Long Island Elder Law & Estate Planning

When you are planning your estate, you may want to consider trusts and acts of charitable giving. Generosity is its own reward, and there are many causes and institutions that can always use help.

In addition to the emotional rewards, you can also gain some tax advantages under certain circumstances when you engage in acts of philanthropy. With this in mind, let’s look at the estate planning structure called a charitable remainder trust.

Annuity Payments

When you create a charitable remainder trust, you are the grantor of the trust. The grantor will typically act as the non-charitable beneficiary. The non-charitable beneficiary receives annuity payments throughout the duration of the trust term. You set the length of the term when you create the trust, and the term could be for the duration of your life.

You also name a charitable beneficiary. The charitable beneficiary must receive at least 10 percent of the value of the trust after the expiration of its term.

With the charitable remainder trust called a charitable remainder unitrust, you receive a fixed percentage of the total value of the trust each year. The percentage must be at least five percent and no more than 50 percent of the trust’s value.

In addition to the unitrust, there is also a charitable remainder annuity trust. You would receive an annual fixed annuity payment rather than a percentage if you create a charitable remainder annuity trust.

Tax Benefits

There are a number of different tax benefits that can be gained when you create a charitable remainder trust. For one, you get a charitable deduction, because you are ultimately going to be donating money to charity.

People who are transferring more than $11.7 million (this is the 2021 exclusion) are potentially exposed to the federal estate tax. Here in New York, we have a state-level estate tax with a $5.93 million exclusion.

If you have estate tax concerns, assets that you convey into the trust would no longer be part of your taxable estate.

A charitable remainder trust can also be useful if you want to mitigate your capital gains tax exposure. If you are in possession of appreciated assets, you could convey the assets into the trust, and the trust could sell the assets. As a result, the capital gains responsibility would be spread out over the length of the trust term.

Unlimited Marital Deduction

As we have touched upon above, transfer efficiency can be a concern when you are planning your estate as a high net worth individual. The federal estate tax carries a 40 percent maximum rate. This tax is unified with the gift tax, and it carries the same rate, so you cannot give away assets while you are living to avoid taxation.

There is an unlimited marital estate tax deduction. Because of this deduction, you do not have to use any of your exclusion to transfer assets to your spouse in a tax-free manner. You can use the unlimited marital deduction to transfer unlimited assets to your spouse tax-free, either while you are living or after you pass away.

However, to use the unlimited marital transfer tax deduction, your spouse must be a citizen of the United States.

Why would this stipulation be in place? The tax man is not left out in the cold if you leave everything to your spouse tax-free. If you did this, he or she would be in possession of an estate that would be subject to taxation in the United States.

On the other hand, if the unlimited marital deduction was afforded to a spouse who is a citizen of another country, the surviving spouse could return to that country. If the surviving spouse never returned to the United States, the estate tax would never be collected.

Commonly Embraced Solution

Now that we have provided the necessary background information, we can look at the value of QDOT trusts. The acronym stands for a qualified domestic trust.

With this type of trust, you would make your non-citizen spouse the initial beneficiary, and most people would name their children (or anyone else you choose) as the secondary beneficiaries.

If you predecease your spouse, the trustee could distribute earnings from the trust to your spouse throughout the rest of his or her life. These distributions would not be subject to the estate tax, as long as they were not being drawn from the principal.

After your spouse passes away, the successor beneficiaries would assume ownership of anything that remains in the trust, and the estate tax would be applicable at that time.

Schedule a Consultation!

Taxation can play havoc with your legacy, but as you can see, there are steps that you can take to mitigate your exposure. If you would like to schedule a consultation, send us a message through our contact page or call us at 631-265-0599.

 

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About Mark S. Eghrari, Estate Planning Attorney

Mark S. Eghrari is an attorney in private practice in Smithtown, New York. He has been in practice since 1988. Mark S. Eghrari provides extensive estate and tax planning services to individuals and businesses. Mr. Eghrari’s primary focus is helping clients avoid probate, minimize or eliminate Federal and State Estate taxes and protect their assets from the high cost of nursing care, if they become ill.