Planning for Large Estates After TRA 97: A New Look at Some Old (Charitable) Friends

The Taxpayer Relief Act of 1997 didn’t actually provide relief for many rich people because the estate tax credit is only available for estates worth less than $10 million. This means that larger estates still face a 55 percent tax rate, just like before. As a result, estate planning techniques like life insurance trusts and family limited partnerships are still important for wealthy individuals. This is especially true for younger entrepreneurs who need to plan for their large estates in our current economy. This article discusses using charitable trusts in nontraditional ways for large estate planning. There are two types of charitable trust: charitable remainder trust (CRT) and charitable lead trust (CLT). A CRT gives income to individuals and then passes the remaining assets to charity, with tax advantages such as maintaining a standard of living, increasing cash flow, deferring capital gains tax, reducing income tax, and eliminating estate tax. It also allows for control over investments and asset protection. In order to get the benefits of a charitable trust, it needs to meet specific rules under tax law. One rule is that the trust has to pay out at least five percent of its value each year. The payout can be calculated as a fixed amount (annuity) or as a percentage of the trust’s value (unitrust). A unitrust is often preferred because it can pay more if the trust’s value goes up. But if the value goes down, the payout will go down too. It’s important to set the right payout rate to make sure the trust can keep growing and paying out income. A Charitable Remainder Trust (CRT) is a type of trust that allows you to support both charity and yourself or others. It can last for a lifetime or a set number of years, and the assets must go to a qualified charity when the trust ends. The trust must be irrevocable and have rules to prevent activities that go against its charitable purpose. You can choose who will manage the trust, but it must follow state and federal tax laws to get the tax benefits. A Charitable Lead Trust (CLT) is a way to give money to charity while still passing assets to your family. It works by giving money to charity for a certain amount of time, then giving the rest to your family. One big advantage is that you can get a tax deduction for the money you give to charity. Unlike a CRT, there are no rules about how much money you have to give to charity each year. You can also decide how long the trust will last, unlike a CRT which has a maximum length of 20 years. A Charitable Lead Trust (CLT) is a type of trust set up by a donor to give money to charities for a certain period of time, with the remaining money going to the donor’s family. The donor doesn’t have to pay income taxes on the money in the trust, and the trust itself is exempt from income taxes. However, when the donor puts money into the CLT, it can be considered a taxable gift to the family members. But because of certain rules, the amount of gift tax the donor has to pay can be much lower than if they had given the money directly to the family. To help a younger business owner with their financial planning, they could set up two different types of trust. One trust would be for selling their business and the other would be for life insurance to provide for their family. This way they can have more control over their money and better meet their needs. The donor is trying to decide between setting up a trust that will give them income for life, but at a lower rate, or a trust that will give them a higher income for 20 years. They can’t decide which is better. One option is to set up both trusts, so they get higher income when they need it most, and then settle into a steady income for life. This way, they have a safety net of income for life, with extra money in the earlier years. Plus, they can get tax deductions from both trusts. A couple with a lot of money in stocks wanted to figure out how to leave it to their kids without paying a ton of taxes. They didn’t want to just buy a bunch of life insurance because it would be too expensive and they didn’t want to put all their money into a CRT either. So, they decided to use a mix of a CRT and a CLT, which helped them save money and pass on their wealth to their kids. A couple decided to set up a trust and a charitable trust with their portfolio to save on taxes and provide income for themselves. They also established a family foundation to help their children manage their wealth. They also used a special agreement called a “split-dollar” agreement to turn their taxable income into tax-deductible income that will be repaid to them or their family tax-free in the future. They also set up a life insurance trust to benefit a charity and also provide a death benefit for their family. When you donate to a charity, you can deduct a larger portion of your income from taxes than if you donate to a private foundation. This is because the charity uses your contributions to fund a life insurance policy, which allows your family to access the cash value in the policy through tax-free loans. When you pass away, your family will receive the insurance proceeds, also tax-free. However, this type of planning is risky and may not be suitable for everyone. The IRS has not officially approved these tax benefits, so it’s important to carefully consider the potential risks and rewards for each individual. As the year comes to an end, it’s important to remember that when you donate to a charitable trust, you can get a tax deduction right away. This could be a big incentive for someone who doesn’t have many deductions to go ahead with their donation before the year is over. So, if you’re thinking about making a charitable contribution, it might be worth doing it now instead of waiting until next year. The Taxpayer Relief Act of 1997 didn’t offer many benefits for wealthy people looking to reduce their estate and gift taxes. However, there are still effective and affordable ways to transfer wealth to family members with minimal tax consequences. These options include charitable trusts, life insurance trusts, and split-dollar life insurance plans. These strategies can help wealthy individuals pass on their wealth to their loved ones while minimizing taxes.

Source: https://www.floridabar.org/the-florida-bar-journal/planning-for-large-estates-after-tra-97-a-new-look-at-some-old-charitable-friends/