Doing Well by Doing Good

[Bruce A. Mann]: Let me start with a situation that arises occasionally, [Peter K. Maier]. Suppose an attorney receives in one year an extraordinarily large fee which is not likely to occur regularly in the future. What can he or she do in the way of a charitable contribution to offset the very substantial tax liability which would otherwise obtain? Maier: Well first, Bruce, we need to note that as of January 1, 2013, federal taxes on ordinary income were raised substantially for those taxpayers earning $250,000 a year or more in salaries, dividends, interest, rents, and other forms of ordinary income. And in some states, particularly California, rates also increased substantially for higher-income taxpayers. One should also note that the taxes imposed by the Affordable Care Act ("Obamacare") added an additional level of taxation starting in 2013. Therefore, your question has more tax import this year than it would have had in the prior 10 years. Maier: Yes. Say an attorney gives cash or highly appreciated property to a charity for a remainder trust and retains the life interest for his and his spouse's lifetime, remainder to the 501(c)(3) charitable organization. The annuity tables provided by the 1RS specify both parties' life expectancy. Assume the value of the lifetime interest is, say, 50 percent and the remainder is 50 percent. So if the attorney establishes a charitable remainder trust for $100,000, he would receive a $50,000 deduction and would have a $50,000 basis in the charitable annuity. This would be recovered ratably over the expected period of time that the donors live. Maier: Usually not any more. As I mentioned before, the estate tax exemption is now over $5 million, and it is likely to go up over the years, so most attorneys, and if they are married, they and their spouses, can bequeath to others $10.5 million without incurring an estate tax. This assumes they have not used up part of their exemption in their lifetime(s). If one's assets are worth less than that amount, there is no point in transferring any assets out of one's estate, and there is an advantage in keeping them there, namely, the stepped-up basis I mentioned before. In the case of a community property spouse, if one of them dies, then Section 1014(b)(6) of the Code specifies that the entire asset is stepped up and the survivor can sell the appreciated family home, and for that matter all other appreciated assets, at the fair market value at the death of the first spouse. In