You thought you did everything right. You and your spouse have saved enough money to build a big house, you’ve sent your children to the best colleges, and now you have a comfortable retirement filled with exotic travel plans and golfing with friends. You may even believe that you are leaving most of your estate to your children.One day you read an article (like this one) and find out that if your spouse passes away and leaves your entire $4 million dollar estate to you, there will be a huge tax liability when you pass away and leave it to your children. In fact, as much as 45% of the amount over $2 million dollars could be owed to the Internal Revenue Service (IRS) for Federal Estate Taxes. In 2008, you are allowed to leave $2 million dollars to your heirs free of estate taxes, but your kids may have to write a check for $900,000, or 45% of the balance of the estate, payable to the IRS.The IRS has approved many, many strategies you can use to reduce this liability to your estate. If you don’t take advantage of them, they will happily cash that $900,000 check without a second thought. One of these strategies involves the creation of a special trust, commonly known as a Charitable Remainder Trust (CRT), which allows you to leave a portion of your estate to charities and not-for-profit organizations. At the same time you are helping these charity’s generate revenue for their causes, you may receive a reduction in estate taxes, eliminate capital gains, and/or receive an income tax deduction.A CRT is an irrevocable trust that benefits two beneficiaries: the income beneficiary and the remainder beneficiary. You and your spouse may be the first set of beneficiaries, and the charity, or several charities, would be the second beneficiary. The trust is administered by a trustee who could be you and/or your spouse, or someone else you choose. There are no limits on how much you can contribute to a CRT.During your lifetimes, you and your spouse receive the income from the trust at a set rate per year. According to IRS rules, the trust must distribute at least 5% of the fair market value of the trust each year. At the death of both spouses, the remaining balance of the trust will be dispersed to the charities you named.Depending on the type of asset you contribute to the trust, and the type of charity you name to receive the remainder interest when you and your spouse pass away, you could receive an income tax deduction of 20-50% against your adjusted gross income. This tax deduction can be carried forward for 5 years or until used, whichever is less. The tax deduction is based on the amount of income you take each year. The higher the income, the lower the tax deduction as less money may be left to the charity in the end.The best assets to contribute to a CRT are highly appreciated assets such as growth stocks and real estate since CRT’s are not subject to capital gains taxes. By transferring the asset to the trust and having the trust sell it, you avoid paying any capital gains tax.If you are concerned about leaving your entire estate to your children, there are creative strategies that allow you to replace the amount you contributed to the CRT. One way is to purchase a life insurance policy for the amount you would like to replace, or the amount you would like your children to inherit. If this life insurance policy is purchased by another type of trust, called an Irrevocable Life Insurance Trust (ILIT), they may be able to receive the proceeds free of income and estate taxes. The income you receive from the CRT can be used to pay the premiums on the life insurance.Charities fulfill a need in society by helping those less fortunate than you, such as people with health problems and abused or homeless children and animals. The benefit to you is a reduction of your tax bill. You can do nothing and leave a big portion of your estate to the IRS, or you can choose to make a difference and leave a legacy.Since most tax strategies can be very confusing and must follow strict IRS rules to qualify, and since there are many different ways to utilize charities in your gift planning, I recommend you consult with your financial, tax and legal advisors to determine and establish the most appropriate charitable giving strategies for your specific situation.
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