By Salvadore R. Salvo
After you pass away, who do you want to get your money? Most physicians believe they can funnel their money to their family. Unfortunately, the funnel has leaks in it, namely, the IRS and taxing authority of some states. Recently, the federal gift tax exemption allowed a single individual to pass over $5 million ($10 million for a couple) tax free to heirs. But, some states have a much lower threshold, starting as low as $675,000 in New Jersey.
New York passed legislation as of April 1, 2014 that more than doubles the estate tax exemption ($2,062,500) and increases annually till it matches the federal exemption in 2019 (Projected to be $5.9 million in 2019). However, most physicians have some form of retirement plan, such as IRAs, 401(k)s, etc, all of which produce a significant income tax liability for their family since the taxes on these assets have not been paid yet.
If doctors do not include charity in their planning, the IRS and the states could take a significant amount of wealth through taxes, and could use that money for a goal that does not align with their values. Allowing the government and state to use your tax money to promote someone else’s interpretation of “social good” would make you an involuntary philanthropist. With the proper planning, you can be a voluntary philanthropist and direct those assets to a social good you care about, while helping your family in the process.
A charitable lead trust, for example, will allow you to leverage generosity to simultaneously benefit a favorite charity and family, producing tax savings as well. A CLT basically functions in the following manner: A charity receives an agreed-upon stream of income for an agreed-upon term, which can be for a number of years, lifetime of you (the donor), life of you and your spouse.
At the end of the term, the remaining income on the CLT can revert back to the donor or pass onto the other beneficiaries named in the trust. All in all, if physicians are voluntary philanthropists and do their own charitable giving in the most tax-efficient way possible, Uncle Sam won’t have to do it for them.
PROS
• Minimize your taxable estate, consequently potentially reducing federal estate tax liabilities;
• Gift and estate tax sanctuary for assets expected to appreciate;
• Flexibility to donate to charity and keep trust assets in the family; and
• Flexibility to control the payment method, term of the trust, and beneficiaries.
CONS
• Must be the “owner” of charitable lead trust to receive income tax deduction;
• Long-term commitment necessary; and
• Must be consistent about regarding charitable payments.
Salvadore R. Salvo is a co-founder of The Institute for Family Wealth Counseling, and offers Securities and Investment Advisory services through Summit Equities Inc, Member FINRA/SIPC, and financial planning services through Summit Equities Inc’s affiliate Summit Financial Resources Inc.
Disclaimer: Summit Financial Resources and the Institute for Family Wealth Counseling do not give tax, accounting or legal advice to their clients. The effectiveness of any strategy described will depend on your individual situation. This information is for discussion purposes only and is not intended to constitute legal or tax advice. Clients should consult with legal and/or tax counsel of their choice prior to taking any action since the members of Summit’s financial planning design team do not serve in a representative capacity to Summit’s clients. 20160712-0611
