Charitable Giving in Succession Planning

We recently posted a series of articles on estate and succession planning.  We are going to highlight a few throughout the next few months through blog posts and today, we start with charitable giving.

Charitable giving is a portion of many estate plans, for many reasons.  For some, the sole purpose is charitable while for others, there may be both a charitable purposes and advantageous tax treatment.

For estate planning purposes, any amount given to a qualified charity is deductible.  Thus, a person with a $10 million estate could transfer $5.43 million to his or her heirs and the remainder to charity, thus avoiding the payment of estate taxes.  The charitable deduction for estate tax purposes is unlimited.

The charitable deduction for income tax purposes, however, is not unlimited.  Various rules apply and it is best to consult with your accountant to explore the scenarios.  This blog post is merely to discuss some of the legal rules and encourage you to read the entire charitable giving article!

Generally, (and again, speak with your accountant), the limitations depend upon: (1) whether the giving is to a public or private charity, (2) the type of property being given, and (3) whether or not the donor is an individual or corporation.  Again, generally, an individual may take a charitable deduction for income tax purposes of up to 50% of the donor’s adjusted gross income.

To determine if your selected charity is an eligible recipient, the IRS maintains a list.  There are some other requirements, found in Section 2055 of the Internal Revenue Code, but generally, if your charitable contribution is to a political entity (e.g. United States, a state, political subdivision), non-profit (including fraternal societies, orders, and lodge system), or veterans’ organization incorporated by Act of Congress, the charitable gift is to an eligible entity.

Charitable gifts may be outright, such as a contribution to an alumni fund or the collection plate at church, or a partial interest in property, such as retaining a life estate in donated agricultural land.  If you wish to retain a partial interest in the property, you will need to explore more sophisticated planning options such as charitable lead trusts, charitable remainder trusts, gift annuities, and in certain instances for farm land and residences, a life estate.

We encourage you to read the Charitable Giving article and contact us if you have any questions!


2014 Tax Exclusions, Exemptions Limits Released

The IRS has released the 2014 tax exclusions, exemptions, and other information.  Of interest to this audience:

  • The unified credit (estate and gift tax, or basic exclusion) is $5.34 million in 2014.  Portability remains and the spouses can transfer up to $10.68 million tax free.
  • For an estate of a decedent dying in 2014, if special use valuation under section 2032A is used, the aggregate decrease in the value of the qualified property resulting from the use of section 2032A cannot exceed $1.09 million.
  • The annual gift tax exclusion remains $14,000 in 2014.
  • The loan limit for agricultural bonds for first-time farmers (“aggie bonds”) is $509,600.

Also included in the IRS notification are the 2014 tax brackets.  You may find this information useful as you begin tax planning for 2014.  (The information is on pages 5 – 7 of the notification.)

What does it all mean?  It means that there were no substantive changes to estate and gift tax in 2014 (as of this writing) and aggie bonds are available to first-time farmers.  Later this week we’ll go into further detail about estate and gift tax issues but for now, know that an individual will not pay federal estate taxes for a taxable estate under $5.34 million (or, if married, under $10.68 million).

In the meantime, should you have any questions, you are welcome to contact us!

Portability of the estate tax exclusion amount

Due to the passage of the American Taxpayer Relief Act of 2012 (ATRA), taxpayers saw the portability election made permanent.  What exactly does this mean for the average Nebraska and South Dakota farmer or rancher?

First, we have to discuss what portability election is.  As you likely know, in 2013, every taxpayer has a unified credit of $5.25 million.  This means a taxpayer can pass at death or gift throughout his or her lifetime $5.25 million prior to the imposition of the estate and gift tax.  But what if a person does not use the entire $5.25 million?  In other words, what if the total assets of a person total $3.25 million?

Assuming you are married (sorry … this won’t work if you are unmarried), you have the option of making a portability election.  A portability election is a mechanism for spouses to ensure full use of each of their exemptions, totaling $10.5 million in 2013.  Portability allows a surviving spouse to use the deceased spouse’s unused exclusion amount for estate and gift taxes.

An example is the best way to understand the math of the portability election.  Assuming no other estate planning, the taxable estate of the deceased spouse is $3.25 million.  Most of that amount is due to the value of farmland.  The deceased spouse’s unused exclusion amount is $2 million.  The surviving spouse can then elect to “port” the $2 million unused exclusion amount, thus raising the surviving spouse’s exclusion amount to $7.25 million.

The election to port, however, must be done on an estate tax return for the deceased spouse.  This means an estate tax return must be filed even when no estate tax is due.  If you are filing an estate tax return solely for the purposes of a portability election, a good faith estimate of asset value is required.  The estate tax return is due nine months after the deceased spouse’s death, before any extensions for filing are requested (an extension is typically six months).

Why is knowledge of the portability election important?  Portability can function as a default estate planning tool to ensure the maximum exclusion amount between spouses is used.  No prior planning is required, unlike with a trust, will, or business entity.  It does require, however, the timely filing of an estate tax return after the deceased spouse’s death.

The portability election can be especially important as land values continue to rise.  The ability to transfer the deceased spouse’s unused exclusion amount to the surviving spouse may allow farm and ranch land to be transferred without imposition of the estate and gift tax.  As many farmers and ranchers know, land values are rising faster than the rate of inflation.  There may be a legitimate concern that the estate tax exemption, which is indexed to the rate of inflation, may not be able to keep up with land valuations.  Thus, while the taxable estate of the deceased spouse may not reach the estate tax exemption (in 2013, $5.25 million), the taxable estate of the surviving spouse may exceed the estate tax exemption because the rate of inflation is lower than rising land values.  Portability is a means to capture the deceased spouse’s unused exclusion amount, which may provide enough of a cushion to ensure the estate tax is not paid due to the combining of the surviving spouse’s exclusion amount and deceased spouse’s unused exclusion amount.

Other things to keep in mind: the portability election is for the deceased spouse’s unused exclusion amount.  If the surviving spouse remarries and does not use the deceased spouse’s unused exclusion amount and the second spouse passes, the surviving spouse no longer can use the unused exclusion from his or her first spouse.  Additionally, while it is likely that the portability election will remain in the tax code permanently, that can all change in an instant with new legislation.  Finally, there is no method to retroactively elect to port the unused exclusion amount — the election must be done in the nine months (or after any extensions have been been granted) after the deceased spouse’s death.

Portability may be an option or other “traditional” estate planning techniques such as trusts may be required.  Do you want to discuss the possibilities?  You are welcome to contact us for a one-on-one mentoring session, attend a workshop or attend a clinic.