By Karen Hube
December 14, 2018
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If you’ve arranged to bequeath assets to charity, you may want to revisit your estate plan: The tax benefit for your largess may be lost under the new U.S. Tax Cuts and Jobs Act.
Wealthy families got massive estate-tax savings under the new tax law. The estate-tax exclusion was doubled, from $5.49 million per individual to $11.18 million. This means couples can now pass a combined $22.36 million to their heirs, free of the 40% estate tax.
But tied to this boon is an irksome trade-off: The charitable deduction for gifts passed through wills is irrelevant for families with estates valued up to the exemption amount. The loss of a deduction when there is no tax bill in the first place is obviously no hardship, but it raises the question: Is there a way to still get a tax benefit from your gifts?
The obvious answer is to simply make donations during your lifetime, so you can qualify to take a deduction against taxable income rather than against your estate. But you may also want to consider a charitable remainder trust, which lets you leave assets to charity upon your death without bequeathing them in your will, while providing an immediate deduction against income.
“ Don’t wait until right before you want to sell to transfer the property into a charitable trust. ”
These irrevocable trusts are funded with assets that are then turned into a lifelong income stream for you and your spouse, or your beneficiaries. What’s left in the trust when you die goes to charity. At least 10% of the original value of the trust must go to charity. In the year the trust is set up, you get an income-tax deduction for the eventual gift.
The value of that deduction is calculated using a formula involving life expectancy, interest rates, and other factors. The lower the interest rates, the lower the value of the deduction, so as rates continue to rise, as expected, these trusts will become more attractive.
And as long as stock market values hold up, the trusts look particularly good from a tax-avoidance standpoint. With the bull market in stocks nearing its 10th year, many folks are sitting on highly appreciated assets. By transferring assets with big gains into the trust, you remove your eventual capital-gains tax burden. Once transferred to the trust, assets are typically sold—with no capital-gain tax consequence—and shifted into income-producing investments to provide for the trust’s annuity.
Other appreciated assets, such as real estate or a business, can be transferred to a charitable remainder trust, but a word of caution: “Don’t wait until right before you want to sell to transfer the property into a charitable trust,” says Darin Donovan, a shareholder at Hopkins Carley, a Palo Alto, Calif.–based wealth management firm.
The Internal Revenue Service frowns on estate-planning moves that appear to be purely tax driven. “At the point when you begin thinking about selling, you may want to transfer it into a trust then, before you ever contact a realtor,” Donovan says.
As with any estate-planning moves these days, be sure to consider the fact that by the time your will is unsealed, the estate-tax laws may have changed yet again. The current higher exemption is scheduled to expire and revert back to $5.49 million per individual in 2026 if Congress doesn’t move to extend it. The charitable remainder trust is irrevocable. So be sure you will be happy with the structure even if the tax rules are upended again.