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In contrast, charitable giving at the time of death is an excellent technique to eliminate the estate tax while permitting the client to retain control during his or her life. irs web site Income tax estimator. Assuming, in a 50% estate tax bracket, gifts to charity (assume $100,000) at the time of the death of the surviving spouse will reduce the estate tax by 50% of the charitable gift ($50,000) and the heirs= inheritance by 50% of the charitable gift ($50,000). In order to eliminate the estate tax, you can structure the estate to provide that any assets in excess of the exemption amount would be distributed to charity. The following chart illustrates the economics of death-time charitable giving assuming: (1) no charitable gift, (2) $100,000 gift, and (3) gift to eliminate the estate tax. irs web site Tax slayer. No charitable giftReduce estate taxwith $100,000 giftGift to Eliminateestate taxEstateExemptionCharity3,000,000(1,300,000)03,000,000(1,300,000)(100,000)3,000,000(1,300,000)(1,700,000)NetTax rate1,700,000x 50%1,600,000x 50%0n/aTax850,000800,0000RESULT Heirs2,150,0002,100,0001,300,000Tax850,000800,0000Charity0100,0001,700,000InheritanceInsurance used to pay estate taxInsurance used to compensate for $50,000 reduction in inheritanceInsurance used to compensate for $850,000 reduction in inheritanceRationale. Paying estate taxes is optional. Rather than paying the estate tax and your client''s money being used by the government for its projects, your client can control the public use of the funds by designating a charity or charities of his or her own choice. irs web site Inheritance-taxes. "Compensate" heirs. Rather than using insurance to pay the estate tax, the insurance would be used to "compensate" the heirs for the reduction in their inheritance. We have seen "compensation" range from no compensation (under the theory that the net inheritance is enough), to compensation for the reduction of their share ($850,000 in the no estate tax alternative, under the theory that the inheritance of $1,300,000 plus the $850,000 insurance equals the share the heirs would have received had there been no charitable gift - $2,150,000), to full compensation ($1,700,000, under the theory that the children would be able to receive the entire estate tax free: $1,300,000 tax free amount under the current exemption plus $1,700,000 "compensation" = $3,000,000). Suppose the premium for an $850,000 second-to-die policy for a husband and wife each age 60 is $9,000. If structured properly the insurance premium constitutes a $3,000 gift to each child (assuming 3 children) under the annual exclusion. The family can still give $17,000 to each child under the remaining annual exclusion. Heirs'' Inheritance. We have found that many times a charitable giving discussion starts with the question, "How much do you want to leave your children?" Sometimes, it is not the primary goal to leave the entire estate to the children. The charity would receive the excess. Other Reasons. In addition to reducing estate and income tax, clients are motivated to make charitable bequests to increase their cash flow, to diversify their investment portfolio, to benefit the community and to involve their family in philanthropy. GIFTING METHODSA client can make a direct gift to charity or make a gift and retain some economic benefit. First direct gifts will be discussed, followed by gifts with retained interests. Gifts of life insurance and gifts to a charity as beneficiary of a qualified plan or IRA will then be addressed. Lifetime Direct GiftsOutright gift. A client can simply make an outright gift to charity to be used for the general purposes of the charity or dedicated to a special purpose designated by the client. Alternatively, the client can create a donor advised fund or a supporting organization, which are both discussed below.
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