If your estate is large enough to pay estate taxes when you die, you may need some additional planning. You are probably aware that, in 2010, there is currently no federal estate tax, but Congress may reinstate it at any time. If Congress does nothing, the federal estate tax will automatically return in 2011. We don't know when Congress will act and what it will do, but since it looks like this tax is still in our future, it is important to understand how you can reduce or eliminate it and preserve more of your assets for your family. Also, some states now have their own death or inheritance tax, so while your estate may not have to pay a federal estate tax, it could have to pay a state tax.
Your estate will have to pay federal estate taxes when you die if the net value (assets minus debts) is more than the exempt amount at that time. In 2009, the exemption was $3.5 million; every dollar over this amount was taxed at 45%. Historically, the federal estate tax rate has been 45-55%. If Congress does nothing this year, the federal estate tax is scheduled to come back in 2011 with a $1 million exemption and a 55% tax rate.
Instead of giving all that tax money to Uncle Sam after you die and letting Congress decide how to spend it, you can set up your own charitable foundation, donate your assets to it and keep some control over how the money is spent! (The IRS does have a few restrictions on how the money is used.)
You can set up the foundation while you are living, or it can be established after you die. To qualify, a small percentage of the trust assets must be distributed to charity each year. But you can name whomever you wish to run the foundation, including your children, and the foundation can pay them a reasonable salary. You can be very specific about which charities you want to support, or you can leave that up to the trustees of the foundation to decide (within the IRS guidelines, of course).
The tax benefits of setting up your own foundation can be substantial. You can save estate, capital gains and ordinary income taxes:
- The assets you give to the foundation will be removed from your taxable estate. So, for example, if you give your entire estate to the foundation (or the entire amount over the estate tax exemption), your estate will pay no estate taxes!
- There will be no capital gains tax when the assets are sold by the foundation, so it's great for appreciated assets.
- And, if you donate publicly traded securities to a private foundation, you can get a charitable income tax deduction for their full fair market value - up to 30% of your adjusted gross income. (The deduction is less than the 50% limit for standard charitable contributions because this is a private charitable foundation.)