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Estate Planning with Charity in Mind

Updated from article that first appeared Feb. 21, 2012, on the Central Indiana Community Foundation Website 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010) increases the federal gift, estate and generation skipping transfer tax exemptions to $5 million (plus an adjustment for inflation, for 2012). However, as of Jan. 1, 2013, such exemptions will fall to $1 million (except that the generation skipping transfer tax exemption will be higher, after an adjustment for inflation). The obvious tax planning implication of TRA 2010 is that it may make sense, from a “death tax” planning standpoint, to gift assets for the benefit of family members in 2012, in order to (i) utilize the higher federal transfer tax exemptions while they are “certainly” available, (ii) remove future appreciation from the federal taxable estate, and (iii) possibly reduce Indiana inheritance taxes.

There are many ways to effectuate gifts for the benefit of family members – including outright gifts (i.e., gifts directly to a family member, with no strings or limitations attached), gifts that utilize certain discounting techniques (such as interests in a family limited partnership or in a family limited liability company), and/or gifts to some form of irrevocable trust for the benefit of family members.

How might the desire to utilize the higher $5 million gift tax exemption, through gifts in 2012, impact charitable estate planning?

For some people, effectuating gifts of $5 million (for a single individual) or $10 million (for a married couple) now (through gifts in 2012), for the benefit of children and/or grandchildren, will mean that they have provided “enough” for their children and grandchildren, and that any remaining estate could be left outright to charity at death. Such a person might previously have had the “dream” of passing significant wealth to children and/or grandchildren, paying no federal estate taxes, and having a one page Last Will & Testament that the attorneys “don’t need to keep fiddling with” – and such a dream could now be a reality. The individual’s Last Will & Testament might simply leave such person’s remaining estate outright to his/her surviving spouse, or, if no such spouse is surviving, outright to charity.

A person who has made significant gifts for the benefit of children and/or grandchildren (utilizing the gift tax exemption), and who desires to primarily benefit charity with the balance of his or her estate but who would also like to provide for the very good possibility of passing additional assets to children at no further transfer tax cost (or at a low transfer tax cost), may want to take advantage of the currently very low Internal Revenue Code Section 7520 rate (1.4 percent in April 2012) and establish a lifetime charitable lead annuity trust (CLAT). A CLAT first pays an annuity interest to charity for a period of years, and at the end of such period whatever is left in the CLAT passes to the named non-charitable beneficiaries (i.e., the donor’s children). The CLAT can be structured such that the donor is not considered to be making any taxable gift to his/her children upon creation and funding of the CLAT; but, in reality, if the assets in the CLAT outperform the Internal Revenue Code Section 7520 rate, then assets in fact will ultimately pass to the non-charitable remainder beneficiaries at no further transfer tax cost.

A person who has charitable desires, and who wants to provide for a child but is concerned about leaving assets outright to a child, might want to consider currently establishing a Charitable Remainder Unitrust (CRUT). This person could name himself/herself and his/her child as the life beneficiaries of the CRUT, or could simply name the child as the life beneficiary of the CRUT, and charity must be named as the remainder beneficiary. The actuarial value of the remainder interest that will pass to the charity qualifies for income and gift tax deductions in the year of creation and funding. The actuarial portion of the gift to the CRUT that is considered to be a gift to the child, could be sheltered by the person’s $5 million gift tax exemption (in 2012). Accordingly, the current creation and funding of a CRUT could provide an income tax deduction for the donor, utilize the donor’s gift tax exemption, provide a stream of funding for the life of the donor and/or of donor’s child while also continuing to protect the principal of the assets in the CRUT for the benefit of such life beneficiaries or beneficiary, and ultimately significantly benefit charity.

A person who has charitable desires might even structure an estate plan that includes both a CRUT and a CLAT. For example, a donor could establish a CRUT during life, and then provide for all assets remaining at death to pass to a testamentary CLAT. This type of plan could transfer substantial wealth to family members at no gift or estate tax cost, while also significantly benefitting charity.

In light of TRA 2010, it is very important to promptly act upon estate planning opportunities that may be available for only a very short period of time!

If you have questions about the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, please contact John Lueken at Bingham Greenebaum Doll LLP.

  • Partner

    John is Chair of the firm's Estate Planning Department. He also leads the firm's Senior Partner Committee, and is a member of the firm's Finance Committee. John, a former Certified Public Accountant, began his career in the tax ...



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