients feel that they've given enough to their children, or that even if they wanted to donate to charity, they don't know the intricacies involved. Regardless of the end result, clients always want to eliminate taxes from the picture and spend their savings as they choose, not as the government does.
Here are seven key tips and strategies for you to suggest your clients employ to achieve their goal of zero-tax estate planning.
1. Amounts that go to charity are excluded from your taxable estate. Amounts given or left to your spouse are not subject to transfer taxes. Amounts donated to charity are tax-deductible from your taxable income up to 50% of adjusted gross income when you give to qualified charities.
2. Make as much in lifetime charitable donations as possible every year to get the maximum income tax savings. The double benefit of making lifetime charitable donations is that it reduces your current income tax bill and — if you plan to leave the remainder of your estate to charity — you can give more to charity with the extra income saved in taxes.
(Related read: Help clients manage tax payments during the year)
3. Allow your beneficiaries to disclaim in favor of a charitable vehicle. Have provisions in your estate documents that allow each child separately to disclaim all or a part of his or her inheritance in favor of charity. There is no estate tax on the disclaimed portion that goes to charity, and disclaimed sums can go to a variety of charitable vehicles.
4. Establish a charitable lead trust. During life, the charitable lead trust must give a certain amount to charity each year for the specified period of time you choose with the remainder going to your children. If you make it a maximum zeroed-out charitable lead trust, there are no estate or gift taxes on the remainder the child gets.
At death, the same principals as during life apply. The only issue to be decided becomes how old the children will be when they actually get the funds.
5. Utilize a charitable remainder trust. Put very low-tax-basis assets into a charitable remainder trust and sell them to defer the tax. This will also provide for more diversification and additional income. Design the charitable remainder trust for the maximum income you are allowed, if you want, or no income. Charities in the end must get a minimum of the present value of about 10% of the charitable remainder trust value. You get an upfront charitable income tax deduction in the year the charitable remainder trust is set up.
6. Annual charitable deduction donations and bequests at your passing can be made in a variety of ways using a variety of vehicles, such as a private family foundation, a donor-advised fund, a charity of your choice and others. Charitable vehicles can build and teach family values that can be passed through generations and also make a statement about current donors
7. Set up a qualified terminable interest property trust (Q-TIP). This is where you leave assets to your spouse in a trust and he or she gets the income for life with their children usually getting the remainder. Your spouse cannot change the remainder beneficiaries.
The remainder interest in a Q-TIP does not always have to be the testator's children. Charity can be a good end vehicle as well. There is no estate or gift tax when the Q-TIP comes into being and no estate tax if the remainder goes to charity.
Robert Karon is managing director at CBIZ MHM.