Tax and Estate Planning in the Age of Obamacare
Posted on: July 24th, 2013 No Comments

With the ongoing implementation of the Patient Protection and Affordable Care Act (PPACA or “Obamacare”), many taxpayers are finding themselves subject to a variety of new taxes.  As a result, the Wall Street Journal has noted that several estate planning strategies that have been used sparingly in the past twenty years are now coming back into vogue.   One of those strategies is the so-called “Charitable Remainder Trust,” which is very useful in minimizing the impact of Obamacare’s 3.8% surtax on investment income.  The 3.8% tax applies to the net investment income of most individuals with more than $200,000 adjusted gross income and married couple filing joint returns with more than $250,000 adjusted gross income.  The 3.8% tax rate is on top of other taxes owed.

Charitable Remainder Trusts offer individuals the opportunity to have a steady income stream and minimize taxes, while at the same time benefiting a charity of their choice.  Remainder trusts are typically set up with an asset that has appreciated substantially in value – such as a vacation home, stocks and bonds, or art work.  Once the property has been transferred to the trust it is sold.  The proceeds from the sale are then paid out to you in annual payments of at least 5% of the trust’s initial value.  Whatever is left when you die goes to the charity you have designated.

The tax benefit lies in the fact that the trust can sell the appreciated property without incurring the 3.8% Obamacare tax.  Payments made to the trust’s beneficiaries – you or your family – would still be subject to any capital gains tax owed, but since the payments are in smaller amounts and spread out of time the tax hit is much more manageable.

Another option for appreciated assets worth less than $25,000 is the charitable gift annuity.  This type of annuity allows you to make a donation to a nonprofit in exchange for lifetime fixed annuity payments.  The charitable gift annuity is a cheaper and less burdensome alternative to the charitable remainder trust.

Finally, another tax savings option is the Charitable Lead Trust.  With a lead trust, payments go directly to the charity each year and what is left at the end of the trust’s term goes to your heirs.  The advantage of the lead trust is that it can shift investment income away from the trust and to the charity, which generally isn’t subject to tax.  Another benefit is that your heirs will receive at least a portion of the value from the trust after the trust terminates. Contact an experienced estate and tax planning attorney at the McCleskey Law Firm if you have questions or want to develop an estate planning strategy.

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