The Salvation Army sponsors a national Estate and Charitable Gift Planning Seminar which involves not only a local audience at the Minneapolis Convention Center, but has an international web-based audience through a satellite link. The following questions were raised at the 21st Annual Estate and Charitable Gift Planning Institute on September 25, 2013.
What is the most important practical aspect of the higher estate and gift tax exclusion amounts put in place in the American Taxpayers Relief Act of 2012?
Most planners estimate that the higher estate and gift tax exclusion amounts ($5.25 million for each individual in 2013) mean that less than one quarter of one percent of all decedents will be subject to estate tax. While best practice in estate and gift planning has always been to start with the client’s goals in planning (as opposed to letting taxes drive the estate and gift planning process) it is more important now than ever. Ask the client to prioritize personal and charitable planning priorities, then create a personal and charitable plan that addresses those objectives. There has never been a better opportunity or more flexible platform to combine personal and charitable goals to meet the client’s goals.
How will the American Taxpayer Relief Act of 2012 affect irrevocable trusts?
The greatest impact on existing irrevocable trusts is the increased tax rate inside those complex trusts at the higher income levels. However, the most noticeable impact will be on testamentary trusts created in an environment without estate tax consequences. That may mean donors have the opportunity to create trusts without the limitations of qualifying for the marital deduction, without the limitations of family trusts geared to the exclusion amount, and with the possibility of including charitable and non-charitable beneficiaries in a single trust. The key to the ongoing success of these trusts will be to clearly specific distribution options and priorities, managing trust terms, and managing the income tax impact inside the trusts.
My client has a charitable remainder annuity trust with an 8% annuity payout that had an initial value of $400,000 but is now valued at less than $100,000. It appears the trust will be exhausted before the end of the trust term. What are my client’s options?
Many trusts created in the late 1990’s and early 2000’s with high annuity rates have struggled in the economic environment since 2000. The erratic markets, and many years of negative market returns, have substantially diminished the market values of these trusts and have set them on a path to potential exhaustion. It is possible in most states to terminate these trusts. Check the IRS regulations guiding termination as well as state laws on trust termination. With the agreement of all parties, including the non-charitable beneficiary(ies), the charitable remainder beneficiary(ies), the Trustee and the State’s Attorney General who represents the charitable interests in the state, it is possible to calculate the value of the charitable remainder interest(s) and the annuitant(s) income interest and terminate the trust and distribute the assets in accordance with the calculation.
Commercial annuities issued by insurance companies have protection when insurance companies go out of business. Is there similar protection when charities issue charitable gift annuities and then go out of business?
A charitable gift annuity involves a gift to a charity in exchange for that charity’s promise to pay the annuitant (or up to two annuitants) an annual annuity payment based on the annuitant(s) age at the date the charitable gift annuity is created. To qualify for a charitable deduction, the charitable gift annuity must be backed by the charity’s general assets. Therefore, if the charity runs out of the gift amount contributed by the donor, but still has general assets, the annuitant(s) will continue to receive annuity payments. If, however, the charity goes bankrupt and has no assets the annuitant’s payments may cease. Both the donor and the donor’s advisor should do due diligence to determine the financial stability of the charity before entering into a charitable gift annuity arrangement. Thousands of charities in the United States operate successful and viable charitable gift annuity programs.