Estate planning is a complex but important part of your financial planning strategy, especially when it comes to taxes. Learn how Charitable Trusts can play a role.
Do you have a high net worth that has you worried about paying Estate Taxes? Are you charitably inclined? If so, you need to consider how the following estate planning strategies may benefit you, your family, and your favorite charitable causes.
Use An Irrevocable Trust
One method to accomplish both of these goals — reducing or eliminating estate taxes while benefiting your favorite charitable causes — is to set up an Irrevocable Trust. As a word of caution, there are certain aspects of an Irrevocable Trust that cannot be changed in the future; you are, in essence, setting money aside for predefined purposes in such a way that you are not permitted to change your mind later. The loss of future control to change your uses of those assets has the key benefit of eliminating the assets in that trust from your taxable estate.
Here is a simple example illustrating the potential tax savings from using an Irrevocable Trust to reduce estate taxes:
| Your Situation | Without an Irrevocable Trust | With an Irrevocable Trust |
|---|---|---|
| Estate Worth: | $25,990,000 | $25,990,000 |
| Fund a Trust: | $0 | $12,000,000 |
| Tax Exemption (2025): | $13,990,000 | $13,990,000 |
| Amount Taxed: | $12,000,000 | $0 |
| Estate Tax Due: | $4,745,800 | $0 |
Next, we will explore a couple of ways that you can benefit your favorite charitable causes based upon how you structure your Irrevocable Trust.
Charitable Option: Charitable Remainder Trust
How a Charitable Remainder Trust works:
- Trust Income can be paid to you or the beneficiaries of the trust that you name (family members, for example).
- At the end of the trust term, the remaining assets go to a designated charity(ies) of your choosing as outlined in the trust.
- You may also eliminate capital gains income taxes on highly appreciated assets that you gift into the trust. As an example,
- Say you have $1 million in stocks, with embedded capital gains of $400,000.
- You will have no income taxes due on the capital gains if you gift those assets into the Charitable Remainder Trust.
- Had you sold the assets outside of the trust, you may have owed capital gains taxes of $80,000 (20% of $400,000).
Charitable Option: Charitable Lead Trust
How a Charitable Lead Trust works:
- Trust Income can be paid to a designated charity(ies) of your choosing as outlined in the trust.
- At the end of the trust term, the remaining assets go to the beneficiaries of the trust that you name (family members, for example).
- You may also eliminate capital gains income taxes on highly appreciated assets that you gift into the trust, as outlined above.
Is a Charitable Trust Right for Me?
A Charitable Trust can play a highly beneficial role in certain estate plans. If your interest is piqued and you wish to explore this option, we suggest that you:
- Discuss this strategy with your McKinley Carter financial professional to consider how it may fit with your long-term goals.
- Consult with an estate planning attorney to help you understand the implications and types of trusts you can create. If you need a referral to an estate planning attorney, please ask.
- Consult with your qualified tax professional/CPA to understand the tax implications of the move.
Working with the right professionals is essential to help you create a Charitable Trust so you can achieve your goals of reducing estate taxes and meeting your charitable wishes. Reach out to your McKinley Carter advisor or other trusted professional for guidance.