We have an estate tax exclusion of $5.34 million in 2014, and this is a unified exclusion that encompasses taxable gifts that you give throughout your life as well as the assets that you are passing on after your death.
It is worthwhile to emphasize the fact that you should not rest easy if your assets do not exceed this amount. Though you will hear the term “permanent” tossed around with regard to this $5 million exclusion with ongoing inflation adjustments, legislative changes are always possible.
If you are faced with the prospect of paying the estate tax, which carries a 40% maximum rate this year, you may want to consider conveying resources into a charitable lead trust. It is possible to create a testamentary charitable lead trust which would capture the portion of your estate that exceeds the exclusion amount after your death.
This is sometimes referred to as a “wait-and-see” trust. The grantor selects a charitable beneficiary that will receive contributions over a prescribed term, and he or she names a non-charitable beneficiary as well.
The grantor is entitled to an estate tax charitable contribution deduction for the present value of the trust. Anticipated interest is calculated by the Internal Revenue Service using what is called a hurdle or discount rate which is tied to prevailing interest rates.
The goal is to “zero out” the tax responsibility by allowing the charity to absorb all of the trust’s value as defined by the IRS using the hurdle rate.
Interest rates are low at the present time. Therefore, according to strategist Gregory D. Singer from New York’s Bernstein Global Wealth Management, there is a 95% chance that the beneficiary would assume ownership of a remainder because the trust’s investments are likely to outperform the discount rate.
The transfer to the non-charitable beneficiary would take place in a tax-free manner if the trust was structured properly.
