While you may have already heard of charitable gifts that can provide income to those you designate, along with income and estate tax savings, you may be more concerned about family economic considerations as you do your estate planning. You may think that such an income-producing gift doesn't apply in your case because you want your spouse and children to have it all.
However, there is a way to do both: get more income today and provide a significant inheritance tomorrow, along with making a gift to a favorite charitable or educational organization that brings you satisfaction.
To learn how well it could work for you, the first step is to contact your financial adviser or the organization you wish to benefit.
To narrow the choices based on your financial needs, you can request projections that illustrate the economic benefits in "black and white."
It works like this: You establish a charitable trust that pays you (and your spouse, if appropriate) at least 5 percent of the trust's value as income. You, the charity or a bank can serve as the trustee. The trustee is needed to administer and invest the donated asset, to take care of record-keeping, and to pay the income to you and others you choose.
You receive an income tax charitable deduction to lower current taxable income and, if appreciated assets are donated, no immediate capital gain taxes are owed. Stocks, bonds, mutual funds and even real estate are smart choices; cash works well, too.
To derive the maximum benefit from this method, you can use some of the income received from the charitable trust to pay the premiums on a new insurance policy. The policy will legally be owned by a separate life insurance trust set up for that purpose. At your death, the policy's proceeds can be paid to your children or other heirs and no federal estate taxes will be owed because the trust is not part of your estate. (Otherwise, 35 percent tax rates would be applicable if the total taxable estate exceeds $5,120,000 in 2012.)
So you can, using a creative two-step method, receive income today, make a tax-saving gift to help your favorite charitable or educational organization, and provide a full inheritance for loved ones.
That's good planning.
Deborah Miller is the director of planned giving for the West Virginia University Foundation.