On January 9, 2014, I had the pleasure of speaking at the Sacramento Estate Planning Council’s 2014 Technical Forum, a day-long event focusing on estate and charitable tax planning at the McGeorge School of Law (the event’s co-sponsor). It was a great way to begin the speaking year. Not only does the event draw a large crowd of experienced professionals from the Sacramento estate planning community, but speakers and sponsors are treated to an elegant dinner at the end of the day. This year’s Chef, Noah Zonca of Capital Dime, prepared an amazing six course dinner. If you’re ever invited to speak at this event, accept!
In my session I again focused on the most effective options in charitable planning in the current economic and tax environment. Here are two key questions and answers raised during the session:
What is the most effective way to make a lifetime charitable gift and maximize the charitable deduction benefits?
The most effective way to maximize the income tax benefits of a lifetime gift is to use long-term appreciated property to make the gift. This simple technique is not new, but important because so few donors use this approach. If a donor itemizes, she or he receives a charitable deduction for the value of the gift. In addition, the donor avoids tax on the the long-term capital gain in the contributed asset. This allows two tax benefits for a single gift. However, many donors do not itemize (only 32% of all taxpayers itemized in 2011, the last year for which there is data). These non-itemizing donors still receive the benefit of avoiding long-term capital gains on contributed property. Advisors and charities should encourage their donors to consider this simple idea.
What is the biggest impact of the higher $5.34 million estate exclusion (for 2014) on testamentary charitable planning?
The liveliest discussion in testamentary charitable planning focuses on using non-charitable trusts for charitable purposes which is a trust that combines both individual/family and charitable interests and does not qualify for a charitable estate tax deduction. Since 1969 planners have carefully structured charitable remainder trusts, charitable lead trusts, and perpetual wholly charitable trusts in a way that complies with the Internal Revenue Code and regulations relating to those entity forms. This often leads to difficult discussions with donors since the Code and regulations create many limits on how these gifts can be structured and the amounts that can be distributed. If the estate is smaller than the $5.34 million exclusion amount, testators can create trusts that do not need to comply with those complex rules and limits. Instead, testators can create testamentary trusts that generate benefits for both family and charity, can direct specific distribution or withdrawal standards for each, and can give the trustee discretion in allocating available funds. Planners who take this approach for their clients need to focus on two things. First, this mixed-beneficiary testamentary trust will be taxed as a complex trust. This means special attention should be paid to managing the tax consequences of undistributed revenue inside the trust. Second, this custom-designed trust requires new documents. Most planners rely on carefully vetted charitable trust and estate planning documents to achieve client goals. Custom-designed trusts will need to be carefully reviewed to avoid unintended administrative, tax, or dispositive problems.
There is also likely to be more interest in combining family and charitable interests in testamentary gifts of non-trust property. For example, the client may chose to separate income and principal interests in assets by directing that at death the client’s brokerage account revenue is to be distributed to family members for 10 years before all assets are distributed to one or more named charities (or vice versa, the income to one or more charities with the account assets to the family at the end of the term). There are many new options for planners working with clients with non-taxable estates. If you have solved a client’s charitable planning goal using non-traditional structures, let me know by commenting on this post or commenting me directly. I expect to see great creativity in this area!