There are several potential mechanisms which can be brought into play here. Charitable donations are deducted from your income in the year of the donation, so you pay lower taxes.
It is possible to donate assets, e.g., cash or securities, to a charity and receive a guaranteed income stream for life or for a guaranteed term of years - this is called a gift annuity.
It is possible to donate a home or a family farm to charity but retain the right to live there during one or more lifetimes or a term of years - this is called a retained life estate, and the tax break is taken in the year of the donation.
It is also possible to set up a family foundation which donates money to charity and also provides an income stream to the members of the family, as part of a charitable remainder trust. The trust pays the taxes that it earns and distributes the income to the heirs tax free.
It is also possible to set up a charitable lead trust, which pays income to the spouse and possibly the children, then terminates after life or a fixed number of years, and then the trust property goes to the grandchildren or others free of gift and estate taxes - or taxed at a lower rate.
The caveat here for all these plans is that the wealthy person must donate the assets to the charity, foundation, or trust, and thereby loses control. If you are a multi-millionaire like Gates, Soros and Buffet, no problem. But when you are talking about a family farm or a closely held business, donating your farm or business to charity in order to take advantage of these estate planning techniques isn't usually a good idea.
However, the estate tax exemption for 2001 is only $675,000, which isn't a lot of money when you are talking about a farm or a business - and unless you have a life insurance policy or other liquid assets sufficient for your heirs to pay the estate taxe upon your death, your heirs will have to sell that asset to pay the tax, which is a really bad idea. |
