Many people decide that they would like to give to charitable organizations when they are contemplating their legacies. This is obviously going to provide you with a personal sense of satisfaction as you assist worthy causes that are meaningful to you.
At the same time, you may also be able to realize some tax benefits by giving to charities in a measured and informed manner.
Charitable giving can be a good way to gain estate tax efficiency if you are exposed to the federal estate tax. After the passing of the American Taxpayer Relief Act of 2012 we have estate tax parameters in place that are said to be permanent.
The estate tax exclusion is $5.25 million in 2013, and it can be adjusted to account for inflation annually. The maximum rate of the estate tax, the gift tax, and the generation-skipping transfer tax has been set at 40%.
What this means to you is that the portion of your estate that exceeds $5.25 million in value is potentially taxable.
Here in the state of Connecticut we have state-level gift and estate taxes to contend with as well.
When you give to charities you get a tax deduction, but you are also reducing the taxable value of your estate. There are various different vehicles of charitable giving that are utilized in the field of estate planning.
One of these is the private foundation. We have all heard of very large, famous foundations like the Ford Foundation and the Rockefeller Foundation. This can make you believe that only the wealthiest families can start a foundation.
However, this is really not the case. Most of the foundations in the United States are funded with less than $1 million
Another possible course of action would be to place assets into a charitable trust. Charitable lead trusts and charitable remainder trusts can be used quite effectively when you’re planning your estate.
When you fund the trust you are reducing the taxable value of your estate, and of course you get a tax deduction. With a charitable remainder trust you name a beneficiary that receives income from the trust during its term and the charity assumes ownership of the remainder when the trust term expires.
With a charitable lead trust things work in reverse. The charity you name receives payments during the term of the trust and the beneficiary inherits the remainder.
Another option would be a donor advised fund. These funds allow for efficient giving because you convey assets into the trust and subsequently make recommendations with regard to grant endowments.
You can make just the one donation but ultimately provide resources for a number of different charities. Your accounting is streamlined, and you get a charitable deduction for the year during which the donation was made even if no grants are distributed during that calendar year.
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