Charitable trust assists in reducing inheritance taxes

by Timothy M. Reese

for the Business Journal

If you've executed a will that specifies how your assets should be divided among your heirs once you're gone, you may think that you don't need to do any more estate planning.

But one of the biggest estate planning mistakes you can make is to hold onto all of your assets until death, when federal estate taxes as high as 55 percent could substantially reduce the amount your heirs receive. Instead, consider initiating one or more estate-tax saving techniques.

A charitable remainder trust, combined with a wealth replacement trust, is one way to ensure that more of your estate goes to your heirs instead of to the federal government. And, this strategy provides current income in addition to tax benefits.

With a charitable remainder trust, you actually transfer ownership of assets to a trust. The trustee then makes periodic payments to you or your chosen beneficiary.

Suppose your estate has grown to $3 million and included in that is a portfolio of appreciated securities paying you a 2 percent annual income. You could contribute say $1 million of that stock to a charitable remainder trust and receive a percentage of that contribution annually for your lifetime. When you (and/or your spouse) die, or after a specified term, the remaining assets are distributed to the charities designated in the trust.

You benefit because you will receive a current income tax deduction based on the present value of the charity's future interest, avoid any larger capital gains tax on the sale of the stock, and reduce estate taxes by removing the assets from your estate. The charity benefits when it receives the remaining assets in the trust.

While a charitable remainder trust can provide an annual income for your and a contribution to your favorite charity, it does not leave inheritance for your loved ones. However, you can use the income tax savings and a portion of the annual income from your charitable remainder trust to purchase life insurance through an irrevocable life insurance trust.

This wealth-replacement trust invests in a life insurance policy with a death benefit sufficient to replace your gift to the charity, and the proceeds will be paid to your heirs at your death. As long as the irrevocable trust owns the policy, the insurance proceeds will not be included in your estate, thus avoiding estate tax.

While legally you can name yourself trustee of your charitable remainder trust, Internal Revenue Service regulations may make it difficult for you to manage the trust without violating some IRS rule.

You can appoint your charity as trustee, however, you could have problems changing or adding beneficiaries if the current charity controls the trust. You may also consider the use of a corporate trustee, which can act independently, provide tax and investment expertise, and allow you to change beneficiaries (and trustees).

In short, charitable trusts can give you and your heirs multiple tax breaks and your favorite charity a sizable donation.

(Timothy M. Reese is vice president of investments with A.G. Edwards & Sons, member SIPC.)

[[In-content Ad]]