For the uber-rich and sometimes simply for the high-net-worth client niche, charitable giving through trusts and foundations is an outstanding tax-reducing tack.
Indeed, gifting is both giving and receiving: Give away assets, receive an income tax break.
For some fine points on this strategy, and more, ThinkAdvisor chatted with Scott E. Squillace, a life, business and estate planning attorney, and founder of the Boston law firm, Squillace & Associates.
He focuses on tax, asset protection and estate planning for an international clientele, including corporate executives, small business owners, physicians and attorneys. Squillace, who has also practiced law in Paris, Moscow and Brussels, wrote the new book "Whether to Wed: A Legal and Tax Guide for Gay and Lesbian Couples."
ThinkAdvisor: Is gifting a good strategy to reduce income tax?
Squillace: It is. One way, especially if you don't yet know where you want to make the gift, is to bookmark it using a donor advised fund: You can set up a fund that allows you to take the tax deduction in the year in which you make the gift. But it's parked there until you decide which charities will be the [beneficiaries].
How popular is this one?
It isn't well known. But it's a really nice, flexible tool to take a charitable deduction in a year, for example, in which you get a big bonus or get some other extraordinary income. But you don't have to send any money to the charities right away. Once it's set up, you turn on and off the spigot as to which ones ultimately get the gift. You have your choice of charities.
What's the down side?
You can't get the money back. Once it's gone [committed], you don't get it back. You have to be prepared to irrevocably part with it.
Aren't charitable remainder trusts and charitable lead trusts irrevocable, too?
Yes. Those are kind of two sides of the same coin.
With a charitable remainder trust, you basically get an income stream for your lifetime, and then the charity winds up with money after you're gone.
Where does the tax break come in?
With the piece that goes to the charity. You get to take the deduction in the year in which you set it up. So that helps a little.
And the charitable lead trust?
With this one, the charity gets the money while you're alive, and your heirs – whomever you pick – wind up with the balance after you're gone. Like the charitable remainder trust, you can take the tax deduction in the year that it's set up.
What about gifting to relatives?
You can give $14,000 a year per person, or if you're a married couple, a total of $28,000, to anyone without being subject to gift tax. And on top of that, there's a lifetime credit you can use up. This year, it's $5.35 million; last year it was $5.25 million. If you use [some of] it during your lifetime, then it's that much less you can pass at death. Please elaborate.
For example, you can't give away $5 million during your lifetime tax-free and then turn around and leave an estate of $5 million tax-free. You get that credit either during your lifetime or at death.
What's an illustration?
Let's say you want to give your kids some stock. If it's worth more than the $14,000 a year gift, you'd file a gift-tax return using up some of your credit; the balance is used at your death.
Any other type of trust that helps in the income-tax department?
One [specialized] trust is called a qualified personal residential trust (QPRT). It's a way to transfer a vacation home, or even your principal residence, tax efficiently.
Where do family revocable trusts fit in?
Those are just pass-through entities. They don't help with tax planning; but they're helpful for avoiding probate.
Tell me about foundations.
They're like charities. Basically, a foundation is a private charity that has a whole bunch of rules around it and is pretty expensive to set up and maintain. So usually, unless you're prepared to give away more than $1 million — though there's no rule on that — it's probably not worth setting up your own private foundation.
