Sunday, January 20, 2013

Charitable Giving

Charitable Giving

Many people give to charity during their lives, but unfortunately too few Americans take advantage of the benefits of incorporating charitable giving into their estate plans. By planning ahead, you can save on income and estate taxes, provide a meaningful contribution to the charity of your choice, and even guarantee a steady stream of income throughout your lifetime.

Those who do plan to leave a gift to charity upon their death typically do so by making a simple bequest in a will. However, there are a variety of estate planning tools designed to maximize the benefits of a gift to both the charity and the donor. Donors and their heirs may be better served by incorporating deferred gifts or split-interest gifts, which afford both estate tax and income tax deductions, although for less than the full value of the asset donated.

One of the most common tools is the Charitable Remainder Trust (CRT), which provides the donor or other designated beneficiary the ability to receive income for his or her lifetime, or for a set period of years. At death, or the conclusion of the set period, the “remainder interest” held in the trust is transferred to the charity. The CRT affords the donor a tax deduction based on the calculated remainder interest that will be left to charity. This remainder interest is calculated according to the terms of the trust and the Applicable Federal Rate published monthly by the IRS.

The Charitable Lead Trust (CLT) follows the same basic principle, in reverse. With a CLT, the charity receives the income during the donor’s lifetime, with the remainder interest transferring to the donor’s heirs upon his or her death.

To qualify for tax benefits, both CRTs and CLTs must be established as:

  • A Charitable Remainder Annuity Trust (CRAT) or a Charitable Lead Annuity Trust (CLAT), wherein the income is established at the beginning, as a fixed amount, with no option to make further additions to the trust; or
  • A unitrust which recalculates income as a pre-set percentage of trust assets on an annual basis; which would be either a Charitable Remainder Unitrust (CRUT) or a Charitable Remainder Annuity Trust (CRAT).

Another variation is the Net Income Charitable Remainder Unitrust, which provides more flexible payment options for the donor. One advantage to this type of trust is that a shortfall in income one year can be made up the following year.

The Charitable Gift Annuity (CGA) enables the donor to buy an annuity, directly from the charity, which provides guaranteed fixed payments over the donor’s lifetime. As with all annuities, the amount of income provided depends on the donor’s age when the annuity is purchased. The CGA gives donors an immediate income tax deduction, the value of which can be carried forward for up to five years to maximize tax savings.

IRA contributions are also an option through 2011 for donors who are at least 70½ years of age. Donors who meet the age requirement can donate funds in an Individual Retirement Account (IRA) to charity via a charitable IRA rollover or qualified charitable distribution. The amount of the donation can include the donors’ required minimum distribution (RMD), but may not exceed $100,000. The contribution must be made directly by the trustee of the IRA.

With several ways to incorporate charitable giving into your estate plan, it’s important that you carefully consider the benefits and consequences, taking into account your assets, income and desired tax benefits. A qualified estate planning attorney and financial advisor can help you determine the best arrangement which will most benefit you and your charity of choice.

Saturday, May 12, 2012

Tennessee Repeals Gift Tax

Effective for gifts on or after January 1, 2012, the Tennessee Legislature has repealed the Tennessee gift tax. Connecticut is the only remaining state with a gift tax.

There is still a federal gift tax. However, because of the federal lifetime exemption ($5,120,000 in 2012, and $1,000,000 in 2013 and thereafter, unless Congress acts to change the law), most gifts will not result in a federal gift tax.

There are other issues when making gifts that warrant caution and careful planning. 

  1. Capital Gains Tax: Loss of Step Up in Basis. Property inherited at death receives a step up in basis. However, for lifetime gifts, the donee receives the basis of the donor. For example, if your father gifts you land that he purchased for $10,000, and the property is worth $100,000 at the time of the gift to you, then you receive his basis of $10,000. When you sell the same land later for $100,000, you will incur a taxable gain of $90,000. Had you inherited the property af your father's death, then your basis would be the value of the property at his death. If the property was worth $100,000 at his death, and you sold it for $100,000, the taxable gain would be 0. 
  2. Can't Undo the Gift. A completed gift generally cannot be undone. The donee has control of the gift, and the property is subject to the donee's liabilities and creditors. Gifts can be made in trust for the intended beneficiary of the property to protect the property from the beneficiary's creditors and to provide parameters of beneficiary control. However, outright gifts to individual donees have no similar protection.
  3. Medicaid Ineligibility.  Gifts may cause a Medicaid long term care Ineligilbity period for the donor. Medicaid has strict gifting rules that generally apply to gifts made within five years of the Medicaid application. The federal annual exemption for gifts does not apply to Medicaid. Under Medicaid, there is no annual exemption amount.

As you can see, even though the Tennessee gift tax has been repealed, there remain complex legal and tax issues when making gifts. The above information is general in nature and is not intended to be legal advice for particular facts or circumstances. If you intend to make a gift of real property or any other signficant gift, your should consult an attorney knowlegable of this subject matter.

Saturday, May 12, 2012

Tennessee Phases Out Inheritance Tax

The Tennessee Legislature has passed legislation to phase out the Tennessee Inheritance Tax. Effective 2016, the tax is complete repealed. In 2012, the exemption amount is $1,000,000. In 2013, the exemption increases to $1,250,000. In 2014, the exemption increases to $2,000,000. In 2015, the exemption increases to $5,000,000. The inheritance tax is repealed for 2016 and thereafter.

Now we will have to wait and see what the U.S. Congress does with the federal estate tax. The exemption amount for the federal estate tax is $5,120,000 in 2012, but is reduced to $1,000,000 in 2013 and beyond, unless legislation is passed to change the law. The tax rate of 35% in 2012 will increase to 55% in 2013 and beyond, unless legislation is passed to change the law.

I have given up on making predictions on this topic except to say that I do not believe that there will be a complete elmination of the federal estate tax. There was such talk a few years back before the economic meltdown in 2008. But with the large national debt, the expenses of two simultaneous wars and a sluggish economy, complete repeal does not appear realistic no matter who wins the White House in November. 

Even if Congress changes the law to provide an increased exemption and/or lower tax rate, there is nothing to say that Congress won't change it again in the future to a less favorable exemption and/or tax rate.

Bottom line: for estates in excess of $1,000,000, estate tax planning may still be prudent in light of the uncertain times we live in.

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The Elder and Special Needs Law Center - Murfreesboro, Tennessee, is a service of attorney John H. Baker III, of counsel with the law firm of Bullock, Fly, Hornsby & Evans. Offices are located at 307 Hickerson Drive, Murfreesboro (Rutherford County), TN 37129. Surrounding communities include Smyrna and LaVergne (Rutherford County), Franklin and Brentwood (Williamson County), Woodbury (Cannon County), Manchester and Tullahoma (Coffee County), Lebanon (Wilson County) and Shelbyville (Bedford County).