Giving Strategies for Tax Reduction

With the current estate tax exemption exceeding $13 million, many taxpayers and tax preparers assume that estate tax strategies are only necessary for the ultra-wealthy. What many fail to realize is that estate beneficiaries could still find themselves in an unforeseen tax situation if assets are not transferred intentionally and with income taxes in mind.

Estate tax planning strategies and planned giving are important conversations to have with clients, especially those looking at asset transitions later in life. Having these conversations now can save your clients and/or beneficiaries significant money as opposed to waiting until after death in many cases.

There are several planned giving strategies that can empower clients to navigate how they would like their assets used while taking advantage of tax benefits. Planned giving strategies allow clients to leverage charitable deductions, remove assets from their estates, and potentially secure lifetime income.

Charitable Remainder Trusts

These irrevocable trusts allow clients to place assets into a trust that pays out income over a set term or the lifetimes of designated beneficiaries. Upon termination of the trust, the remaining assets pass to the charity. Clients can claim an income tax deduction when assets are placed into the trust. This can save estate taxes because the assets are technically owned by the charity upon transfer. The client retains the right to receive income payments for a period of time.

This strategy is helpful even when a client doesn’t have a taxable estate, but perhaps also has assets that don’t necessarily need to pass to children, putting them in an income tax situation. Instead, the client can use current income and elect where their assets are used after death.

Charitable Lead Trusts

In contrast to remainder trusts, lead trusts pay income to the charity first for a set term, with the remaining assets passing to beneficiaries later. While less income tax deduction is available up front, lead trusts can be effective at transferring wealth to heirs free of estate and gift taxes or at significantly reduced rates if properly structured.

This may be a better option when clients want to see more funds pass to their beneficiaries but over a length of time that allows for strategizing on their part.

Charitable Bequests

One of the simplest approaches is to name a qualified charity as a beneficiary of part of the estate. Upon death, these assets pass directly to charity and avoid estate tax. Bequests don’t provide an income tax break now like other planned giving arrangements, but they can still reduce estate taxes if that is the primary goal for your client.

Advisors should focus on the needs of the client. In these cases, the goals of every individual are different and each family will look different when discussing the needs and desires for the beneficiaries. It’s important to keep these key points in mind to maximize client value of your advisory time:

  • Explore planned giving options early when estate value is lower. This maximizes tax savings over time.
  • Trust structures allow clients to still receive income while reducing estate taxes.
  • Bequests avoid taxation entirely on the gifted assets.
  • Follow all rules and regulations when establishing vehicles like trusts and consider partnering with an attorney

Small planning steps today can produce big tax savings in the future while also benefitting worthy charitable causes. Clients often do not know the nuances of estate and gift tax rules, especially when it comes to the present and future value of assets. Creating a winning team of advisors to help guide them can ensure happy clients and boost the bottom line of your practice.

If you want to dive into more details on this topic, be sure to register for this week’s Tax Talk as we dive into how to use these strategies to support your clients.

Christine Gervais

Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.

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