Reducing Estate Taxes: Effective Strategies

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By: The American Academy of Estate Planning Attorneys
Lately it seems like natural disasters around the world are regular occurrences; from earthquakes in South America and China to hurricanes in the Atlantic and Gulf of Mexico. We feel empathetic for the victims, but often feel powerless to help. While we may be too far to personally help the victims of these disasters, many of us send donations to help people in these communities. However, sending a check may not be the wisest choice for taking advantage of the potential tax saving benefits offered through other gifting methods. This article discusses the main gifting strategies for maximizing tax benefits, such as Charitable Trusts.

As our society becomes more global and more “wired,” we’re ever more aware of what’s happening to our neighbors, both around the corner and around the world. It seems like every day, we hear of a new natural disaster or other emergency. We turn on the morning news and see a report about flooding in Asia or Central America. On the way to work, we hear about a hurricane in the Atlantic. Taking the kids to soccer, we hear of an earthquake in South America or China.

It’s easy to feel overwhelmed with all the bad news. Especially since, even though bad news travels fast, we often feel powerless to offer any practical help to the victims of these disasters. On the other hand, we can look at each news report as an opportunity to help.

There are so many organizations on the ground offering relief to the communities and individuals who need it the most. The easiest and most popular thing to do is simply to write a check to contribute to one of these worthy charities. Depending on your financial situation, though, this may not be your wisest choice. If you’re making a large donation, you’ll want to explore the many methods available to you for contributing to your favorite charities.

For example, one way to give generously, and maximize your tax benefits, is through a gift of appreciated property. When you give appreciated property, you can claim a deduction for the full appreciated value of the property, without having to pay tax on any gain.

Contrast this with what happens when you sell appreciated property. Here’s an example. Say you own stock that you purchased for $3,000. It has grown in value and is now worth $9,000. If you sold the stock, you’d pay tax of 15%, in 2010, on the capital gains on the $6,000 difference between the purchase price and the sales price, for a tax bill of $900 in 2010. On the other hand, if you gave the stock to charity, you could claim a deduction for the full $9,000, and never have to pay tax on the $6,000 gain. Capital gains tax rates may fluctuate depending on the year and the tax payer’s situation.

Another option is to establish a Charitable Lead Trust. With a Charitable Lead Trust, you place assets in a trust that pays an income stream to a designated charity for a certain period of time. At the end of that period of time, the trust property is distributed to either you or your family. This provides contributions to the charity while also reducing your estate tax bill or the amount you pay in gift tax for property gifted to your family members.

A Charitable Remainder Trust, on the other hand, works in the opposite way. You place assets in a trust that pays income to you or a family member for a designated period of time. At the end of that period of time, the assets in the trust are distributed to a charity designated by you. This arrangement allows you a current income tax deduction for the value of the trust interest that will eventually be distributed to the charity. Plus, it allows you to have continued control over how the trust assets are invested.

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