If an individual gives a gift to an IRS-approved charity, they can help reduce the amount of taxes their estate may have to pay. These gifts are exempt from federal estate taxes. The majority of states will also exempt these gifts.
It is always helpful to consider ways to lessen the tax burden on an individual’s assets. Should an individual give assets to charity, their wealth can be replaced by their life insurance.
There are advantages to giving an individual’s assets to a charity. These may include:
It is important to note that the charity must take the distribution of the individual’s assets by the fifth year following their death. Additionally, if an individual wishes to leave sufficient assets to their heirs, they may consider purchasing a life insurance policy with a death benefit equal to the value of their assets.
Another option for making a charitable gift of an individual’s assets is to contribute to a charitable remainder trust. The individual’s estate will receive a deduction equal to the charity’s interest in the gift. The individual will also avoid paying income taxes on those assets.
The individual’s beneficiary will then receive payments over a term of years of their life. Eventually, the trust balance will pass to the named charitable organization. It is important to note that if an individual donates assets to a charity or charitable remainder trust during their lifetime, rather than after death, they will still be required to pay income taxes.
An estate includes all of an individual’s personal property and real property that they own at the time of their death. An estate plan contains legal documents and instruments and specifies an individual’s wishes for their property once they pass away. An estate plan may include different instruments depending on the individual’s circumstances. These may include:
A will is a legal document, usually written by an attorney, but created for an individual called a testator. The will outlines how the individual wishes for their property to be distributed when they pass away. A will can include real property or personal property.
A trust is a legal instrument created to hold property for the benefit of a beneficiary, or recipient. An individual puts their property into the trust and a second individual manages the trust. The individual responsible for managing a trust is known as the trustee.
A trust may be created for an individual or individuals for many reasons. The testator can provide stipulations or requirements that must be met before the beneficiary can receive the trust assets. For example, a trust can be created for the testator’s grandchild that includes money held in the trust until the grandchild either reaches the age or majority or graduates college.
A power of attorney is a legal instrument that gives one individual the right to make decisions for another individual should they become unable to do so. Different types of powers of attorney are used for different situations, including medical and financial issues. A medical power of attorney, for example, gives an individual the right to make medical decisions for another individual should the become incapacitated.
Income tax is a percentage of an individual’s annual earnings. Income taxes are due to both the state and federal governments each year on April 15th. The amount of taxes an individual is required to pay is based on their income, in all forms, minus any deductions allowed by the tax laws.
The amount of taxes an individual must pay is set by legislators. Taxes are collected annually by the Internal Revenue Service (IRS). Taxes are complex and include a large body of law. If there is ever an issue or question with an individual’s taxes, it is important to consult with a tax lawyer.
A charitable remainder trust is an estate planning instrument by which property is placed into a trust for a named charitable organization. The individual who creates the trust, known as a grantor or settlor, receives income payments throughout their life. Upon their passing, the charity will receive the remaining property within the trust.
There are two types of charitable remainder trusts. These are a unitrust and an annuity trust. In a unitrust, the income payments are based on a percentage of the value of the assets in the trust. The assets are revalued every year, making the payment amounts fluctuate.
The second type of charitable remainder trust is the annuity trust. In this type of trust, the income rate is fixed when the trust is first created. The payments to the grantor are on a set schedule.
There are tax advantages to creating a charitable remainder trust. Property that is highly appreciated, such as real estate or a stock portfolio, may be donated to charity for the life of the grantor. Income from the stock portfolio goes to the grantor and is reported to the IRS as taxable income. The donation, on the other hand, is tax deductible.
Should the grantor not require the income, it can remain tax free and be deferred until a later date. This can eliminate capital gains taxes on highly appreciated assets, including stocks. It may also reduce the estate taxes heirs may have to pay after an individual’s death by up to 50%. However, the net distributions must be at least 5%.
This type of trust can be used as a retirement plan. This is because income to the grantor can be deferred until retirement.
There are advantages of a charitable remainder trust. Most advantages involve taxes. Advantages to a charitable remainder trust may include:
Charitable remainder trusts are advantageous for individuals already planning to transfer some of their assets to a charity when they pass away.
Yes, if you have any issues related to income tax, estate tax, or trusts, it is important to seek the assistance of a tax lawyer. Often, these types of law will overlap and an attorney will have experience in multiple areas of law.
A lawyer can help you create an estate plan, reduce your income taxes, and create trusts. A lawyer will be able to examine your situation and determine which estate planning instruments are best for you.
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