Here are some of the more commonly used terms you will find in the field of estate planning.
List of Terms
A separate tax is assessed against the capital gain or appreciation in value on property. Short-Term Capital Gains from assets held one year or less are taxed at the ordinary income tax rate in effect for the year, ranging from 10% to 35%. Long-Term Capital Gains from assets held longer than one year are generally taxed at a special rate. The rate that applies depends on which ordinary income tax bracket you fall under. If your total income (including capital gain income) places you in the ten or fifteen percent tax brackets, then you will have Zero tax rate. If your total income (including capital gain income) places you in the twenty-five percent tax bracket or higher, then you will have a 15% tax rate.
A contribution or gift to – or for the use of – a qualified charity results in a deduction for income and gift tax purposes when the donor does not receive (nor expects to receive) any bargained-for benefit, or the benefit to the donor is only incidental to the benefit received by the general public. The gift must be complete – “no strings attached” – and irrevocable. The income tax advantages to the donor depends upon the donor’s tax bracket.
For Estate Tax purposes, a charitable contribution results in a deduction when the qualified charity is able and willing to accept the gift and the testator (the person who made the will) clearly intended to make such a gift for the charitable purposes of the charity.
Essentially, there are two qualified charitable remainder trusts: the Charitable Remainder Annuity Trust (CRAT) and the Charitable Remainder Unitrust (CRU). While both are subject to separate rules under tax law, there are some rules which are common to both:
*Distribution of specified income, at least annually, to one or more beneficiaries, for life or for a term of years;
*The “remainder interest” is held irrevocably for the benefit of the charity;
*The specified income distribution for the CRAT must be a sum certainly not less than 5% of the initial fair market value; for the CRU it must be a fixed percentage not less than 5% of the trust’s value determined annually;
*The trust distributes its income on a four-tier basis; first as ordinary income, second as capital gains income; third as tax-exempt income and fourth as a tax-free distribution of principal.
A trust does not qualify as a charitable remainder trust if there is any provision in the language of the governing instrument that places restrictions upon the investment policy of the trustee or violates state law. In addition, the trust must qualify and act as a charitable remainder trust from its creation, when neither the grantor nor any other person is treated as the owner of the trust.
The estate tax is one of three different taxes which comprise our transfer tax system – gift, estate and generation-skipping taxes. The estate tax is imposed on transfers of property from the deceased to his/her heirs. Since 1981 the lifetime and testamentary transfer of property has been “unified” under the same schedule of tax rates, deductions and credits.
The estate tax is imposed on the value of property that a decedent possesses at death. The tax is both progressive (tax rates increase as value of the estate increases) and cumulative (value of the estate at death is increased by the value of all lifetime gifts in excess of the donor’s annual exclusion). A decedent’s estate is granted an unlimited deduction for gifts to spouse and charity.
The contribution deduction for any gift of property to a qualified charity is based upon the property’s fair market value. This value is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.” For listed securities this value generally is the mean between the highest and lowest selling prices on the date of the gift or the mean between the bid and asked prices of . With gifts of closely held stock the value is often determined by a qualified appraiser following IRS prescribed methods and guidelines.
The value of mutual fund shares is its public redemption price on the gift date. The value of a “life insurance policy” is essentially its replacement cost (paid-up) or the “interpolated terminal reserve” of a policy on which premiums remain to be paid, generally an amount slightly in excess of the cash surrender value.
A gift of real estate presents special problems because its valuation requires specialized knowledge and expertise. As a result, the services of a professional and qualified appraiser generally are required. In a similar fashion, gifts of inventory are also scrutinized by the IRS and their real value for deduction purposes must be weighed against prescribed guidelines and substantiated by expert appraisals.