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Did you know that your generosity could lead to tremendous tax advantages for you and your family? The more you give and the more effectively you give, the more benefits there will be for both you and the charitable organization.By using advanced estate planning techniques, you can make a substantial gift to your favorite charity and receive some generous tax benefits. And all the while, you'll be reducing the size of your taxable estate. This will relieve the tax burden for your heirs and may even provide an income stream for the beneficiaries you designate.Are You Paying Enough Taxes?
Chances are you don't really know how much you are paying in taxes each year. And many people feel that there's nothing they can do about it anyway. But when it comes to your estate, we'd like to share some strategies that can help alleviate your tax burden. Do you realize that you pay tax on your salary, tax on your investment income, tax when you buy assets, tax when you sell assets, tax when you give assets away and tax when you die. Enough is enough.Homework assignment: For one month, track the impact of taxes on your finances. Start by looking at your pay stub. Write down all the federal, state and local taxes you incur. When you go shopping, make a note of the taxes you pay. Save receipts for everything. And don't forget every day expenses like tax on gasoline. You'll be amazed as how much of your income goes toward taxes.Should You Pay Taxes Now Or Later?
Estates that exceed tax exemption will be subject to federal estate taxes that start at 37 percent and go up to 55 percent. Now that long-term capital gains are only taxed at 20 percent, you may want to pay some taxes no on highly appreciated assets or consider a charitable remainder trust that could help you defer or even avoid capital gains taxes and some estate taxes as well.What Happens When You Sell Appreciated Assets?
You'll be faced with a capital gains tax on the appreciation of assets you sell. Simply stated, a capital gain or loss is the difference between the original purchase price and the final selling price. If shares of stack were purchased for $10,000 and later sold for $25,000, the capital gain would be $15,000. If you apply 20 percent capital gains tax, the tax liability would be $3,000.Are You Creating An Unnecessary Tax Burden?
Hopefully your heirs will not have to share too much of your estate with Uncle Sam. With estate tax rates as high as 55 percent and with taxes due in nine months, you my be putting your heirs in a bind if you do not implement effective estate planning. They may be forced to sell part of their inheritance just to pay the taxes. And they may not be able to get fair market value for the assets if they have to sell them in a hurry.What Are The Reasons For Charitable Giving?
Most of us are familiar with the traditional reasons for giving to charity. We give out of a heartfelt concern for the suffering of the poor, the plight of children, the preservation of the environment, the triumph of a political view, or finding a cure for diseases to name just a few examples. These types of donations are driven by each person's individual beliefs.What About The Tax Benefits?
Some people are motivated more by the tax benefits than by the desire to give to a specific charity. And not surprisingly, charities are more than willing to accept your donation irrespective of your motivation. By properly structuring a charitable donation, you have the potential to avoid capital gains tax, receive current income tax deduction and enjoy a steady stream of income.How Do I Make A Gift To Charity?
There are two main ways to donate to charity: outright gifts and charitable trusts. Outright gifts include writing a check and giving cash or property to a charity. It's that simple. It's over and done with just like that. The charity gets the immediate use of the gift and the donor gets a current income tax deduction.Charitable trusts give you the potential to substantially enhance the value of your donation and reap some additional benefits for you and your family. The most common types are Charitable Remainder Trusts, which could either be a Charitable Remainder Annuity Trust or a Charitable Remainder Unitrust, and Charitable Lead Trusts. A Charitable Remainder Trust, or CRT, enables you to retain an income interest in the asset you donate to charity.How Does The CRT Work?
The first thing to do is transfer an appreciated asset to an irrevocable trust that has a charity as its ultimate remainder beneficiary. The person or persons who create the trust and transfer the assets are called Trustors. The person who manages the assets is the Trustee. And finally, the beneficiaries are the people for whom the trust was created. In a CRT, there are tow kinds of beneficiaries: income beneficiaries and remainder beneficiaries. The income beneficiaries would typically be the donors and possibly other family members. In a CRT, the remainder beneficiary is always a qualified charity.What Happens Next?
The trust is now the owner of the property. The Trustee sells the assets and reinvests the proceeds in an income-producing asset. Assets that are donated as part of a CRT are typically ones that were generating little or no income. Reinvesting them in stocks or bonds, for example, increases the income potential. Since charitable trusts are exempt from taxes, there is not tax due on the appreciation of the donated assets.How Else Do The Donors Benefit?
When you make a charitable donation, you'll receive a current income tax deduction that you can take in the year of the gift. Your deduction takes into account a variety of factors, including your level of income, the amount of income received from the CRT, the type and value of the asset, the ages of people receiving income from the CRT, and the applicable federal rate.Are There Different Options For Receiving Income?
Yes. You can choose either a lifetime income option or to receive income for a set number of years. And the income can be based on either one spouse's lifetime or for the lives of both spouses. Choosing the single lifetime income option has a higher monthly payout than the joint lifetime option., but it could leave the surviving spouse without the benefit of that income. Early retirees may want to consider income for a set number of years to bridge the gap until their pension benefits begin.Does The CRT Generate A Fixed Rate Of Income?
There are tow types of CRTs. The Charitable Remainder Annuity Trust (CRAT) can provide fixed income. It allows you to specify a certain dollar amount or percentage of the initial principal that will provide fixed income. This payment will remain constant for the life of the CRT. Unfortunately, this option does not give you any protection against rising inflation.The other type of CRT is the Charitable Remainder Unitrust (CRUT). With this option, your income level will fluctuate each year. The determining factor is the annual value of the CRTs assets. The CRTs assets are allowed to grow on a tax-free basis. This enables the compounding of earnings and growth without an annual tax bite. If the assets are invested wisely, your income amount will also increase. Of course, the opposite is also true. This option does give you more control and could help protect you against inflation.What's The Impact On The Family Members?
The donors' children may feel that they are entitled to the assets that were donated to charity. They may feel shortchanged. But there is a strategy that can replace the gift to charity and provide substantial benefits to the heirs.What Is A Wealth Replacement Trust?
This trust uses life insurance to make sure that the heirs receive an inheritance. This type of trust is called an Irrevocable Life Insurance Trust or ILIT. The donors use some of the income from the CRT and give it to the Trustee of the ILIT to purchase a joint survivor life insurance policy in the name of the new trust. This keeps the life insurance policy out of the donor's taxable estate, thereby enabling the heirs to receive a tax-free death benefit. If you have a million -dollar life insurance policy held in your own name instead of a trust, your heirs would receive less than half of the death benefit if you were in the top tax bracket. So the ILIT could save you hundreds of thousand of dollars.What Else Can The ILIT Do?
Using an ILIT can enable you to control how, when and in what instances your heirs receive their inheritance. Moreover, it provides ready cash for your heirs to pay estate taxes and other expenses. This will save your heirs from having to sell off part of the estate to meet the estate's financial obligations.Who Benefits The Most From A CRT?
Let's look at who can benefit the most from charitable giving. You don't have to be a Rockefeller or Kennedy to take advantage of a CRT. There are other factors such as your age, our income needs, and your tax situation that may make CRTs an appealing option.Successful investors can reap the rewards of CRTs. If you have experienced some capital gains in the stock market over the last couple of years, you may be a good candidate. After all, no one wants to see all those investment profits go to waste on the government.Property owners can benefit from the fully appreciated value of their property. This leads us to large tax benefits and a more significant gift for the charity. The sales proceeds can then be reinvested in income-producing investments at a competitive rate.Business owners have some unique benefits when it comes too charitable giving. Owners of closely held businesses can gift company stock to charity. The business would typically buy back the stock. This allows for some attractive benefits without giving up control of the business.Early retirees who are looking for an additional source of income can benefit from CRTs as well. The new or increased income flow can help fill the gap between the person's retirement and the time that pension benefits begin.Philanthropists will be interested in new ways to maximize their gifts to charity. Charitable planning enables them to give the full value of an asset to charity. This saves capital gains tax and creates a current income tax deduction.Five Easy Steps To Charitable Trust
At this point, you may have strong interest in pursuing a CFT strategy. The following steps will help give you a better understanding of the practical steps you need to take to get a plan up and running.

1. Are you a candidate?
   For the CRT to work, you only need to say yes to these two questions: Do you own a highly appreciated asset? Are you interested in selling it? By answering in the affirmative, you qualify as a good candidate for a CRT. Assets that would be suitable for a CRT include publicly traded stock, real estate, family businesses and other highly appreciated assets such as jewelry and collectibles.
   
   
2. Identify the charity.
   The nest step is to find a charity that has been approved by the IRS. This step is crucial because many nonprofit organizations are not on the approved list published by the Treasury Department. There are no tax benefits associated with gifts to unapproved charities.
   
   
3. Confer with your advisors.
   Make sure that you work with a qualified tax or estate-planning attorney when assessing your needs and drafting your estate planning documents. Many professionals will take about estate planning but they are not all qualified to help you produce your legal documents. You'll also need to speak with a representative of the charity's Planned Giving Department and let them know your intentions. And finally, confer with a qualified CPA to get a better understanding of the tax implications of setting up a CRT.
   
   
4. Draft the documents.
   Remember to go through this process carefully as you are making an irrevocable gift. Be sure to have the property appraised to determine its fair market value. Then calculate the tax and financial benefits associated with the gift. Next, have a qualified estate planning attorney draft the CRT documents according to your wishes. And finally, create the title transfer documents and finalize the trust.
   
   
5. Transfer title to the trust.
   Now that the documents have been drafted, it's time to sign the transfer documents over to the trust. By doing so, you no longer own the assets. You will retain an income interest in your gift to charity, but the asset is no longer part of your taxable estate.

Here are a few estate-planning examples that show the impact of taxes and the difference charitable giving can make. We'll first look at the estate of Bob and Helen Hanson. They are aged 62 and 57 respectively. They currently own a $1,000,000 asset with a zero basis that generates 4 percent income. Their taxable estate is $1,500,000. The Hanson's did not use any advanced planning strategies.

• Holding the Asset:
• Taxable income(4%)
• $40,000
• Less taxes
• - $6,000
• Annual spendable cash
• $34,000
• Taxable estate
• $1,500,000
• Less taxes
• - $353,750
• Net estate
• $1,146,250
• Selling the Asset
• Sales proceeds
• $1,000,000
• Capital gains tax
• - $200,000
• After-tax cash
• $800,000
• Reinvesting the asset at 7.5%
• After-tax cash
• $800,000
• Rate of return
• .075
• Income produced
• $60,000
• Less income taxes
• - $11,400
• Net spendable cash
• $48,600
• Net annual income increased by $14,600
• Evaluating the Impact of Selling the Asset
• Taxable estate
• $1,300,000
• Less taxes
• $267,750
• Net estate
• $1,032,250
• Net estate value reduced by $114,000
  compared to not selling the asset

Now let's look at the case of Michael and Rebecca Freeman. They are in the same situation as the Hanson's. They too have a $1,000,000 asset that they would like to reinvest at a higher rate of return. They would also like to make a substantial gift to charity. To help them meet their goals, they decided to use a CRT.

• Selling the Asset with a CRT:
• Sales proceeds
• $1,000,000
• Less capital gains tax
• 0
• After-Tax proceeds
• $1,000,000

Since the asset is sold by the Trustee of the CRT, there is no capital gains tax due at the time of the sale. This preserves the full $1,000,000 value of the asset. So even though their rate of return is the same as the Hanson's, their income is higher because it is based on a $1,000,000 asset instead of an $800,000 asset.

• Reinvesting the Asset with a CRT:
• After-tax value
• $1,000,000
• CRT payment
• .075
• Taxable income
• $75,000
• Less income taxes
• -$15,600
• Net spendable cash
• $59,400
• Evaluating the Impact of the CRT
• Assets to Charity
• $1,000,000
• Assets to Children
• $500,000

This example may be acceptable for some families who wish to provide a substantial gift to charity and are comfortable with leaving a $500,000 inheritance for their children. But there is a way to make sure the children still receive a $1,000,000 inheritance. An irrevocable life insure trust, or ILIT, can be set up and funded by income from the CRT. By having the Trustee purchase a life insurance policy with a $500,000 death benefit, the heirs will have a $1,000,000.

• Including and ILIT:
• Assets to Charity
• $1,000,000
• Assets to Children
• $1,000,000

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