12 May What to do with a $5 million estate

 Q. I have more money than I want to leave my kids when I’m gone because I want them to learn some financial responsibility. I’m debating between giving my money to charity or setting up trusts for future grandchildren, or maybe both. What should I consider before deciding? I’m 87 and I expect to die with more than $5 million.

A. There are tax and non-tax issues to address when establishing an estate plan.

The Internal Revenue Code currently allows each taxpayer to pass $5.430 million tax-free to anyone whether during life or at death, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park. This is referred to as the unified credit exemption, and it’s adjusted annually for inflation.

“The federal estate tax rate for amounts in excess of the exemption is 40 percent,” Romania said. “In addition, transfers in excess of $5.430 million to beneficiaries two or more generations younger than you may incur a generation-skipping transfer tax at the rate of 40 percent — which is in addition to the federal estate tax.”

Then there’s New Jersey’s estate tax if your estate is more than $675,000 when you die.

“New Jersey estate tax rates begin at 4.8 percent and gradually rise to 16 percent,” said Pat Daquila, a certified public accountant with Lassus Wherley in New Providence.

“New Jersey also may impose a transfer inheritance tax on the estate as well, depending upon the amount that is received and the relationship between the decedent and the beneficiary,” Daquila said. “However, you would only pay the higher of the two either the New Jersey estate tax or the New Jersey inheritance tax, but not both.”

You can take steps to reduce your taxable estate at any time.

Romania said each person is also permitted to make a present interest gift in the amount of $14,000 each year to any number of beneficiaries — free of transfer tax. This is called the “annual exclusion.”

“Gifts over the annual exclusion but less than the federal exemption require the filing of a gift tax return,” Romania said. “No gift tax will be owed but the transferor’s remaining exemption will be reduced by the amount by which the value of the gift exceeds the annual exclusion.”

Married taxpayers can also take advantage of the marital deduction, whereby transfers to a spouse are transfer tax-free, Romania said. Married taxpayers may also take advantage of their deceased spouse’s unused federal exemption, a concept referred to as portability, if the deceased spouse died in 2011 or later, she said.

Romania said to the extent you leave your children and grandchildren amounts in excess of your remaining exemption, both federal and New Jersey estate tax will be owed and generation-skipping transfer tax may be triggered.

“These taxes will be avoided to the extent that you cap the amounts passing to your children and grandchildren at the amount of your remaining exemption and you give to charity any amounts above this cap,” she said.

Romania said you can give more to your children and living grandchildren without paying additional federal estate tax by making a lifetime gift to each of them, outright or in trust, not to exceed $14,000 each year.

“These gifts do not diminish your available exemption,” she said. “In addition, you can directly pay medical or educational expenses for your children and grandchildren without diminishing your exemption. These direct payments also do not count toward your $14,000 annual exclusion.”

You can also give to charity.

If you start making charitable contributions to reduce the size of your estate while you are alive, then you possibly can take an income tax deduction on your schedule A of your current year federal income tax return, Daquila said.

“Your deduction for charitable contributions generally cannot be more than 50 percent of your adjusted gross income, but in some cases a 20 percent and 30 percent limit may apply,” she said.

The contributions must be made to a qualified organization.

Daquila said if you have an IRA, you may also want to consider designating a charitable organization as the beneficiary.

“This would not reduce the size of your estate, but your family would not pay income tax on the IRA distributions,” she said. “In addition, you can also bequest funds to a charitable organization. This would be a deduction on your Estate tax return and could reduce the amount of your taxable estate.”

Or you could consider a charitable trust.

“Although there are numerous restrictions with regard to these trusts, simply stated they are irrevocable trusts set up during life or at death which name one or more charities as remainder beneficiaries and one or more individuals as beneficiaries for lifetime or a term of years not to exceed 20 years,” Romania said. “Alternatively the trusts name one or more charities as the beneficiary for a term of years and individuals to receive the balance upon expiration of the stated term.”

She said a charitable deduction is permitted for the calculated value of the amounts anticipated to pass to the charity.

You could also set up trusts for your family members.

Daquila said when thinking about trusts, the same general gifting and tax rules apply. For example, a trust set up for a grandchild may trigger a generation-skipping tax. The current lifetime exemption for gifting and generation-skipping tax is $5.43 million, she said.

With a trust, you will have to decide how much control over the trust’s assets you wish to exert.

“You may establish rules for access to the income or principal in the trust that your trustee would carry out,” Daquila said. “Furthermore, future grandchildren may never materialize so you will need a fallback plan.”

So while you have many options, be sure you work with an experienced estate planning attorney to make sure all your bases and wishes are covered.

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This story was first posted in May 2015.