Copyright © 2009 EBS Responsible Wealth

By using a Zero Estate Tax Plan or Testamentary Charitable Lead Annuity Trust, you may be able to:

• Leave your entire estate to your family and favorite charities
• Pay no estate tax
• Keep control over your assets during your lifetime
• Have a simple plan that can be changed at any time up until your death
• Have a plan that works even if the estate tax is ever permanently eliminated

Zero Estate Tax Plan

The Charitable IRA (see our separate explanation of a Charitable IRA) accomplishes a great deal for both the heirs and charity. The same approach can be applied with all the estate assets – in other words, a Zero Estate Tax Plan (ZETP). You would 1) determine in advance an appropriate inheritance for the heirs, 2) make gifts to a Wealth Replacement Trust of the funds necessary to purchase insurance in that amount, and 3) arrange at death to leave all estate assets to your favorite charities. The financial advantage of this arrangement is

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Copyright © 2009 EBS Responsible Wealth

(For purposes of this discussion a Qualified Plan will also be referred to as IRA)

Although an IRA may be a valuable asset while a person is alive, it is severely taxed at death. In fact, the IRA is a tax magnet at death since the combination of estate and income taxes can produce a long-range effective tax rate in excess of 65%.

Some of the problems that lead to the significant shrinkage in values passed on to family members are:

• IRA assets do not receive a step up in basis at death like other assets you own.
• IRA assets are subject to estate tax at death.
• Your family will have to pay income tax on the IRA after your death (although they may be entitled a deduction for estate tax previously paid).
• You cannot make gifts from the IRA to family members during your lifetime without triggering an income tax consequence.

Although your family may be entitled to stretch out the income tax on distributions over their remaining life expectancy (so called “Stretch IRA”), the income tax will ultimately have to be paid. In addition, if there are insufficient assets outside the IRA to pay the estate tax related to the IRA, or if you do not wish to use those other assets, taxable distributions will need to come from the IRA to cover the estate tax. This is very tax inefficient.

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Copyright © 2009 EBS Responsible Wealth

A charitable remainder trust can be a wonderful planning technique when one owns low basis/ high value assets.  Under a charitable remainder trust you would generally contribute appreciated assets to the trust and retain an interest for your life or the joint life of you and your spouse.

There are two types of charitable remainder trusts. An Annuity Trust pays you a fixed amount for the rest of your lives, regardless of what happens to the value of the principal in the trust. A Unitrust pays you a percentage of the fair market value of the assets, as recalculated each year.  After you both die whatever assets then remaining in trust will be paid to the charities of your choosing.

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