About 99.7 percent of folks who die do not need to file a U.S. Estate Tax Return, form 706. The exclusion (before adjusting for taxable gifts) is currently $5.43 million. That can be left without a federal death tax.
Some states, about 19 of them, do have estate or inheritance taxes, but California, Florida and New York join Nevada in not having a state death tax.
Some folks will show a desire to make gifts that are larger than they feel they can prudently make. They wonder if they will die before taking care of loved ones, or they might outlive their resources or even they could suffer debilitating illness or economic reversals. They are reluctant to sell assets that have grown in value because selling could trigger big capital gain income taxes.
An alternative that might be considered is a 5 percent charitable remainder unitrust (CRUT) using appreciated securities. The giver (donor) would have no capital gains tax to pay. The CRUT would sell the securities and it is tax exempt. The giver would receive an income of 5 percent of the value each year that would be mostly taxable income. Or she (or he) could designate some other person to receive the income.
The giver would get an income tax deduction for the estimated remainder interest that would go to a church or charity of her choice. The amount of the deduction depends on the value of what is given. Depending also on the age of the giver, the deduction could be as much of 66 percent of the value given, if she was age 79 for instance.
The charity is the remainder beneficiary and will receive the funds without them being encumbered by the expense and delay of probate.
If the securities owned were mostly in just one company, the CRUT could sell the item that was given and reinvest in a diversified manner to reduce risk. Since the CRUT would not pay an income tax, what would have been lost to income taxes otherwise is available for investment.
The giver can not get the funds back that are in the trust, but the funds also are beyond the reach of creditors or individuals that might try to take advantage of her in later years.
The 5 percent income interest might be more than is currently being received from dividends or interest. That would increase the income for the giver.
Of course there are various rules to be observed, but nothing that can’t be handled. I wrote “she” because women live longer, have more money and make better astronauts.
If you want more income without selling appreciated securities and paying a tax on the gain, you want an income tax deduction and you have a charity you want to benefit, maybe this is an idea worth looking at.
Did you hear? “If you want others to be happy, practice compassion. If you want to be happy, practice compassion.” — Dalai Lama.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.