Reducing Estate and Income Taxes by Giving Your Tax-Deferred Assets to Charities

It's important to consider ways to ease tax burden on your tax-deferred assets. Without a solid strategy in place, estate and income taxes can dramatically erode these assets. One such strategy involves gifting part or all of your tax-deferred assets to charity and using life insurance to replace your wealth. (your tax-deferred annuities will pose certain additional challenges if you pursue this strategy; ask your financial consultant for details.)

Back To Top

The Advantages Of Leaving Tax-Deferred Assets To A Charity

When you name a charity as beneficiary of your tax-deferred assets, you can achieve a number of objectives:

• You generate an estate tax charitable deduction and thus lower your estate taxes.

• You save on the ordinary income tax you would have owed on the income these assets produced.

• You benefit a favorite charity.

A charity is subject to the same distribution rules as your estate. Generally, it must take distribution of your tax-deferred assets by the end of the fifth year after your death, as long as you die before reaching 70 1/2.

Back To Top

The Role Of Life In This Strategy

If you're concerned that leaving your tax-deferred assets to charity will mean less for your heirs, you may want to purchase life insurance with a death benefit at least equal in value to the gifted tax-deferred assets. You may not want to own the life insurance policy yourself for estate tax reasons. By establishing an irrevocable life insurance trust (a wealth insurance trust), you can ensure that life insurance proceeds are kept outside your estate and pass to beneficiaries both estate-and income-tax-free.

Back To Top

Using A Charitable Remainder Trust

Another way to provide a charitable gift of tax-deferred assets is making a contribution to a charirable remainder trust when you die. Your estate recieves an estate tax deduction equal to the charity's interest in the gift, and income taxes on the tax-deferred assets are avoided. Your named beneficiary, such as a spose or child, recieves payments over a term of years or lifetime, with the trust balance eventually passing to your named charity(ies). Depending on the terms of the charitable remainder trust, the presenet value of the trust payments can often approximate what your beneficiaries would have recieved after taxes on a regular distribution of your tax-deferred assets.

Note:If you gift IRA or tax-deferred assets to a charity or a charitable remainder trust during your lifetime, you will incur an immediate income tax liability.

Talk with your financial consultant about the benefits of charitable giving. And as always, consult your tax and legal advisors before engaging in any of these strategies.