Our estate planning attorneys often help New Yorkers create trusts that are used to pass on assets to charities. When structured properly, gifts to favorited causes is both a great way to give back and a smart financial move to save on taxes and ensure that your long-term inheritance wishes are met.
A Charitable Remainder Trust, for example, is sometimes a prudent estate planning tool. This is particularly useful for those with assets that have significantly appreciated who wish to save on taxes while generating an income stream on something that will eventually go to charity. Essentially, this works by creating a trust that is managed by the charity to which the asset will go. The trustee (the charity) then pays you a portion of the income generated by the trust for so many years or the rest of your life. Upon your passing the charity retains the principal.
These trusts have many benefits. They can take assets out of one's estate for estate tax purposes. Also, income tax deductions can be taken on the fair market value of the interest that remains in the trust. By using appreciated assets, the capital gains tax can also be avoided.
Changing in the Future?
All those considering leaving sums to favorite causes should learn more about the charitable remainder trust option to see if it is a good fit. It is also crucial for individuals to remain aware of any possible changes in the tax code which might alter how charitable donations affect one's tax obligations. With tight budgets on the federal level specifically, policymakers continue to make noise about limiting the tax benefits of giving to these organizations in certain ways.
Part of the problem, as discussed in a recent Accounting Today story is that many taxpayers may mistakenly take income tax deductions that violate current law. Specifically, the story points to a new Treasury Inspector General for Tax Administration report which found that nearly $4 billion of deductions are taken by taxpayers annually for "noncash" charitable contributions erroneously. While it is perfectly legal to take deductions on noncash contributions (like those that are often part of charitable remainder trusts), there are specific reporting requirements that must be met Many taxpayers are apparently skirting over those rules.
All of this may lead to IRS changes to crack down on those taking these deductions and lowering their tax liability without following proper protocols. The report itself identified six recommendations, such as better educating taxpayers and more aggressively enforcing the rules.
It is unclear what specific changes, if any, will be made in the coming year to deal with this issues. But, at the very least, this is a key reminder of the need to have professional help with all of these inheritance and tax issues to ensure that the law is following every step of the way.