How to Lower Your Taxes - Technique #4

[ExecConsult]

I have seen a whole lot of people on this site who have huge hearts and see this revaluation as a way to GIVE more (not just get more). This topic is primarily for those with charitable intent. However, the tax provisions might be interesting to some of the rest of you as well.

Charitable Planning hinges on your goals. Structured charitable gifting can accomplish any of the following goals (as long as you have enough money to start with).

1) I need a deduction

2) I'd like to leave my charity a gift

3) I'd like an income for life

4) My charity needs money now to get going

5) I want to provide money for my kids for life

6) I need a way to give assets to my children from my estate without paying gift taxes, but I won't live that long so I need to do it all now

The list above can all be accomplished with charitable planning. Different methods are used for different goals. For instance #s 1, 3, and 5 can each be accomplished through a Charitable Remainder Trust. Whereas #s 4 and 6 could be accomplished through a Charitable Lead Trust.

My goal here is not to teach you everything there is to know about charitable planning. There are plenty of websites out there that can teach you more. (I even have a pretty good section on my website. . . well I think its pretty good. ) What I want to accomplish here is to open your minds to the possibilities.

Before you read the example, you should know that although my undergrad was accounting, numbers just aren't my thing. What follows would usually be worked up by the investment adviser - not me. It takes a team.)

Lets take one example:

Assumptions -- You have enough Dinar that post-RV it will be worth $5,000,000

Tax laws/rates are the same as they are today (assuming 7% state and no local tax)

You really want to leave a gift to the "Tiger Sanctuary" that your nutty friend from high school started. (It is a 501(c )(3))

You don't need all of the money for yourself, but would like to be able to get some out immediately after the RV.

You would like an income stream that could support you for several years to come.

Without Charitable Planning:

You cash out the $5,000,000

You pay Taxes of $1,100,000

$1,750,000 Federal @35%

$350,000 State (figured at 7%)

You have $2,900,000 remaining to do with what you want

With Charitable Planning:

You Create a Charitable Remainder Trust (CRT)

You Cash out $1,000,000 worth of Dinar

You Contribute $4,000,000 worth of the Dinar to the CRT

Lets say:

The Trustee is stupid and only able to invest at a 5% gain (you should be able to do better than this)

The CRT has a 10% payout

The CRT is set up for a term of 20 years (it can either be a term or over a person's lifetime)

What Happens --

Year 1

You cashed out $1,000,000

You get $400,000 more from the CRT

Total income for the year is $1,400,000

You get a Charitable Deduction of $502,440 for your future gift to "Tiger Sanctuary." (I ran this on a CRT Calculator last night)

Taxable income is about $900,000

Tax is $378,000

You have $1,022,000 after tax in Year 1

(I am assuming that in the next years you do NOTHING to reduce your taxable income and that it stays at 35% and 7%. In reality you would have deductions that would improve this picture.)

Year 2 after tax income is $219,240

Year 3 after tax income is $207,182

Year after year the amount will diminish (remember assumed 10% payout but only 5% growth - being conservative)

Until finally in year 20 your after tax income is $79,194 (I could live off of that)

Over 20 years you have received a total of $3,647,485

The remainder in the trust makes a bunch of tigers happy.

You got money, the tigers got money, and you have had enough excess over 20 years to reinvest and carry you the rest of your life. Assuming you spent the entire million in year one to pay off everything and make gifts to everyone. Then assuming starting year two you live off of $100,000 per year (remember you now have no more bills besides utilities) and invest the rest in a Roth IRA at only 5% growth.

By the time you stop receiving payments from the CRT, you have $1,646,284 built up.

This does not account for any additional work you do during your life or any deductions you take in your life or any investments returning more than 5% interest.

I know you should be able to do at least 7% growth in your investing (and so should the Trustee) If that were the case you would have the following scenario

Year 20 after tax income is $113,341 and you have $2,847,259 in the Roth IRA

at 10% growth Yr 20 would be

$191,671 income and $5,877,573 in the Roth IRA

For the type of money being invested - 10% should is not at all out of the question.

This is just one oversimplified example of one charitable vehicle. Lots of different things can be done depending on your goals. If you want to support a charity, it can all be done after the RV. Just don't cash out the portion for charity. Most charities are very sophisticated in the charitable planning options they can provide. If you want several charities or you think you might want to change the charity in the future, those things can be drafted into a charitable trust.

Best of Blessings,

Mark

Edited November 10, 2010 by ExecConsult

[Chief V]

Thank you for the valuable information Mark, it appears there are many here who may have not seen your previous post as well, this is excellent information and my thanks to you personally for sharing what you don't have to share. I would advise folks to copy and paste this information for your post RV packet of information to make decisions of what to do, this will be quite helpful information once the RV occurs and you will be searching for that Tax Attorney and Financial adviser.

V

Here is your former post for those who have missed it:

Hi. My real name is Mark. I am an estate planning attorney. My intention here is to give some pointers on tax, structured gifting, charitable interests, and other estate planning issues you may have to deal with regarding any sudden increase of wealth due to an RV.

INCOME TAX

Taxes on the appreciation of this money will be taxed as ordinary income. It will be listed on your tax return as "interest income." The income is only recognized when you cash out. The income is figured by the amount you receive less the original cost of the Dinar and any fees associated with the original purchase.

Depending on your state's income taxes, you may wish to create an irrevocable trust in a state that does not have income taxes and place the Dinar in that trust. The trust would pay federal income taxes, but you would avoid the state income tax. You will have to weigh your potential savings against the legal fees that would require and decide for yourself if it is worth it.

If you have charitable interests at all, you could also give the Dinar to a charitable trust after the RV, have the trust sell it, and avoid all taxes completely. However, there are things you lose with this tactic as well. These issues should be well thought out with competent counsel.

GIFTING

If you are planning on giving any of your wealth away, these are things you should consider:

Gifting - Tax

Gift tax is paid by the person giving the gift on any gift (or combination of gifts) made in any given year to a single individual (or entity) if the amount of the gift(s) exceeds $13,000. This is the gift tax "exclusion" amount. If your spouse joins you in the gift, you can also add your spouse's exclusion amount for total gifting of $26,000 to any individual in any given year. (This is why you don't have to fill out a gift tax return for every birthday party you ever threw.)

Once you pass the exclusion amount, you start working under the "exemption" amount. Under current law there is a credit for gift taxes that will allow each of us to give up to a lifetime amount of $1,000,000 without any out of pocket expense. Once you have make the gift, you fill out form 709, figure the tax, claim the credit, send it in and you are done. However, there is a potential DOWNSIDE to using your gift tax exemption. For every dollar of gift tax exemption used during life, you lose one dollar of estate tax exemption for when you pass on.

The following are exempted from gift taxes regardless of the amount:

-Gifts for education expenses made directly to the educational institution

-Gifts for medical expenses made directly to the medical institution

-Gifts to charitable and not-for profit entities

Gifting - Timing - Pre RV

Right now the Dinar aren't worth much and you can give them away without exceeding the exclusion amount. However, to claim the exclusion amount the gift must be a "completed gift." That means that you are not just pledging the Dinar, but you have actually given it away so you can't get it back. I know that many of the people we wish to give to probably wouldn't do well with large sums of cash after an RV. (My kids would all own fast cars if they could.) Your gift may be placed in an irrevocable trust with your intended gift receiver(s) as a beneficiary and lots of restrictions on how and for what any distributions should be made. That way, if the RV comes, your grandchildren could end up with school paid for instead of parties paid for. (You may also use well structured limited business interests to pass on wealth but keep control of it.)

Gifting - Timing - Post RV

I personally would NOT gift prior to the RV because I am not that worried about the gift tax and I'd like to know exactly what I am dealing with. There are sooooo many things that can be done to pass on wealth in constructive ways that will still avoid gift taxes. I don't have the time to go into them here (and you wouldn't read it all anyway). There are lots of ways to take care of those you love without gift (or estate) taxes becoming a problem. Some of these include:

-Tying in charitable interests

-Discounting assets

-Carefully structured gifting using Crummy Powers with multiple beneficiaries (who will never receive) to funnel funds to the real beneficiaries

-Captive Insurance (if you have OR START a business)

However, fore each of these tactics legal expenses would be incurred.

Estate Tax

As the law stands right now, if you die after 2010 your estate will have an exemption amount of only $1,000,000 (adjusted for inflation). Any amount above that will be taxed at about 50%. If you have used some of that exemption through gift taxes, your estate tax exemption will be even lower.

If you are married, you should make sure that your Revocable Living Trust has appropriate tax provisions that allow your estate to use both of your exemptions (effectively doubling the amount). This can not be done under current law unless you have trust based planning.

ASSET PROTECTION

Once you have money, you become one of those people we have all heard of who have "deep pockets." There are over 16,000,000 law suits filed in the US in a year. That is more than 1 lawsuit every 2 seconds. You will have a target. There are five general tiers to Asset Protection:

1) Whatever protection state law provides

2) Insurance

3) Business entities (LLC, FLP, etc....)

4) Domestic Asset Protection Trusts

5) Foreign Asset Protection Trusts

I am only scratching the surface here. Unfortunately, many of you will now go on the internet or talk to friends about this tiny bit of information I have given and get a mix of good and bad information. It is my hope that many of you will also seek competent counsel and get only good information that is fine tuned to your personal circumstances. If you need recommendations for good attorneys to work with, I can get them for you.

If it were me personally, I'd wait until after the RV so that I knew what I was dealing with. However, depending on your circumstances, that may not be the correct course of action for you.

I am not going to give you all hours of unpaid legal advice. However, I will do my best to answer simple, general questions for you.

Best of Blessings to you all.

Simplified Version of Disclaimer

None of the foregoing information can be considered legal advice and I have not created an attorney client relationship with you. Pursuant to circular 230 none of the information contained in this post may be used to avoid tax penalties.

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[hspotman]

Thank you for the valuable information Mark, it appears there are many here who may have not seen your previous post as well, this is excellent information and my thanks to you personally for sharing what you don't have to share. I would advise folks to copy and paste this information for your post RV packet of information to make decisions of what to do, this will be quite helpful information once the RV occurs and you will be searching for that Tax Attorney and Financial adviser.

V

I am lucky because my tax guy owns his financial company and he has alot of people working under him. So I'm sure that he has Financial advisers as well, I will call them today just to make sure. As Mark put it in an earlier thread, it will be nice to have your/my tax person and financial adviser working side by side on my sudden income increase so they can better "advise". And as I said before, I have been going to this guy for over 10 years now, and when I told him about this speculative and prospective sudden income increase, he said to let him know ASAP when/if it happens. I'm pretty sure I'm in good hands when/if this thing finally goes through. And thankyou Mark for all your free advice here to ALL of us at DV! Any further notes that I should run past my financial advisers?

Edited November 10, 2010 by hspotman

[tsw8098]

Hi again Mark, Thank you for all your advice. You have helped many people. I pray you are Blessed BIG time with this RV<