There is only so much Shredded Wheat you can eat. Muttered by folks suffering the Great Depression, this barb suggested that those few heirs still inheriting vast fortunes might find a more beneficial use of their funds, beyond the pursuit of excess. Today, many Americans agree. In 2004 U.S. taxpayers, urged by personal largess and allowable deductions of Schedule A, donated $165.5 billion to charities, the IRS reports.
But we Americans want it all. We want to keep on donating to charities, direct our life savings to our children, and most of all we want to keep it out of the taxman’s clutches. In answer, sharper non-profits are showing taxpayers how these three desires can be mutually fulfilled. The Gift Planning Council of New Jersey, in sponsorship with the Princeton Area Community Foundation, is holding its annual conference on Wednesday and Thursday, April 23 and 24, at 7:30 a.m. at the Sheraton at Woodbridge Place in Iselin. Cost: $200. Visit www.giftplanning-nj.org.
Among the many nationwide experts, attorney Charles Schultz, founder of Crescendo Interactive Inc., presents “IRAs: Turning Bad Assets into Good Assets.” Schultz claims that a lot of his idealism came from the times of his youth. Growing up in North Dakota, he graduated from North Dakota University in 1970 with an engineering bachelors. He then earned his law degree in Michigan University, and a tax specialization at Washington University.
After a two-year stint working in a bank, Schultz joined his first charitable foundation. Here he discovered the need for a professional planning link between donors and non-profits. Seeing this need Schultz launched Crescendo Interactive in 1984, using the special gift-planning software he and his wife, Ardis, had spent the last 18 months designing. Today Crescendo produces a host of seminar packages and software that allow individuals to plan their giving most advantageously. These tools are available for non-profits, advising tax attorneys, and individual donors. Visit www.crescendointeractive.com. Schultz also publishes the weekly newsletter “Gift Law.”
It’s only wise to grab every tax saving measure, and we do. Currently, one quarter of America’s net worth — $4 trillion — is tied up in qualified funds, such as IRAs. This has proved a great asset for parents, allowing them to set aside untaxed funds as part of their life savings. But for the children these savings can quickly turn to ashes when the IRS steps in with its income tax bill.
Although the whole of estate tax is presently under Congressional consideration, with heavy pressure from the administration, estate taxes in 2008 stand as follows: If you die today, the first $2 million passed on to your heirs are tax exempt, the rest is taxed up to a maximum of 45 percent. With home values having soared over the last decade, a substantial number of individuals are exceeding the $2 million exemption. But as Schultz points out, one doesn’t have to just grit one’s teeth and take a 45 percent hit. There are better ways.
Remainder trusts. A popular shield against heavy estate tax assaults, more than 8 million Americans have established some sort of testamentary or remainder trust. Schultz suggests that this method particularly suits individuals with estates ranging from $1 million to $5 million. The remainder trust may be executed during life or afterwards. Basically, the grantor donates certain assets to a charity, while still retaining use of the assets for a set time. The income from these assets can go to his heirs or beneficiaries.
After the set time, the assets’ principal is turned over to the charity. The children have received income. Dad, meanwhile, has avoided any capital gains on the donated assets and even claims a tax deduction for the fair market value of the interest remaining. Doing well by doing good.
Grantors are allowed to give an untaxed maximum of $1 million annually (that’s $2 million for Mom and Dad combined,) with a limit of $12,000 annually to any single benefactor. Schultz notes that there could be some state taxes factored in. Such trusts can also be established through the will as testamentary trusts.
Lead Trusts. Lead trusts have become the tool of choice of larger estates, approximately $20 million and up. Acting as a kind of reverse remainder trust, the benefactor establishes a set amount of his assets to go into a fixed-term trust. In this case, a chosen percentage of the assets go to the charity annually, and at the end of term, all remaining principal and income go to the heirs.
While there is no income tax deduction for lead trusts, Schultz notes that gift and transfer taxes can drop to zero if properly engineered. Most large estate grantors are placing 30 to 60 percent of their assets in lead trusts, with the practice of layering trusts becoming increasingly popular.
Layered lead trusts keep income flowing over time. The grantor sets one bundle of, for example, $5 million due in 10 years; then another $5 million due in 15 and another $5 million due in 20 years. This way, the charity gets a steady stream of income and the children receive periodic checks, reminding them of how hard Mom and Dad scrimped and saved. The terms may be fixed to arrive when children or grandchildren will probably need college or wedding funds.
“In the larger estates, parents must consider their gifts’ effects on their children,” says Schultz. “You want to target enough funds at the right time to provide for them, but you do not want to dump on them amounts that will quell initiative.” Many parents have combated this quandary by making their children part of the giving process. The lead trust initiates the funding of a certain charity, and the monies bequeathed to the children include wishes, or even strings, that they further execute support of their folks’ favored organization.
Schultz warns adamantly that all involved parties must take part in the gift planning, not just the grantor and his attorney. Not every charity can adequately handle every type of trust. Still others have existing programs that will enhance your funds’ use. Heirs, likewise, might be able to help estimate reasonable target amounts. While you don’t want your children asking strangers if they can spare a dime, your offsprings’ common sense may surprise you. They probably already realize that there is only so much Shredded Wheat you can eat.