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Time to Review Your Charitable Giving

“Wealthy families got massive estate-tax savings under the new tax law. The estate-tax exclusion was doubled, from $5.49 million per individual to $11.18 million. This means couples can now pass a combined $22.36 million to their heirs, free of the 40% estate tax.”


The charitable deduction for gifts given through wills, loses any tax benefit for families whose assets fall under the exemption limits. The loss of a deduction when there’s no tax benefit isn’t a major problem. However, it does lead families to wonder if there is any way that their charitable giving can still generate a tax benefit. The answer is yes. There are several ways for this to happen.

One way is making donations during your lifetime. This means that the donor qualifies to take a deduction against taxable income, instead of the estate after death. However, there is also the option of the charitable remainder trust. This allows assets to be left to a charity upon death, without leaving them in a will, which provides an immediate deduction against income.

This is done with an irrevocable trust that is funded with assets that then become the source of a lifelong income stream for the donor and spouse or beneficiaries. When the donor dies, the assets left in the trust are donated to the named charity. At least 10% of the original value of the trust must go to charity. In the year the trust is set up, the donor also gets an income tax deduction for the future gift.

How is the value of that deduction calculated? There is a formula that involves life expectancy, interest rates and several other factors. As you might expect, lower interest rates mean a lower deduction. However, if rates continue to rise, this type of trust and charitable giving is likely to become more attractive.

If markets stop being volatile and stays at elevated levels (as of this writing), then the trust looks especially favorable from a tax planning viewpoint. By transferring assets with large gains into the trust, the capital gains tax burden can be lightened. Once they are transferred into the trust, these assets are usually sold, with no capital gain taxes. They are shifted into income producing investments to ensure that the trust remains robust.

Other appreciated assets, like property or a business, can be transferred into a charitable remainder trust. However, this must be done with great care. The IRS may look askance at a move that appears to be solely about tax-avoidance.

Reference: Barron’s Penta (Dec. 14, 2018) “How to Leave Assets—With an Immediate Tax Write-Off”

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