inheritance tax, inheritance

The last thing an entertainer or entrepreneur wants to think about are estate taxes after they pass away. But not doing so will cost them – and cost them big.

Taxpayers are currently allowed to give up to $5.45 million without paying estate taxes. Anything above that will be lost to federal taxation at a rate of up to 40 percent.

Most people planning their estates think this is just how things are and there’s nothing that can be done about it.

Not so fast, said Paul DeLauro, senior vice president and manager of wealth planning at City National Bank in Los Angeles. DeLauro has worked with high-net-worth clients for more than 16 years. He said that most clients, “have not taken advantage of the most basic charitable tax saving tools available that can benefit not only charity, but their family as well, to the tune of millions otherwise lost to federal taxation.”

Charitable organizations like Geffen Playhouse would not be able to provide the powerful community programs they offer without advisors like DeLauro using charitable tax planning tools.

For example, say that after the $5.45 million estate tax exemption has been passed to children there’s another $5 million left, DeLauro explained. Some families choose to create a “charitable lead trust” at death and fund it with the $5 million that’s leftover. “Lead trusts” only last for a few years, generate an estate tax charitable deduction, benefit local charity, and return what’s left to the family.

“If every year a ‘lead trust’ earned a net of 4 percent and gifted 4 percent to local charity, at the end of 18 years the lead trust would have paid out $5 million and would still have the $5 million it started with,” DeLauro said.

The estate takes a charitable deduction that may wipe out its estate tax, local charities get major contributions, and families get to keep the assets when the “lead trust” ends. The downside? “It just takes time,” DeLauro said.

For charities, “lead trusts” are a godsend, said Gil Cates Jr., Geffen Playhouse executive director. “Charitable giving by our generous patrons has allowed Geffen Playhouse to bring the power, inspiration, and beauty of live theater arts to Los Angeles County communities. This was always a dream of my father’s, and I’m thrilled to be able to carry that vision forward,” said Cates.

It’s all about being proactive and thinking about things most of us would rather avoid talking about … estate taxes.

“Do you want to mitigate or avoid the federal estate tax? Do you want your estate to benefit charity or go to the federal government?” asked DeLauro. “It really is up to you.”

City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person of any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.