Because of recent changes to the federal estate tax many people incorrectly believe that they do not need to plan accordingly.  However the current federal estate tax system is due to expire after December 31, 2010 and there is uncertainty about what to plan for.  If proper planning isn’t performed a person’s estate may be taxed at a rate of up to 48%.  The good news is that if one is charitably inclined there are many estate planning techniques that can both reduce taxes and accomplish a person’s charitable purposes.  Here are some of the more popular ideas and their benefits.

Credit Shelter Trust—A credit shelter trust is one of most the fundamentally sound methods for a married couple to reduce estate taxes.  This technique permits a decedent to pass up to $1.5 million, in 2004, free of estate tax to someone other than a spouse while providing a spouse with lifetime income from the trust.  A charity or other beneficiaries can then receive the remainder of the trust upon the surviving spouse’s death.  This technique is best used for married couples with at least $1.5 million or more in assets and insurance.

Life and death direct gifts to charity—A person may make a lifetime gift to charity and receive an income tax deduction and reduce their gross taxable estate for federal estate tax purposes.  An individual may also use a will or trust to give property to charity at death.  The effect is that an estate tax deduction is permitted for the value of the property.

Charitable life insurance planning—While a person is alive they can make a gift of an existing fully paid life insurance policy to a charity or make a charity the beneficiary of a policy.  By doing either of these the death benefit of the policy will be removed from the individual’s estate, thus reducing the tax base of the decedent’s gross estate.  An income tax deduction is also permitted for an outright gift of the entire policy to a charity.

Gift of residence with retained life estate—A person can deed a residence to charity and continue to occupy the residence for the rest of his or her life.  The donor can receive a charitable income tax deduction using this technique as well as successfully remove the value of the home from the gross taxable estate at death.

Charitable Remainder Trusts—A charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT) are two popular techniques.  With a CRAT a gift of cash or property is made to an irrevocable trust.  The donor or another non-charitable beneficiary receives fixed payments for a term of years.  The CRUT is created in the same way as a CRAT.  However instead of fixed payments the donor receives variable payments based on a fixed percentage for the term of the trust.  At the end of the term of either of these trusts the designated qualified charity receives the property in the trust and any appreciation.  The benefit to the donor is that these arrangements can qualify for an income tax deduction, remove assets from the estate and insure a stream of income to the donor for a term of years before death.

Charitable Lead Trusts—A charitable lead annuity trust (CLAT) and charitable lead unitrust (CLUT) are two types of “lead” trusts.  These are established in an irrevocable trust.  In contrast to remainder trusts, with both of these arrangements the payments to charity come first.  A CLAT pays a charity a fixed payment.  A CLUT pays the charity variable payments.  The remainder interest in both of these can pass to anyone the donor desires.  An advantage of both of these is a large income tax deduction to the donor upon establishment.  Another benefit is that the remainder interest is in effect “discounted” thus reducing the gross taxable estate.  Furthermore, the present value of the charities income stream can be deductible for estate tax purposes.

Gift of conservation easement—A conservation easement is a restriction placed on your real property for the benefit of a qualified conservation charity.  An example is a restriction prohibiting industrial development on residential property.  The easement allows both an income tax deduction and an estate tax deduction for the donor.  Generally the donor’s intended use of the property is never affected.

This is just a summary of these techniques.  The applicability of each varies on a case by case basis.  If you are concerned about reducing your potential estate taxes or have a charitable intent for your property it is best to consult with a qualified estate planning attorney who is experienced in these matters.  Please call our firm for a free initial consultation.