Charitable Opportunities
Who will forget the year 2001? Do you remember where you were that
morning of 9/11? The terrorism of that day sent shockwaves
throughout America that continue to reverberate. Despite the evil of
others, Americans remained generous in the midst of their suffering,
giving an estimated $212 billion that year to charity.
Are you a gracious giver, perhaps even a
philanthropist? If you are a taxpayer, then the answer is
yes. How, you ask? During your lifetime, your wealth is subject
to taxes in a variety of forms. Income taxes levied on your wages,
interest and dividends, and capital gains taxes extracted on the
sale of your appreciated assets may tend to make April 15th one of
your least favorite days each year.
Voluntary Taxes
Our tax system is voluntary in
its form, but the civil and criminal penalties for noncompliance
make the process involuntary in its substance. Thankfully for
our national defense and other essential programs of the federal
government, most taxpayers voluntarily comply with the Internal
Revenue Code (IRC) and pay their fair share.
Beyond the essentials of government, however, are there
any programs funded by the federal government you personally
consider nonessential and perhaps even wasteful? If there are, then
you are an involuntary philanthropist by your financial
support of such causes as selected by Congress and the White House.
Perhaps there are private sector charities you deem
more worthy of your tax dollars? Chances are you already support
these charities. If so, then you really should know about IRC § 664
and how you may turn your involuntary philanthropy into
tax-savvy voluntary philanthropy.
IRC § 664
Charitable tax deductions have been part
of the Internal Revenue Code since its inception. Why? The
government’s own research determined that private sector charities
deliver social services more cost-effectively than the government
itself. The government, in turn, sought to encourage increased
charitable giving to private sector charities by enacting IRC § 664
in 1969, permitting split-interest gifts.
A Charitable Remainder Trust (CRT) is a popular
split-interest gifting technique. Through a CRT, you may increase
your current income, enjoy current income tax deductions and leave a
substantial financial legacy for your favorite charity(ies) upon
your death (or upon the death of your spouse, if later).
Here is how it works. First, you create a CRT and
contribute an asset to it. [Note: appreciated assets, i.e., assets
that would be subject to capital gains taxation were you to sell
them yourself, are commonly contributed because they tend to be low
income producers and have a low income tax basis.]
Second, the CRT sells the asset without capital gains
taxation and then reinvests the proceeds in an income-producing
portfolio that grows income-tax-free inside the CRT.
Third, you (and your spouse) receive an enhanced
lifetime income plus valuable income tax deductions for up to six
years.
Fourth, upon your death (or upon the death of your
spouse, if later), the CRT distributes any remaining assets
probate-free to your selected charities and your estate receives a
charitable estate tax deduction for their value.
Family Matters
As the saying goes, charity begins at
home. Accordingly, many Americans want to maximize the wealth
they ultimately transfer to their children and grandchildren. While
the CRT provides a lifetime of income and tax benefits to the
taxpayer (and spouse), it also reduces the estate eventually
available to loved ones. This is one of the major drawbacks to CRT
planning. However, there is a tax-savvy strategy to replace the
value of the CRT assets for the benefit of loved ones. This strategy
leverages the Annual Gift Exclusion, Life Insurance and the
Irrevocable Life Insurance Trust.
Consult qualified legal counsel before you pursue any
complex financial or legal strategy.
The Trifecta Challenge
In the world of high-stakes wagering on horse races, winning the
Trifecta is a most noteworthy achievement. To win, you must pick
not only the winner of the race, but also the second and third place
finishers. When it comes to gracious giving, most taxpayers would
prefer to benefit their charities first, themselves second, their
loved ones third … and the IRS dead last. This Charitable
Planning Trifecta can be achieved through a carefully
coordinated financial and legal strategy that includes both a
Charitable Remainder Trust
(CRT) and a Wealth Replacement Trust (WRT).
The Trifecta Challenge
The creation of a CRT helps your charity
finish first, with you (and your spouse) a close second. Before the
charity inherits the assets held in the CRT upon your death
(or upon the death of your spouse, if later), you (and your spouse)
enjoy a lifetime income from the CRT and valuable charitable tax
deductions. However, when the charity inherits the assets held in
the CRT, they are forever unavailable to your loved ones. That is
where the WRT comes in.
The WRT Solution
With your CRT generating income
sweetened by income tax deductions, you may have a total annual
income in excess of the amount necessary to maintain your lifestyle.
If so, then you may want to consider acquiring Life Insurance in a
WRT to replace the value of the CRT assets ultimately passing to
charity instead of to loved ones. To keep the value of the Life
Insurance
death benefit out of your estate (and that of your spouse) you
must be very careful to follow the WRT dance steps to ensure
proper ownership of the Life Insurance from the outset.
WRT Dance Steps
First, you create a WRT. While you may
not serve as a Trustee (nor should your spouse), you may select the
current and successor Trustees. The beneficiaries of the WRT will be
your loved ones.
Second, you (and your spouse) make gifts to the Trustee
on behalf of the WRT beneficiaries in an amount roughly equal to the
insurance premiums. The Trustee then provides written notice of the
completed gift to each WRT beneficiary and notes that each
beneficiary has a designated period of time (not less than 30 days
is typical) to request distribution of their respective share of the
gift. After the designated period has lapsed, the Trustee applies
for the appropriate Life Insurance and pays the initial premium.
[Note: This annual gifting ritual continues until your death or the
death of your spouse, if an insured and your survivor.]
Third, assuming all of the WRT dance steps have been
followed, the death benefit will be estate tax free when paid to the
WRT for your loved ones. This will replace the value of the CRT
assets paid to the charity.
Conclusion
With careful planning and crisp
execution, your Charitable Planning Trifecta will enrich your
charity, yourself (and your spouse) and your loved ones …
disinheriting only the IRS. |
