Gifts to charities while you are alive will reduce your estate for estate tax purposes and provide you with an income tax deduction, while gifts to charities at death will merely reduce your estate for purposes of determining your estate tax.
There are methods whereby you can make a gift during your lifetime while retaining an income interest in the subject matter of the gift and still obtain both income and estate tax deductions.
In 1969, Congress created special rules for the creation of charitable split- interest trusts known as charitable remainder annuity trusts and charitable remainder unitrusts, A charitable remainder annuity trust will provide you with a specific dollar amount that you will receive from the trust on a periodic basis during your lifetime with the remainder going to a qualified charity upon your death. A charitable remainder unitrust will provide you with an amount from the trust each year based all. The value of the trust determined each year with the remainder being distributed to a qualified charity upon your death.
The amount of the income tax deduction which you will receive from contributing assets to a charitable remainder annuity trust or a charitable remainder unitrust will depend on your age and the value of the benefit you are expected to receive from the trust during your lifetime. The older you are when you establish the trust, the larger the amount of the income tax deduction you will receive.
These charitable split-interest trusts can also be prepared in a manner so that another individual will receive the income interest for their lifetime after your death, but this type of provision will reduce the amount of the income tax deduction which you will receive and will also reduce the estate tax deduction at your death. Many individuals utilize split-interest trusts to convert low income producing property to high income producing property without incurring an immediate recognition of income.
For example, if you own shares of stock in a publicly traded company which you purchased several years ago at a relatively low price per share and the value of that stock has greatly appreciated, but the dividend income paid as a percentage of the current fair market value of that stock is low, you could contribute the stock to a charitable remainder trust without recognizing any income tax as a result of the transfer to the trust. The trust could then sell the stock without incurring income tax liability and reinvest the proceeds in investments that produce a much-improved rate of return. The annual benefit which you would receive from the charitable remainder trust would be dependent upon type of charitable remainder trust utilized, a charitable remainder annuity trust or a charitable remainder unitrust.
Often this planning strategy is utilized in conjunction with an irrevocable trust that purchases a policy of life insurance in an amount equal to the value of the assets that has been set aside for charity to replace the value of that wealth for the benefit of family members free of estate taxes.
Charitable lead trusts are the flip side of this theme and can allow you significant leverage the size of a gift you desire to make to your children or other non-charitable beneficiaries.
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