Monday, November 16, 2015

Charitable Deductions and U.S. Estate Taxes

Are you thinking about leaving money or property in your estate to your college or favorite charity?  If so, it is very important you discuss the best way to do this with your financial adviser.  You have several options, and you want to make sure you use the option that will allow you to use the charitable deduction to reduce the estate taxes on your estate, benefiting both your heirs and the charity.

In some cases, you can even arrange your charitable giving in such a way that you or a loved one can receive a stream of income from your charitable contribution.  By doing this, you can help yourself or an heir, as well as the charity.  Everyone wins!

Recently, I received an interesting brochure from the university which I attended.  It summarized some of the options donors have.  Below you will find some excerpts from that brochure, as well as additional comments.  If this is something you think you will want to do as part of your estate tax planning, you will want to be sure you carefully research the type of charitable gift that will be best for your circumstances.

How the Federal Estate Tax Rate Can Affect Your Charitable Donations

When you have large capital gains on some of your assets, the estate tax rate can be as much as 28 percent.  However, if you give the assets to a qualified charity, you can reduce or eliminate this portion of your estate taxes.

"Tax on capital gains property such as securities and real estate can sting tax payers in the highest brackets at a rate of more than 28 percent.  Not selling first, but giving appreciated assets directly to a charity allows a donor to avoid the capital gains tax." 

According to their explanation, the charity will get a stepped up basis on the donated property, and the donor or his estate is able to avoid paying taxes on the gain.

Create an Income from your Charitable Donations

What if you have valuable assets that do not currently produce an income for you?  An example of this might be a valuable art collection that you wish to donate after you die.  Another example would be stocks that do not pay a dividend.  There are ways you can gift this property to a charitable organization while you are still alive and they will provide you or the person of your choice with a stream of income for an agreed period of time.

"When a donor makes a gift of appreciated property to a charity in exchange for a life income arrangement, the donor is allowed to spread the capital gains tax over the life of the agreement, reducing the impact of the tax on the donor and creating a stream of payments over a period of years, or for a lifetime.  Donors can accomplish this through certain types of charitable trusts or charitable gift annuities."

Many charitable organizations are already familiar with this type of gift arrangement and can help you make the necessary arrangements.  Of course, you will want to discuss this with your financial advisor first, so you donate the appropriate assets.

Make a Charity a Beneficiary of All or a Portion of Your Retirement Account

When you receive a distribution from a retirement account, you usually must pay taxes on it.  However, when the distribution is donated to a charity, the charitable deduction may be used to offset all or part of the taxes.  This is true even when you have already died!

"The tax owed on a retirement plan does not go away at death.  The tax liability passes into the estate and onto heirs with some exceptions, such as when a charity is beneficiary of the account.  Charities are not taxable.... (When a charity is) the beneficiary of all or a portion of your retirement account, it removes a highly taxable asset from your estate."

You MIGHT Be Able to Make an IRA Charitable Rollover

In 2014, Congress made it possible for donors to roll over part of their IRA to a charity.  However, this has to be voted on each year, so it might not always be possible in the future, depending on what Congress decides.  If they keep the rules the same, the requirements currently are:

*  You must be 70 1/2 or older when you make the gift;
*  You cannot transfer more than $100,000 to a charity;
*  This only applies to IRAs and not other types of retirement plans;
*  The funds must go directly to a charity and NOT to a charitable trust, a charitable gift annuity or anything similar.

What Should You Do?

The best type of charitable giving arrangement will be different for each person.  This article is only intended to let you know about the different types of possible options so you can reduce your federal estate taxes.  You need to discuss the best option for you with your financial adviser, tax accountant, the lawyer handling your will and the charity involved.

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1 comment:

  1. I found your information helpful--followed you over here from mylot--and now, am going to poke around a bit

    ReplyDelete

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