Financial Estate Planning: Your Guide to Trusts, Gifting Strategies, Charitable Donations, and Taxes

Paper page with Estate Planning printed at the top with eye glasses and a pen.

Through the process of estate planning, you’re able to establish, shape, and protect your legacy. 

But the strategies that will be most helpful to you will depend on your individual circumstances. 

In this article, you’ll be exposed to a variety of estate planning tools that can help maximize the wealth you’re transferring to those next-in-line. These tools include, but are not limited to various trusts, gifting options, and taxation exclusions. 

Estate Planning Trusts

A trust is a fiduciary arrangement that involves a third party (i.e. a trustee) being given assets for the benefit of a designated beneficiary. 

Trusts are a common component of a well-made estate plan. Their structure offers tax, and other benefits when transferring the wealth of your estate. Below, we’ll review some of the most-common types, and when they come into play. 

Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) allows you to place your home, or “qualified residence,” inside of a trust. This effectively removes your home from your estate before it’s passed down to a beneficiary.  

You’ll be able to live in your home and receive a “retained interest” while it’s inside the QPRT. The value of this interest will be calculated using the IRS’s applicable federal rates, and by retaining a portion of your property’s value, you’re able to make its gift value less than its fair market value. This results in a significantly reduced property valuation, which means a far lower gift tax when handing over the keys to your home. 

Charitable Remainder Trust (CRT)

A charitable remainder trust (CRT) is a trust that helps you lower your taxable income while giving to the causes you believe in. You can establish a CRT with a donation, and receive a tax deduction for doing so.

After your CRT is established, it will disperse income to either you (the creator), or one or more non-charitable beneficiaries for a specified time period. After this, the remainder of the trust’s value is given to one or more charitable beneficiaries.

Charitable remainder trusts come in two forms. You’ll either have a charitable remainder annuity trust (CRAT), or charitable remainder unitrust trusts (CRUT). Here’s an overview of each:

  • Charitable Remainder Annuity Trust (CRAT): This form of CRT pays out a fixed annuity each year to non-charitable beneficiaries. No additional contributions are allowed, and the amount paid must be between 5%-50% of the trust’s assets. 
  • Charitable Remainder Unitrust Trusts (CRUTS): This form of CRT pays out a fixed percentage of the trust’s asset balance, which is recalculated every year. Annual payments will vary, but it must also pay out between 5%-50% of the trust’s assets. However, with CRUTS, additional contributions are allowed. 

Qualified Terminable Interest Property Trust (QTIP)

A qualified terminable interest property (QTIP) trust allows you to give assets to your surviving spouse. You can also dictate how those assets are distributed after your surviving spouse passes away. They’re typically used by individuals with children from previous marriages.

Through a QTIP trust, an income will be paid out to your surviving spouse after your death. Once the surviving spouse passes, the estate tax is assessed and the remaining balance is distributed to your designated beneficiaries based on the wishes you expressed in the trust. 

Generation Skipping Trust

Through a generation-skipping trust (GST), you’re able to pass assets directly to your grandchildren. By skipping the next generation (i.e. your kids), your assets can avoid triggering certain estate taxes. 

These taxes, like those on your property after you die, would normally apply if your assets were going directly to your next-in-line children. But by being passed directly to your grandchildren (or other beneficiaries at least 37½ years younger than the grantor) a GST keeps your assets protected from estate taxes. 

Irrevocable Life Insurance Trust (ILIT)

An irrevocable life insurance trust (ILIT) is funded throughout one’s lifetime with one or more life insurance policies. With your policies inside the trust, you avoid having the death benefits of your policies subject to estate taxes. By using an ILIT, you’re able to decide when, and how your death benefits are used along with who receives them. 

ILIT payouts can help cover estate taxes and other costs after your passing. For example, you can use your full annual gift tax exclusion to cover premium costs on the policies inside your trust. Then, after you pass away, the death benefit proceeds can be used to cover other estate expenses rather than a less-preferable option (ex: selling shares of a business).

Grantor Retained Annuity Trust (GRAT)

A grantor retained annuity trust (GRAT) is a tool in estate planning that helps you transfer appreciation on your assets. They’re typically used after your tax exclusions (see next section) are exceeded, or if you have assets that could appreciate exponentially (ex: a startup company). 

GRATs essentially lock a portion of your assets at their current value after you place them inside the trust. This locked value of assets is then paid back to your estate through a series of annuity payments. But any appreciation earned on your assets can be passed on to beneficiaries with no gift taxes. 

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Gifting Strategies

Annual Gift Tax Exclusion

Each year, with the annual gift tax exclusion, you’re able to gift a certain amount per beneficiary without being subject to federal gift taxes. 

For 2023, the IRS will allow individuals to make gifts up to $17,000 each year without being subject to federal gift or estate taxes. For married couples, this amount doubles to $34,000 (i.e. $17,000 per spouse).

Lifetime Gift and Federal Estate Tax Exclusion

The lifetime gift and federal estate tax exclusion applies to all years of your life. Thus, it allows you to avoid triggering federal gift tax consequences even if you’ve exceeded your annual exclusion. 

For 2023, the IRS has raised the lifetime exclusion to $12,920,000 for individuals, and $25,840,000 for married couples. Any amount over your annual exclusion can be covered by your lifetime exclusion. However, once your lifetime exclusion is exceeded, you’ll need to explore other options (ex: GRATs) to avoid paying high estate taxes.   

This exclusion has portability. That means it’s possible for surviving spouses to make use of their deceased partner’s unused exclusion amount (DSUE amount) provided they abide by the proper guidelines.  

Please Note: At the end of 2025, the Tax Cuts and Jobs Act is set to expire. This will result in the federal gift and estate tax exemption returning to its pre-2018 levels. So unless the law changes, the new level will revert to $5,000,000 for individuals (with up-to-date adjustments for inflation) starting in 2026. 

Family Limited Partnerships 

A family limited partnership (FLPs) is a holding company owned by at least two family members. Its design allows for ownership to be given to future generations without a sacrifice in management control over the business or its assets. 

With an FLP, ownership is split between general partners (GPs) and limited partners (LPs). The GPs (usually the business-owner parents) oversee the management of the partnership and its assets. And the LPs (usually children/grandchildren or trusts established for them) have an economic interest in the FLP, but lack control or influence over its operations. 

This structuring can allow you as a GP to control your assets, protect them from creditors, reduce your estate and gift taxes, and even lower your taxable income by distributing the ownership of your partnership. 

529 College Savings Plan

A 529 college savings plan offers you a tax-friendly way to fund an education. That’s because contributions to such accounts are seen as gifts by the IRS. 

In 2023, individuals can give up to $17,000 ($34,000 for married couples) per child without facing gift-tax consequences. So for example, a married couple could give up to $102,000 to their three children ($34,000 each) without exceeding their annual gift tax exclusion. 

Through 5-year gift tax averaging (also called superfunding), you can also contribute multi-year lump sums without exceeding your annual exclusion. For example, in 2023, a single grandparent could give $85,000 (i.e. $17,000 x 5) to each of their grandchildren gift-tax-free with the annual exclusion. They just wouldn’t be able to give any more for the next five years. 

Direct Tuition Payment 

By making tuition payments directly to an educational institution, you can reduce your taxable estate. Direct tuition payments have no dollar limit and they are exempt from both gift taxes and the generation-skipping transfer tax (GSTT).

However, these payments must be for tuition. Money gifted for things like room and board, text books, school supplies, etc. will not fall under this gift tax exclusion. 

That said, with direct tuition payments you’re able to avoid using any of your annual or lifetime gift tax exclusion amounts. But know that using them can significantly impact the receiving student’s eligibility for other financial aid.

Direct Medical Payment

You can also avoid using any of your annual or lifetime tax exclusion amounts with direct medical payments. These payments also have no dollar limit, but instead of going to a school, they go directly to a health care provider to cover someone’s medical expenses. 

Unlike with direct tuition payments, your options of what you can cover are far more varied. Direct medical payments can go towards qualifying expenses including, but not limited to medical care (e.g. costs of diagnostics, treatments, bodily reconstructions, etc.), transportation, housing, and even health insurance premiums.

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Charitable Giving Strategies

Donor-Advised Funds (DAF)

A Donor-Advised Fund (DAF) works similar to an investment account for the causes you believe in. It provides a tax-savvy way to donate a variety of assets, and helps you get the most out of your donations to charity.

You establish a DAF with an irrevocable donation and a commitment to grantmaking for charity. You’ll then be eligible for a variety of tax deductions depending on the assets you donate. Assets you can donate to a DAF include, but are not limited to cash, publicly-traded stock, shares of a private business, life insurance, and cryptocurrencies.

Once inside your DAF, your assets can grow tax-free, which leaves you with even more to give to the organizations you’re looking to support.

Bunching Strategy

With a bunching strategy, you can double up on your charitable giving in certain years. And doing so can help you make the most of your tax deductions. Below is an example of how a bunching strategy might work:

Without Bunching: Let’s say you’re a single, head of household tax payer. You have the option of itemizing your deductions at ~$10,000 each year, or taking a standard deduction of $19,400. And you want to give $8,400 for two years to a charity you support. In the end, you decide to take the standard deduction for both years, and since you’re in the 32% tax bracket, you save $320 each year off the $1,000 difference (i.e. $19,400 standard vs $18,400 itemized deduction). 

With Bunching: It’s the same exact scenario as above. Only this time you double your charitable contributions for one year ($16,800), which brings your total itemized deductions to $26,800 ($16,800 + $10,000 annual itemized deduction). So in year one, you take the itemized deduction. Then in year two, you take the standard deduction of $19,400. 

This brings a total of $26,800 of deductions in year one. And compared to taking one year of a standard deduction ($19,400), you end up with $7,400 more in total deductions. This ends up saving you $2,368 in a single year while in the 32% tax bracket.

Qualified Charitable Distributions (QCDs)

Depending on the type of retirement account you have (ex: traditional IRA), you may be subject to required minimum distributions (RMDs). RMDs are minimum withdrawals you’re required to take from your retirement account after reaching a specified age. 

Normally these distributions are taxable, but qualified charitable distributions (QCDs) offer a tax-free alternative. That’s because QCDs allow individuals to send distributions directly to the charitable organization of their choice.

QCDs also come in handy if you’re looking to convert a traditional IRA to a Roth variety. That’s because you must take an RMD before converting to a Roth in the same year. But with a QCD, you can fully offset your RMD and have no barrier in the way of your conversion. 

Please Note: QCDs can only be made from certain individual retirement account types. They’re typically reserved for traditional IRAs (including inherited or rolled over ones), and accounts like SEP and SIMPLE IRAs cannot be used. However, exceptions can be made in both of these cases if the account is considered inactive by the IRS.

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How CW O’Conner Can Help You

At CW O’Conner we look to make the most of our clients’ legacies. And that means putting together a rock-solid estate plan that serves them, their loved ones, and the causes they care about.

We know the difference proper trusts, gifting strategies, and tax exclusions can make when transferring wealth to those next-in-line. And we’re eager to help you make the most of the estate plan that’s right for you. 

If you’re interested in learning more about any of the estate planning tools listed above, please don’t hesitate to reach out. You can call us directly at 770-368-9919, or fill out a contact card, and we’ll reach out to you. 

The opinions and analysis expressed herein are based on C.W. O’Conner Wealth Advisors, Inc. research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.

Cliff is the founder and president of C.W. O'Conner Wealth Advisors, Inc. Cliff earned a Bachelor of Business Administration degree in Accounting from Georgia State University.

Kevin O'Conner is a financial planner with C.W. O'Conner Wealth Advisors, Inc. He earned a Bachelor of Business Administration degree in Business Management from Georgia College, and is a Certified Investment Management Analyst (CIMA).