100% Estate Tax Elimination with a Testamentary Charitable Lead Trust or Charitable Remainder Trust
October 15th, 2012
A testamentary charitable lead trust (CLT) or charitable remainder trust (CRT) can be used to totally eliminate estate taxes if the trust is structured properly. By including a formula and specific wording, a testamentary trust can be structured so that, upon death of the Trust Creator, a charitable contribution is made to a public charity equal in size to the amount of estate taxes that would otherwise be owed to the government. Since every dollar donated to a charity can be deducted from estate taxes, this strategy reduces estate taxes to zero.
The Ohio planned giving attorneys at Gudorf Law Group highly recommend that anyone leaving an estate that will be subject to estate taxes use a testamentary trust to have more control over how their money is used. Would you prefer that the U.S. government decide how your hard-earned money is used, or would you rather see it used by a charitable organization that supports a cause or interest that you care about?
A testamentary charitable lead trust (CLT) or charitable remainder trust (CRT) can redirect every potential estate tax dollar into the charity or charities of your choice and keep government hands off your money.
How a Testamentary Charitable Lead Trust or Charitable Remainder Trust Works
For the rest of 2012, the first $5 million of any estate is exempt from federal estate taxes, and every estate dollar after the first five million is taxed at up to 35%. However, unless Congress changes the law, on January 1, 2013 only the first $1 million of any estate will be exempt from federal estate taxes, and every estate dollar after the first million will be taxed at up to 55%. So a $2 million estate would pay about $550,000 in estate taxes if no deductibles apply.
Fortunately, the federal government allows every U.S. citizen the ability to redirect estate tax dollars to their favorite charity. Every dollar donated from the estate of a deceased person to a qualifying charitable organization reduces the estate tax owed by that estate by $1. An estate that donates an amount to charity that is at least equal to the amount of estate tax owed will owe no federal estate tax. A testamentary charitable lead trust or charitable remainder trust achieves exactly this.
A testamentary trust is a trust that is created upon the death of the Trust Creator based on instructions given prior to death. When drafting a testamentary trust, a sophisticated attorney can include language that causes an amount of money equal to the estate tax owed to be donated to a chosen charitable organization so that no estate tax is owed. Since estate tax laws change frequently and the amount of estate tax owed can fluctuate, rather than stating a specific amount to be donated, the amount is calculated using a formula based on the estate tax that would be owed according to the tax laws at the time the estate is scouted. The Ohio estate planning attorneys at Gudorf Law Group have considerable experience drafting charitable lead trusts and charitable remainder trusts of this sort.
For example, as noted above, a $2 million estate administered after January 1, 2013 will owe $550,000. If the individual, prior to his death, set up a testamentary charitable lead trust with $1 million, the trust could be structured to make annual payments of $55,000 a year to a qualifying charity for 10 years. The money remaining in the trust could then be passed to the Trust Creator’s heirs. Since the charitable contribution is paid out over 10 years, more money remains in the charitable lead trust for a longer time and earns more interest. This results in more money for the heirs to inherit. Note that capital gains tax will be reduced as well since no capital gains tax will be owed on the portion donated to charity.
If the same individual had set up a testamentary charitable remainder trust, the trust would work in the same way except that the heirs would receive the yearly payouts for 10 years and the charity would receive the money left over in the trust.
Find out more about testamentary charitable lead trusts and charitable remainder trusts
In Ohio, the planned giving attorneys at Gudorf Law Group, LLC, can help you determine whether a testamentary charitable lead trust or charitable remainder trust can help you eliminate federal estate taxes and leave more inheritance for your heirs. Arrange a free consultation with our Ohio planned giving attorneys by calling 1-877-483-6730.
Tags: Charitable Giving