University Retirement Specialists, LLC

Charitable Lead Trusts

How they work, how they may help you reduce taxes.

 

Are you concerned about the inheritance taxes your heirs may have to pay? Then you may want to consider creating a charitable lead trust.

A charitable lead trust is the inverse of a charitable remainder trust. While a CRT is structured to provide income to the trust beneficiaries and an eventual charitable donation, a CLT provides a charitable gift at its implementation plus the possibility of eventual income to your heirs.¹

A CLT may provide an estate tax solution for a highly appreciated asset. As a hypothetical example, a multi-millionaire named Scott owns $1 million of greatly appreciated blue-chip stock. He wants to reduce the value of his taxable estate; he does not want to burden his heirs with death taxes. He would also like to make a major gift to a local charity. So Scott collaborates with an estate planning attorney to draw up and implement a CLT.

By gifting the highly appreciated stock to the charity using a CLT with a term of 20 years, Scott creates an income stream for the charity with significant tax benefits as a byproduct. Income payments to the charity will be made in 20 yearly installments of $50,000 from the trust principal. After either 20 years or Scott’s death, his heirs will receive the interest off of the initial CLT principal (i.e., the appreciation on those shares across 20 years) while the actual shares will go to the charity.¹

In donating the stock through the CLT, Scott is eligible to take an upfront income tax deduction for the full value of the charitable donation. He receives a gift and estate tax break equivalent to what would happen if he simply wrote a $1 million check to the charity, while also offering a potential financial benefit to his heirs.²

 

All CLTs are irrevocable, and there are different varieties of them. Here is a brief breakdown of their variations, and their characteristics.²

*CLTs can be created either before one’s death or at one’s death. In an inter vivos CLT, the grantor (i.e., donor) relinquishes ownership of the asset(s) to the trust while alive. Asset(s) transfer into a testamentary CLT only upon the death of the grantor. An executor to a testamentary CLT can fund that CLT with assets equaling any inheritance taxes owed.^1,2

*Some CLTs are structured to allow further asset contributions during the trust term. Other CLTs are designed so that no further contributions to the trust are permitted once the trust is active.^1,2

  

*Most CLTs are non-grantor trusts. These CLTs are expressly designed to benefit a charity and the donor’s heirs. In a non-grantor CLT (such as the above example), the donor gives away the asset(s) to charity; heirs receive only the interest on the principal at the end of the trust term. You can see the potential downside: if the asset depreciates over the trust term, the heirs receive nothing. In a non-grantor CLT, the donor is able to take an annual income tax deduction on the value of the income that heads to the charity discounted at the federal funds rate.^3,4

*Other CLTs are grantor trusts. These CLTs are primarily designed to benefit a charity and the donor. The charity receives income off the trust principal for X years, but the donor will regain ownership of the appreciated asset(s) when the trust term expires. The donor gets to claim an upfront income tax deduction for the gift. In this variation, the donor pays taxes on the income the CLT generates, so it is wise to put tax-exempt investments into a grantor CLT.^3,4

An IRS formula figures the future value of the donor’s gift. The variables here include the annual income the charity will receive, the duration of the CLT and the projected ROI for the trust asset(s). The IRS determines the ROI using an interest rate (the “hurdle” rate) based on Treasury yields. Non-charitable beneficiaries of the CLT are projected to receive the value of the trust assets at the end of the trust term minus the value of the initial gift. This amount will be exposed to estate taxes, but in many cases it will be far less than the generous estate tax exemption.²

CLTs allow you to pursue three estate planning objectives. If you want to make a sizable charitable gift, help your heirs and reduce taxes, you may want to explore creating one.

    

Citations.

1 - finance.zacks.com/charitable-lead-trust-work-7556.html [10/8/15]

2 - nolo.com/legal-encyclopedia/charitable-lead-trusts.html [10/8/15]

3 - thinkadvisor.com/2015/09/25/now-is-the-time-for-charitable-lead-trusts [9/25/15]

4 - bbt.com/bbtdotcom/wealth/retirement-and-planning/trusts-and-estates/charitable-lead-trusts.page [10/9/15]

End-of-the-Year Money Moves 2015

Here are some things you might want to do before saying goodbye to 2015.  

                       

What has changed for you in 2015? Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2016 begins.

     

Even if your 2015 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth. 

   

Do you practice tax loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.¹ 

   

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.¹

   

Do you itemize deductions? If you do, great. Now would be a good time to get the receipts and assorted paperwork together. Besides a possible mortgage interest deduction, you might be able to take a state sales tax deduction, a student loan interest deduction, a military-related deduction, a deduction for the amount of estate tax paid on inherited IRA assets, an energy-saving deduction… there are so many deductions you can potentially claim, and now is the time to meet with your tax professional to strategize to claim as many as you can.

    

Could you ramp up 401(k) or 403(b) contributions? If you can do this in November and December, that will lower your taxable income for 2015. Do it enough and you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so those Roth account contributions won’t lower your taxable income for 2015 (they will still help to build your retirement savings).²

   

Are you thinking of gifting? How about donating to a charity or some other kind of 501(c)(3) non-profit organization before 2015 ends? In most cases, these gifts are partly tax-deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.³

  

If you donate appreciated securities you have owned for at least a year, you can take a charitable deduction for their current value and forego the capital gains tax hit that would result from their sale. If you pour some money into an education savings plan on behalf of a child, you could claim a full or partial state income tax deduction (depending on the state).^4,5

   

Of course, you can also reduce the value of your taxable estate with a gift or two. The gift tax exclusion is $14,000 for both 2015. So as an individual, you can gift up to $14,000 to as many people as you wish this year. A married couple can gift up to $28,000 to as many people as desired in 2015. (Unfortunately, the IRS prohibits a current-year income tax deduction for the value of a non-charitable gift.)⁶

   

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and your retirement plan at work? If you haven’t reviewed them for a decade or more (which is all too common), double-check to see that these assets will go where you want them to go should you pass away. Lastly, take a look at your will to see that it remains valid and up to date.  

   

Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday... and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are never taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. If you do this and change your mind, the IRS gives you until October 15 of the year after a conversion to undo it.⁷

   

Can you take advantage of the American Opportunity Tax Credit? In place through 2017, the AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels.⁸

   

What can you do before they sing “Auld Lang Syne?” Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

   

 

Citations.

1 - azcentral.com/story/money/business/consumers/2015/10/23/seasonal-planning-now-taxes-charities-more/74325400/ [10/23/15]

2 - fool.com/retirement/iras/2015/01/11/ira-contribution-limits-in-2014-and-2015-and-how-t.aspx [1/11/15]

3 - irs.gov/taxtopics/tc506.html [3/5/15]

4 - philanthropy.com/article/Donors-Often-Overlook-Benefits/148561/ [8/29/14]

5 - finaid.org/savings/state529deductions.phtml [10/29/15]

6 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes [10/2/15]

7 - tinyurl.com/nmou7jc [10/2/15]

8 - irs.gov/uac/American-Opportunity-Tax-Credit [8/24/15]

 

End Of Year Money Moves

Here are some things you might want to do before saying goodbye to 2014.  

                       

What has changed for you in 2014? Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2015 begins.

    

Even if your 2014 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth. 

   

Do you practice tax loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.¹ 

   

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.¹

   

Do you itemize deductions? Now would be a good time to get the receipts and assorted paperwork together. Besides a possible mortgage interest deduction, you might be able to take a state sales tax deduction, a student-loan interest deduction, a military-related deduction, a deduction for the amount of estate tax paid on inherited IRA assets, an energy-saving deduction, a homebuyer credit… there are so many deductions you can potentially claim, and now is the time to meet with your tax professional so that you can strategize to claim as many as you can.

    

Could you ramp up 401(k) or 403(b) contributions? If you can do this in December, that will lower your taxable income for 2014. Do it enough and you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so those Roth account contributions won’t lower your taxable income for 2014 (they will still help to build your retirement savings).^2,3

   

Are you thinking of gifting? How about donating to a charity or some other kind of 501(c)(3) non-profit organization before 2014 ends? In most cases, these gifts are partly tax-deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.⁴

 

If you donate appreciated stocks you have owned for at least a year, you can take a charitable deduction for their current value and forego the capital gains tax hit that would result from their sale. If you pour some money into a 529 plan on behalf of a child, you could get a deduction at the state level (depending on the state).²

   

Of course, you can also reduce the value of your taxable estate with a gift or two. The gift tax exclusion is $14,000 for both 2014 and 2015. So as an individual, you can gift up to $14,000 to as many people as you wish this year and next. A married couple can gift up to $28,000 to as many people as desired this year and next.⁵

   

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and your retirement plan at work? If you haven’t reviewed them for a decade or more (which isn’t uncommon), double-check to see that these assets will go where you want them to go should you pass away. Lastly, take a look at your will to see that it remains valid and up to date.  

   

Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday... and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are never taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. If you do this and change your mind, the IRS gives you until October 15 of the year after a conversion to undo it.²

   

Can you take advantage of the American Opportunity Tax Credit? Now in place through 2017, the AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels.⁶

   

What can you do before they sing “Auld Lang Syne?” Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

   

    

Citations.

1 - bankrate.com/finance/money-guides/capital-losses-can-help-cut-your-tax-bill-1.aspx [9/19/13]

2 - kiplinger.com/article/saving/T047-C001-S003-10-ways-to-improve-your-finances-by-new-year-s-eve.html [12/3/14]

3 - investopedia.com/articles/retirement/06/addroths.asp [12/2/14]

4 - forbes.com/sites/mikepatton/2014/11/25/year-end-charitable-tax-tips/ [11/25/14]

5 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes [11/17/14]

6 - irs.gov/uac/American-Opportunity-Tax-Credit [9/23/14]

Your Year End Financial Checklist

Seven aspects of your financial life to review as the year draws to a close.

                      

The end of a year makes us think about last-minute things we need to address and good habits we want to start keeping. To that end, here are seven aspects of your financial life to think about as this year leads into the next...

 

Your investments. Review your approach to investing and make sure it suits your objectives. Look over your portfolio positions and revisit your asset allocation.

 

Your retirement planning strategy. Does it seem as practical as it did a few years ago? Are you able to max out contributions to IRAs and workplace retirement plans like 401(k)s? Is it time to make catch-up contributions? Finally, consider Roth IRA conversion scenarios, and whether the potential tax-free retirement distributions tomorrow seem worth the taxes you may incur today. Be sure to take your Required Minimum Distribution (RMD) from your traditional IRA(s) by December 31. If you don’t, the IRS will assess a penalty of 50% of the RMD amount on top of the taxes you will already pay on that income. (While you can postpone your very first IRA RMD until April 1, 2015, that forces you into taking two RMDs next year, both taxable events.)¹

   

Your tax situation. How many potential credits and/or deductions can you and your accountant find before the year ends? Have your CPA craft a year-end projection including Alternative Minimum Tax (AMT). The rise in the top marginal tax bracket for 2014 made fewer high-earning executives and business owners subject to the AMT, as their ordinary income tax liabilities grew. That calls for a fresh look at accelerated depreciation, R&D credits, the Work Opportunity Tax Credit, incentive stock options and certain types of tax-advantaged investments.²

  

Review any sales of appreciated property and both realized and unrealized losses and gains. Take a look back at last year’s loss carry-forwards. If you’ve sold securities, gather up cost-basis information. Look for any transactions that could potentially enhance your circumstances.

 

Your charitable gifting goals. Plan charitable contributions or contributions to education accounts, and make any desired cash gifts to family members. The annual federal gift tax exclusion is $14,000 per individual for 2014 and 2015, meaning a taxpayer can gift as much as $14,000 to as many individuals as you like in each year without tax consequences. A married couple can gift up to $28,000 tax-free to as many individuals as they prefer. The gifts do count against the lifetime estate tax exemption amount, which climbs to $5.43 million per individual and $10.86 per married couple for 2015.³

    

You could also gift appreciated stocks to a charity. If you have owned them for more than a year, you can deduct 100% of their fair market value and legally avoid capital gains tax you would normally incur from selling them.⁴

 

Besides outright gifts, you can plan other financial moves on behalf of your family – you can create and fund trusts, for example. The end of the year is a good time to review any trusts you have in place.

 

Your life insurance coverage. Are your policies and beneficiaries up-to-date? Review premium costs, beneficiaries, and any and all life events that may have altered your coverage needs.

 

Speaking of life events...did you happen to get married or divorced in 2014?Did you move or change jobs?Buy a home or business? Did you lose a family member, or see a severe illness or ailment affect a loved one? Did you reach the point at which Mom or Dad needed assisted living? Was there a new addition to your family this year? Did you receive an inheritance or a gift? All of these circumstances can have a financial impact on your life, and even the way you invest and plan for retirement and wind down your career or business. They are worth discussing with the financial or tax professional you know and trust. 

 

Lastly, did you reach any of these financially important ages in 2014? If so, act accordingly.

 

Did you turn 70½ this year? If so, you must now take Required Minimum Distributions (RMDs) from your IRA(s).

Did you turn 62 this year? If so, you’re now eligible to apply for Social Security benefits.

Did you turn 59½ this year? If so, you may take IRA distributions without a 10% penalty.

Did you turn 55 this year? If so, and you retired during this year, you may now take distributions from your 401(k) account without penalty.

Did you turn 50 this year? If so, “catch-up” contributions may now be made to IRAs (and certain qualified retirement plans).^1,5,6

 

The end of the year is a key time to review your financial well-being. If you feel you need to address any of the items above, please feel free to give us a call.

   

Citations.

1 - irs.gov/Retirement-Plans/RMD-Comparison-Chart-%28IRAs-vs.-Defined-Contribution-Plans%29 [4/30/14]

2 - tinyurl.com/o7wqk7z [3/27/14]

3 - forbes.com/sites/ashleaebeling/2014/10/30/irs-announces-2015-estate-and-gift-tax-limits/ [10/30/14]

4 - philanthropy.com/article/Donors-Often-Overlook-Benefits/148561/ [8/29/14]

5 - nolo.com/legal-encyclopedia/getting-retirement-money-early-without-30168.html [12/2/14]

6 - turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/Tax-Tips-After-January-1--2015/INF12070.html [12/2/14]

Donating Highly Appreciated Stock

It can give you a tax break. It can give a charity a tax break in the future.

   

Why sell shares when you can gift them? If you have appreciated stocks in your portfolio (and you hold them in a non-qualified account that doesn’t get special tax treatment), then you might want to consider donating those shares to charity rather than selling them someday.

   

Why, exactly? Donating appreciated securities to a tax-exempt charity can result in a pair of tax breaks. If you have held the stock for more than a year, you can deduct the fair market value of the stock in the year that you make the donation. If the charity is tax-exempt, it won’t face capital gains tax on the stock if it sells it in the future. Again, this is all provided you donate the shares to the charity out of a non-retirement account (and not out of a qualified retirement plan such as an IRA).¹

   

When is donating stock a better choice than gifting cash or just selling the shares? Two reasons may motivate you to donate highly appreciated stock to a tax-exempt charity. One, if you own too much company stock or your portfolio isn’t very diverse, it can give you a chance to reduce overweighting in one stock or sector. Two, it might be a smart tax move if you own a number of low-basis stocks.

 

If you just hand some cash to the tax-exempt charity, the tax benefit is certainly significant. Cash gifts are deductible up to 50% of AGI, and that lowers their net cost for a donor. As an example, if a donor in the 35% tax bracket gives a 501(c)(3) non-profit organization a gift of $5,000, the net cost can work out to just $3,250 with $1,750 realized in tax savings.²

      

If you donate highly appreciated securities that you have owned for at least one year, the tax benefit can be even more significant. You can deduct the full fair market value of the securities (up to 30% of your AGI) and the unrealized gains won’t be taxed either. So the more the stock appreciates, the greater the potential capital gains tax break down the road.²

 

If you sell shares of appreciated stock from a taxable account and subsequently donate the proceeds from the sale to charity, then you face capital gains tax on the gain you realize, which effectively trims the tax benefit of a cash donation.³

 

If you donate shares of depreciated stock from a taxable account to a charity, you can only deduct their current value, not the value they had when you originally bought them – so there is far less merit in doing that.³

 

Remember the federal tax rules for charitable donations. If you donate highly appreciated stock to a charity, make sure to abide by the rules set down in IRS Publication 526, Charitable Contributions. Double-check to see that the charity has legitimate non-profit status under federal tax law, and be sure to record the deduction on a Schedule A that you attach to your 1040.^4,5

 

If your contribution totals $250 or more, the donation(s) must be recorded – that is, the charity needs to give you a written statement describing the donation and its value and whether it is providing you with goods or services in exchange for it. (A bank record or even payroll deduction records can also denote the contribution.) If your total deduction for all noncash contributions in a tax year exceeds $500, then complete and attach Form 8283 (Noncash Charitable Contributions) to your 1040 when filing. If you donate more than $5,000 of property to a charity, you will need to provide a letter from a qualified appraiser to the charity (and by extension, the IRS) stating the monetary value of the gift(s).^4,5

      

    

Citations.

1 - raymondjames.com/thorsenwealthmanagement/pdfs/charity_article.pdf. [10/12/12]

2 - purdue.edu/giving/fed_tax.html [6/10/14]

3 - money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2013/09/26/how-to-give-stock-to-charity-2 [9/26/13]

4 - today.com/money/charitable-giving-how-you-can-donate-cause-benefit-tax-time-2D79751463 [6/3/14]

5 - irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions [11/4/13]

 

Planned Giving: Beneficiary Strategies

An easy way to give to a non-profit organization is to name them as a beneficiary. Other than estate planning purposes and helping the organization there are no other living benefits. This method of giving is straightforward and revocable during your lifetime.

 

The first, most common way, is to make a bequest in your will. Instead of rewriting your will, just add a codicil stating the gift and any conditions on it. Your lawyer can easily add this to your last will and testament for a nominal fee.

 

One can also name an organization as the beneficiary on a life insurance policy. This is one of many strategies using life insurance. We will discuss more of these gifting strategies in a later article devoted solely for life insurance...

 

Sometimes it is better to leave your heirs assets outside of your retirement accounts. Other than your spouse, your heirs can expect a taxable event upon receiving either your IRA/401k in small tax bites annually or large lump sum ones. Bequeath your retirement assets by changing your beneficiary designations. One development officer has named her organization as a 50% beneficiary of her retirement plan.

 

These are three simple examples of changing your beneficiaries that can leave a legacy to your favorite charity. All three strategies are revocable. In addition, you can state a dollar amount or a percentage (from 1% to 100%). One last item is to give the organization letter stating the terms of your gift. Two reasons for this: 1) the organization can thank you privately or publicly before your premature death and 2) the organization can follow up after your death.

Planned Giving

Planned giving can be defined as a method of supporting charitable causes by individuals making larger gifts than they could make from their income. These gifts can provide lifetime income to the donor and/or their heirs, most involve a measure of tax planning to achieve the maximum benefit to the donor and the charity. The donor can use cash, appreciated investments, real estate, life insurance, royalties, or personal property.

 

The ultimate goal is to create a scenario that benefits the donor while advancing the charitable organizations mission and financial strength. The process involves the donor’s personal advisers in finance, tax, and legal arenas.

 

Sometimes it is as simple a cash gift targeted for a specific purpose in the organization for a tax deduction or as complex as giving 100 Corvettes to a museum and receiving a lifetime stipend from the gift. Anything is possible with legal and creative thinking.

 

Going forward, University Retirement Specialists will have a monthly planned giving idea or strategy for your consideration. We are finding our clients are involved with organizations like their church, civic organizations, alma maters, or non-profit groups that have a shared passion. If you need help constructing a gift, please feel free to contact us at 800-572-6024 or [email protected] .

 

Our first strategy:

 

Instead of giving cash as your tithe or annual gift to your church or favorite charity, give them stock that you have a profit in. By doing this you are giving away your capital gains tax consequences on the position while achieving the same tax deduction. The organization is indifferent because they are getting the same value of gift and no tax consequences. You then can take your cash and purchase a new investment with a new higher cost basis.

End of Year Money Moves for 2013

Here are some things you might want to do before saying goodbye to 2013.  

 

                       

What has changed for you in 2013? Did you start a new job – or leave a job behind? Did you retire? Did you start a family? If some notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and the next one begins.

 

Even if your 2013 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth. 

 

Do you practice tax loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.¹ 

 

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.¹

   

Do you itemize deductions? If you do, great. Now would be a good time to get the receipts and assorted paperwork together. Besides a possible mortgage interest deduction, you might be able to take a state sales tax deduction, a student-loan interest deduction, a military-related deduction, a deduction for the amount of estate tax paid on inherited IRA assets, an energy-saving deduction, a homebuyer credit … there are so many deductions you can potentially claim, and now is the time to meet with your tax professional so that you can strategize to claim as many as you can.

  

Could you ramp up 401(k) or 403(b) contributions? If you can do this in November and December, that will lower your taxable income for 2013. Do it enough and you might be able to qualify for other tax credits or breaks available to those under certain income limits.

 

Are you thinking of gifting? How about making a contribution to a charity or some other kind of 501(c)(3) non-profit organization before 2013 ends? In many cases, these gifts are partly tax-deductible. If you pour some money into a 529 plan on behalf of a child, you could get a deduction at the state level (depending on the state).

 

Of course, you can also reduce the value of your taxable estate with a gift or two. This year, the gift tax exclusion is $14,000. So you can gift up to $14,000 to as many people as you wish this year, with the understanding that you have a $5.25 million lifetime limit before you are actually hit with gift taxes. This $5.25 million limit will rise in future years as it is inflation-indexed.²

 

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and your retirement plan at work? If you haven’t reviewed them for a decade or more (which isn’t uncommon), double-check to see that these assets will go where you want them to go should you pass away. Lastly, take a look at your will to see that it remains valid and up to date.  

 

Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday ... and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are never taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. If you do this and change your mind, the IRS gives you until October 15 of the year after a conversion to undo it.³

 

Can you take advantage of the American Opportunity Tax Credit? Now in place through 2017, the AOTC for qualified college expenses allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified tuition and related expenses. Phase-outs kick in above those MAGI levels.^3,4

 

What can you do before they sing “Auld Lang Syne”? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

 

 

Citations.

1 - bankrate.com/finance/money-guides/capital-losses-can-help-cut-your-tax-bill-1.aspx [9/19/13]

2 - chron.com/news/article/New-act-clears-up-estate-gift-tax-confusion-4301217.php [2/22/13]

3 - tinyurl.com/lcb66o8 [12/28/12]

4 - irs.gov/uac/American-Opportunity-Tax-Credit [5/31/13]

 

The Right Beneficiary

Who should inherit your IRA or 401(k)? See that they do.

 

 

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or annuity? You may be able to answer such a question quickly and easily. Or you may be saying, “You know … I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

 

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit – perhaps more than a bit?

 

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.

 

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

 

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

 

Beneficiary designations commonly take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she is in line to receive the death benefit when you die, regardless of what your will states. Beneficiary designations allow life insurance proceeds to transfer automatically to heirs; these assets do not have go through probate.^1,2

 

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)

 

How your choices affect your estate. Virtually any inheritance carries a tax consequence. (Of course, through careful estate planning, you can try to defer or even eliminate that consequence.)

 

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.³

 

When the beneficiary isn’t your spouse, things get a little more complicated for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of his or her taxable estate, and his or her heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.⁴

 

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.⁵

 

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give me a call or send me an e-mail – I’m happy to help you.

 

 

Citations.

1 - smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]

2 - www.dummies.com/how-to/content/bypassing-probate-with-beneficiary-designations.html [1/30/13]

3 - www.nolo.com/legal-encyclopedia/estate-planning-when-you-re-married-noncitizen.html [1/30/13]

4 - individual.troweprice.com/staticFiles/Retail/Shared/PDFs/beneGuide.pdf [9/10]

5 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes [8/1/12]

 

Charitable IRA Gifts

In 2013, you can once again donate up to $100k to a charity tax-free.

 

 

The IRS extends a major tax break. Thanks to the American Taxpayer Relief Act of 2012, charitable IRA gifts are once again allowed in 2013. An IRA owner aged 70½ or older may gift up to $100,000 this year to either a 170(b)(1)(A) public foundation or a 501(c)(3) charity. Congress may elect to extend this opportunity in 2014 and subsequent years.^1,2

    

What do you gain by doing this? The possible tax benefits of a qualified charitable distribution (QCD) from an IRA are threefold.

 

A QCD counts toward your RMD, but it doesn’t count as taxable income. If you dread mandatory IRA withdrawals and the taxes that come with them, you should know that a charitable IRA gift can be used to satisfy all or part of the annual Required Minimum Distribution. At the same time, the contribution amount is excluded from your gross income. With higher tax rates and surtaxes kicking in this year, reducing your AGI may be a priority.^1,3

 

A QCD can help you reduce the size of your taxable estate. Most of the money in a traditional IRA will eventually be taxable. Donating some or all of these assets to charity will lower your taxable estate dollar for dollar. (As you can surmise, QCDs are more beneficial to traditional IRA owners than Roth IRA owners from this standpoint.)^3,4

 

A QCD could also help you contend with charitable donation limits. You may reach a point where you would like to donate an amount greater than 50% of your AGI to charity. Normally, the IRS doesn’t allow that – but charitable IRA gifts don't count against that 50% limit as they aren’t included in a taxpayer’s gross income. While a charitable IRA gift isn’t tax-deductible, you may not itemize to begin with – many retirees just take the standard deduction.³

 

How do you do this? To realize most or all of these tax perks, the gift has to take the form of a qualified charitable distribution (QCD), alternately known as a trustee-to-trustee transfer or IRA charitable rollover. In other words, the financial firm serving as the trustee of your IRA writes a check directly to the charity. A financial professional you know and trust can help you fill out the accompanying paperwork.² 

 

If the IRA trustee makes the check payable to you and you deposit it and write a check for the equivalent amount made payable to the charity, it is a taxable event and the whole purpose of the charitable IRA gift is defeated. Should you make that blunder, you will have to declare the income and just take a normal charitable deduction on the donation.²

 

What does the fine print say? To make a QCD, you have to own an IRA and be age 70½ or older. You can’t make a QCD from an employer-sponsored retirement account such as a 401(k) or 403(b); in fact, you can’t make a QCD from a SEP or Simple IRA either.^1,2

 

The QCD can’t be made in a way whereby you would derive benefits from the charity or foundation later. It can’t become the basis of a charitable remainder trust or a gift annuity, for example. A QCD also can’t be made to a donor-advised fund (via which the contributed assets would be invested and grow tax-free prior to the actual charitable donation).²

 

A QCD can’t be a split interest gift. The amount of the QCD must otherwise have been considered taxable income, and you are not permitted to claim a charitable deduction for it.²

  

Help a charity, help your financial situation. If you are well off and don’t really need or want the additional income and income taxes that would result from your RMD, a charitable IRA gift may offer you a solution with the flavor of a win-win – a boon for the charity, a tax break for you and/or your heirs.

    

Citations.

1 - irs.gov/Retirement-Plans/Charitable-Donations-from-IRAs-for-2012-and-2013 [5/1/13]

2 - fpanet.org/ToolsResources/ArticlesBooksChecklists/Articles/CharitablePlannedGiving/QualifiedCharitableDistributionsfor2012and2013/ [1/29/13]

3 - bankrate.com/finance/taxes/gifts-to-charity-pay-off-on-your-taxes-1.aspx [1/10/13]

4 - fidelitycharitable.org/giving-strategies/advisors/donating-retirement-assets-to-charity.shtml [5/7/13]