2014 AdNet Days - Chris Hoyt Handout
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Transcript of 2014 AdNet Days - Chris Hoyt Handout
CHARITABLE PLANNING FOR
UPPER-INCOME DONORS
PRINTING SUGGESTIONS:If you want to print out these slides, may I suggest:
#1 – AVOID PRINTING THE DARK BACKGROUND.
It makes it hard to read. Suggest using the print
command “BLACK and WHITE”; avoid using “color”
#2 – PRINT SIX SLIDES PER PAGE. Slides contain a
very large font. Six slides per page will conserve paper.
CHARITABLE PLANNING FOR
UPPER-INCOME DONORS
Advancement Network
2014 Annual ConferenceCleveland, Ohio -- October 18, 2014
CHRISTOPHER R. HOYT
University of Missouri - Kansas City
School of Law
Tax Planning Challenges
* Planning Strategies for the new 3.8% surtax: Net Investment Income
* Retirement Assets -- Hot Topics-- Lifetime planning-- Bequests of Retirement Assets
-- spouse -- trusts -- charities
INCOME TAX RATES
INVEST WAGES LTCG
Income Level -MENT (+1.45%) & Divid
AGI < $200k/$250k 28% 29.4% 15%
Congratulations! Brilliant tax planning! “Bush tax cuts” remain in full effect for people with adjusted gross income under $200,000 ($250,000 on a joint return)
INCOME TAX RATES
INVEST WAGES LTCG
Income Level -MENT (+1.45%) & Divid
AGI < $200k/$250k 28% 29.4% 15%
AGI > $200k/$250k 33% 34.4% 15%
33% rate when taxable income
> $186,350 -- single
> $226,850 – married filing jointly
TAX RATES paid on TAXABLE INCOME
ADJUSTED GROSS INCOME (“AGI”)
Minus: Greater of
-- Standard Deduction ($6,100)
or
-- Itemized Deductions (Mortgage interest;
charitable contributions; state & local taxes)
Minus: Personal Exemption & Dependents
($3,900 each)
= TAXABLE INCOME
WEALTHY PAY SOME TAXES ON “AGI”
ADJUSTED GROSS INCOME(“AGI”)
Minus: Greater of
-- Standard Deduction ($6,100)
or
-- Itemized Deductions (Mortgage interest;
charitable contributions; state & local taxes)
Minus: Personal Exemption & Dependents
($3,900 each)
= TAXABLE INCOME
INCOME TAX RATES
INVEST WAGES LTCG
Income Level -MENT (+1.45%) & Divid
AGI < $200k/$250k 28% 29.4% 15%
AGI > $200k/$250k 33% 34.4% 15%
plus health care surtax 3.8% 0.9% 3.8%
36.8% 35.3% 18.8%
0.9% MEDICARE SURTAX:
When Compensation Exceeds $200,000 ($250,000 married joint return)
Compensation -- wages & self-employment income
(Added to 1.45% Medicare/Medicaid tax )
(Employee pays entire 0.9%; no employer match)
Employer must withhold when W-2 Form compensation exceeds $200,000
Married joint? Together over $250,000?-- Pay on Form 1040 , e.g. if neither spouse has over $200,000
. (e.g., Husband has $100k and Wife has $160k = $260k)
3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)
3.8% surtax on the lesser of:
Net Investment Income
or
MAGI over $200,000 ($250,000 joint)
( $200k/$250k not indexed for inflation )
Trusts and estates pay 3.8% at $12,150 !!
3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)
How many people are affected?
2011 Tax Returns with AGI over $200,000:
3.2% of all returns
0.7% of single returns
7.6% of married joint returns
86% of the returns with over $200,000*
of AGI were married joint
3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)
Strategies for three different taxpayers:
#1 - Richest 1% - Income over $400,000
-- Reduce NII (not likely to get AGI <200k)
#2 – Taxpayers with AGI near $200k ($250 jt)
-- Either reduce NII or reduce AGI
#3 - Taxpayers with AGI below $200k ($250 jt)
-- Avoid spikes in income that trigger 3.8% tax
-- Charitable Remainder Trusts !!
CHARITABLE REMAINDER TRUSTS
Payment to non-charitable beneficiary
(ies) for life *or* for a term of years
(maximum 20 years)
Remainder interest distributed to
charity
Exempt from income tax
CHARITABLE REMAINDER TRUSTS
EXAMPLE
Husband & wife age 65
Sell stock or land for $1 million gain
Other option: contribute to CRT
before sale is finalized; have CRT
make the sale
CHARITABLE REMAINDER TRUSTS
CRT PROVIDES:
1. Charitable income tax deduction
2. Greater cash flow for life
3. Avoid spike in income – 3.8% tax
4. “Wealth replacement” strategy with
life insurance.
CHARITABLE REMAINDER TRUSTS
DONATE STOCK TO C.R.T.;
KEEP THE STOCK C.R.T. SELLS STOCK
Sales Price $ 1,000,000 $1,000,000
Cost of Stock -0- -0-
Gain on Sale $ 1,000,000 $1,000,000
Capital Gains
Tax (about 25%) 250,000 None
Remaining Proceeds $ 750,000 $1,000,000
CHARITABLE REMAINDER TRUSTS
DONATE STOCK TO C.R.T.;
KEEP THE STOCK C.R.T. SELLS STOCK
Remaining Proceeds $ 750,000 $1,000,000
Interest Rate x 5% x 5%
Annual Income $ 37,500 $ 50,000
══════ ══════
(33% more)
3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)
Net Investment Income
Interest & Dividends
Annuities
Rents & Royalties
Profits from LLC / S Corp (if not employed)
Business of trading commodities & fin instruments
Most capital gains
3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)
Income Exempt from Surtax:
Trade / Business income from an LLC, partnership, Subchapter S corporation or sole proprietorship, provided the recipient is employed at the business.
-- “material participation” test
(work 500+ hours during the year?)
Gain from selling property used in trade/ business [rental property gains -> 3.8% tax]
3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)
Other Income Exempt from 3.8% Surtax:
Income that isn’t interest, rents, gains, etc :
Retirement income – social security, qualified plans: IRAs, 401(k), pensions, etc – (non-qualified annuities are subject to tax)
Wages & self-employment income ( 0.9% tax)
Alimony income
Lottery winnings
INCOME TAX RATES
INVEST WAGES LTCG
Income Level -MENT (+1.45%) & Divid
AGI < $200k/$250k 28% 29.4% 15%
AGI > $200k/$250k 33% 34.4% 15%
plus health care surtax 3.8% 0.9% 3.8%
36.8% 35.3% 18.8%
INCOME TAX RATES
INVEST WAGES LTCG
Income Level -MENT (+1.45%) & Divid
AGI < $200k/$250k 28% 29.4% 15%
AGI > $200k/$250k 33% 34.4% 15%
AGI > $250k/$300k 33% 34.4% 15%
-- 3% phase-out itemized deductions
-- Phase-out personal exemptions
PHASEOUTSAGI > $250,000 ($300,000 joint returns)
[2014: > $254,200 ($305,060 joint returns)]
3% Phase-out Itemized Deductions
-- disguised 1% tax rate hike (3% x 33% rate)
Personal and Dependent Exemptions
-- $3,900 apiece for self & each dependent
-- lose 2% for every $2,500 income increase
-- 100% eliminated AGI > $377k ($427k jnt)
(Phase-out $254k-$377k ( $305k-$427k jnt))
INCOME TAX RATES
INVEST WAGES LTCG
Income Level -MENT (+1.45%) & Divid
AGI < $200k/$250k 28% 29.4% 15%
AGI > $250k/$300k 33% 34.4% 15%
plus 3% phase-out 1% 1 % 1%
plus health care surtax 3.8% 0.9% 3.8%
37.8% 36.3% 19.8%
[plus personal exemption phase-out means
extra tax until AGI $377,000 ($427,000 jnt)]
INCOME TAX RATES
INVEST WAGES LTCG
Income Level -MENT (+1.45%) & Divid
AGI < $200k/$250k 28% 29.4% 15%
Taxb>$400/$450 39.6% 41.0% 20%
INCOME TAX RATES
INVEST WAGES LTCG
Income Level -MENT (+1.45%) & Divid
AGI < $200k/$250k 28% 29.4% 15%
Taxb>$400/$450 39.6% 41.0% 20%
plus 3% phase-out 1% 1 % 1%
plus health care surtax 3.8% 0.9% 3.8%
With $12,000+ income, 44.4% 42.9% 24.8%
Trusts & Estates >> 43.4% 23.8%
3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)
Two Ways to reduce the 3.8% surtax :
#1 - Reduce AGI to less than $200,000
($250,000 joint)
and/or
#2 – Reduce Net Investment Income
3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)
Strategies for three different taxpayers:
#1 - Richest 1% - Income over $400,000
-- Reduce NII (not likely to get AGI <200k)
#2 – Taxpayers with AGI near $200k ($250 jt)
-- Either reduce NII or reduce AGI
#3 - Taxpayers with AGI below $200k ($250 jt)
-- Avoid spikes in income that trigger 3.8% tax
Reduce Net Investment Income
Two Ways to reduce Net Investment Income:
#1 - Convert NII into income that isn’t NII
#2 – Shift NII to family and to charity that
aren’t subject to tax on their NII
Reduce Net Investment Income
Convert NII into Income That Isn’t NII
Some examples:
#1 - Taxable interest to tax-free muni interest
#2 – Life insurance
#3 – Work 500+ hours at business
#4 – Monster-size Roth IRA Conversions
Reduce Net Investment Income
Shift NII to Family/Charity who pay
no 3.8% tax [note: trusts do pay 3.8%]
Family: Give income-generating investments
Charity:
#1 – Make gifts of appreciated stock
#2 - Donor advised funds & private foundations
#3 – Charitable lead trusts
#1 – MAKE GIFTS
OF APPRECIATED STOCK
DOUBLE-TAX ADVANTAGE
Charitable Income Tax Deduction for the
Full Appreciated Value of the Stock
Never Pay Income Tax on the Growth of
the Value of the Stock
Loss Property? Sell for tax loss; give cash
DOUBLE BENEFIT FROM GIFT
OF APPRECIATED L.T.C.G.
PROPERTY
<< AVOID LONG-TERM
CAPITAL GAIN TAX
<< CHARITABLE INCOME
TAX DEDUCTION
$ Benefits Max Federal Taxes Saved
Person in 2012
50%
<< 15%* LTCG Tax Rate
<< 35% Marginal Tax Rate
* 25% RE Dep Recap
* 28% Collectibles
FUTURE INCOME TAX RATES
Highest tax rates 2012 2013-14
Investment income 35% 44.4%
Earned income 36.4% 43.0%
(wages – 1.45% health)
LT Capital Gains 15% 24.8%
$ Benefits Max Federal Taxes Saved
Person in the Year 201250%
<< 15%* LTCG Tax Rate
<< 35% Marginal Tax Rate
* 25% RE Dep Recap
* 28% Collectibles
$ Benefits Max Federal Taxes Saved
Person in the Year 201465.4%
<< 24.8%* LTCG Tax Rate
<< 39.6*% Marginal Tax Rate
(3.8% surtax not avoided
by charitable deduction)
* 29.8% RE Dep Recap
* 32.8% Collectibles
Reduce Net Investment Income
Shift investment income to charity: #1 – Make gifts of appreciated stock
#2 - Donor advised funds
& private foundations#3 – Charitable lead trusts
DONOR ADVISED FUNDS
Administrative Convenience
– split large gift to many charities
-- anonymous gifts possible with DAFs
-- one receipt from DAF/PF instead of
many CWAs from many charities
Shift Net Investment Income
Client with $400,000+ of income says:
• “My $100,000 investment produces
$4,000 of taxable income every year”
• “I give $4,000 to charity every year”
• “I want to make a charitable bequest
of $100,000”
Shift Net Investment IncomeClient with $400,000+ of income says:• “My $100,000 investment produces $4,000 of taxable income
every year”
• “I give $4,000 to charity every year”
SOLUTION: LIFETIME GIFT OF $100,000 TO PF or DAF; Shift income
• Lifetime income tax deduction produces refund; better than just estate tax bequest
• Investment income of PF/DAF not subject to 3.8% NII surtax
• Tip: Make gift to DAF of appreciated stock
Reduce Net Investment Income
Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%]
Family: Give income-generating investments
Charity:
#1 – Make gifts of appreciated stock
#2 - Donor advised funds & private foundations
#3 – Charitable lead trusts
Shift Net Investment Income
Client with $400,000+ of income says:
• “My $100,000 investment produces
$4,000 of taxable income every year”
• “I give $3,000 to charity every year”
• “I don’t want a charitable bequest of
$100k. Want $100k to go to family.”
Shift Net Investment Income
Client with $400,000+ of income says:
• “My $100,000 investment produces $4,000 of taxable income every year”
• “I give away $3,000 to charity every year”
• “I want family to get the $100,000 investment”
CONCEPT: Put $100,000 into a Charitable Lead Trust for a term of years. Whereas donor is paying 3.8% NIIT on all 4%, the CLT would pay only on undistributed 1%. [ PLUS: CLT discount on wealth transfer ]
Reduce Net Investment Income
Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%]
#1 – Donate appreciated stock
#2 - Donor advised funds & private foundations
#3 – Charitable lead trusts
COST/BENEFIT – Is administrative cost of PF or CLT worth doing just for 3.8% tax savings? Other benefits are needed.( Compare: DAF cheap!)
Taxpayers with AGI Near $200,000
Two Ways to reduce the 3.8% surtax :
#1 - Reduce Net Investment Income
(convert NII or shift NII)
and/or
#2 – Reduce AGI to less than
$200,000 ($250,000 joint)
Taxpayers with AGI Near $200,000 and
with lots of Net Investment Income
Reduce AGI to less than $200k ($250 jnt)
• Reduce NII (see strategies listed earlier)
• Avoid large Roth IRA conversions
• Maximize compensation deferral
-- 401(k) contributions
-- Non-qualified deferred comp (Sec. 409A)
• “Charitable IRA Rollover”
Taxpayers with AGI Near $200,000
”Charitable IRA Rollover” - over age 70 ½
• “QCD” – Qualified Charitable Distribution
• Have charitable gift made directly from IRA to
charity (max: $100,000 /year)
• QCD distribution not counted as income (Price? No itemized charitable deduction)
• QCD can satisfy annual RMD
REQUIRED MINIMUM
DISTRIBUTIONS
*LIFETIME DISTRIBUTIONS*
Age of Account Owner Required Payout
70 1/2 3.65%
75 4.37%
80 5.35%
85 6.76%
90 8.75%
95 11.63%
100 15.88%
Taxpayers with AGI Near $200,000 and
with lots of Net Investment Income
”Charitable IRA Rollover” - over age 70 ½
71 year old professional
• $150,000 compensation income
• $50,000 net investment income
• This year: first RMD from IRA: $40,000
• Intends to make charitable gift: $30,000
Taxpayers with AGI Near $200,000
”Charitable IRA Rollover” - over age 70 ½
Compensation $150,000
Investment 50,000
IRA RMD 40,000 << IRA income
AGI $240,000 not subject
to 3.8% tax
Taxpayers with AGI Near $200,000
”Charitable IRA Rollover” - over age 70 ½
Normal Gift
Compensation $150,000
Investment 50,000
IRA RMD 40,000
AGI $240,000 << 3.8% surtax
Taxable Income $210,000 on $40,000
Taxpayers with AGI Near $200,000
”Charitable IRA Rollover” - over age 70 ½
Normal Gift IRA Gift
Compensation $150,000 $150,000
Investment 50,000 50,000
IRA RMD 40,000 10,000
AGI $240,000 $210,000
3.8% surtax on: $40,000 $10,000
Will Law Be Extended to 2014?
>Planning strategy for 2014if, as in 2008, 2010 & 2012, law has not been
extended until December!:
Give RMD to charity;
can’t lose ! (Some IRAs balk)
(May 29, 2014 – House Ways & Means Cmmtee
voted to make retroactive & permanent !)
3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)
Strategies for three different taxpayers:
#1 - Richest 1% - Income over $400,000
-- Need to reduce NII (won’t have AGI <200k)
#2 – Taxpayers with AGI near $200k ($250 jt)
-- Either reduce NII or reduce AGI
#3 - Taxpayers with AGI below $200k ($250 jt)
Retirement Assets
Proposal to liquidate inherited IRAs in just five years
Impact on planning
charitable bequests
THREE STAGES OF A
RETIREMENT ACCOUNT
Accumulate Wealth
Retirement Withdrawals
Distributions After Death
Accumulate Wealth
Tax deduction at contribution
Accumulate in tax-exempt trust
Taxed upon distribution
= Tax Deferred Compensation
TYPES OF QRPs
1. Sec. 401 – Company plans
2. Sec. 408 – IRAs
-- SEP & SIMPLE IRAs
3. Sec. 403(b) & 457–Charities
4. Roth IRAs & 401(k)/403(b)
Roth IRA,
Roth 401(k), or Roth 403(b)
INVERSE OF TRADITIONAL:
No tax deduction at contribution
Accumulate in tax-exempt trust
Not taxed upon distribution
RETIREMENT
TAXATION
General Rule – Ordinary income
Exceptions:
-- Tax-free return of capital
-- NUA for appreciated employer
stock
-- Roth distributions are tax-free
USUAL OBJECTIVE:
Defer paying income taxes in order to get
greater cash flow
Principal 10% Yield
Pre-Tax Amount $ 100,000 $ 10,000
Income Tax
on Distribution (40%) 40,000
Amount Left to Invest $ 60,000 $ 6,000
REQUIRED MINIMUM
DISTRIBUTION (“RMD”)
BACKGROUND: 50% penalty if not
receive distribution from IRA, 401(k), etc:
#1 – lifetime distributions from own IRA:
beginning after age 70 ½
#2 – an inherited IRA, 401(k), etc –
beginning year after death *
REQUIRED MINIMUM
DISTRIBUTIONS
*LIFETIME DISTRIBUTIONS*
Age of Account Owner Required Payout
70 1/2 3.65%
75 4.37%
80 5.35%
85 6.76%
90 8.75%
95 11.63%
100 15.88%
ADVANTAGES OF
ROTH IRAsUnlike a regular IRA,
no mandatory lifetimedistributions from a
Roth IRA after age 70 ½
Yes, there are mandatory distributions after death
Distributions
After Death Income taxation
Mandatory ERISA distributions
Estate taxation
Asset Protection – Clark v. Rameker
Collision of multiple laws at death
Inherited IRAs -- Bankruptcy
US Supreme Court: Inherited IRAs are
not “retirement funds” entitled to
Sec. 522 bankruptcy exemption
under federal or state exemption
laws. Clark, et ux v. Rameker, 573 U. S. __ (Jun, 12, 2014)
Solution: Name trust with spendthrift
provisions as beneficiary of an IRA
or other qualified plan ?
Distributions
After Death> Income taxation> Mandatory ERISA distributions
> Estate taxation
Collision of three tax worlds at death
INCOME IN RESPECT OF A
DECEDENT - “IRD” – Sec. 691
No stepped up basis for retirement assets
After death, payments are income in respect of a decedent (“IRD”) to the
beneficiaries
Common mistake in the past: children
liquidate inherited retirement accounts.
Distributions
After Death> Income taxation
> Mandatory ERISA distributions
> Estate taxation
Collision of three tax worlds at death
Distributions
After DeathAfter death, must start liquidating account
• Tax planning for family members who
inherit: DEFER distributions as long as
possible – greater tax savings
• “Stretch IRA” – make payments over
beneficiary’s life expectancy
Distributions
After Death“ life expectancy“
Oversimplified: Half of population will die before that age, and half will die after
Implication: For the 50% of people who live beyond L.E. date, an inherited IRA will be empty before they die.
REQUIRED MINIMUM
DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
Age of Beneficiary Life Expectancy
30 83 53.3 more years
40 83 43.6
50 84 34.2
60 85 25.2
70 87 17.0
80 90 10.2
90 97 6.9
REQUIRED MIN. DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
“STRETCH IRAS”
Age of Beneficiary Life Expectancy
30 53.3 more years
40 43.6
50 34.2
60 25.2
70 17.0
80 10.2
90 6.9
REQUIRED MIN. DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
“STRETCH IRAS”
Age of Beneficiary Life Expectancy
30 1.9% 53.3 more years
40 2.3% 43.6
50 2.9% 34.2
60 4.0% 25.2
70 5.9% 17.0
80 10.0% 10.2
90 14.5% 6.9
SENATE PROPOSAL:
LIQUIDATE ALL INHERITED
IRAs IN FIVE YEARS
2012 – Highway Bill – not enacted
President Obama budget proposal
June, 2014 – Sen. Wyden adds to Highway Bill
EXCEPTIONS
-- Spouse -- minor child -- disabled
-- Person not more than ten years younger
REQUIRED MINIMUM DISTRIBUTIONS
Example: Death at age 80?
CURRENT LAW: *Life Expectancy Table*
Age of Beneficiary Life Expectancy
30 1.9% 53.3 more years
40 2.3% 43.6
50 2.9% 34.2
60 4.0% 25.2
70 5.9% 17.0
80 10.0% 10.2
90 10.0% 6.9 * [10.2 yrs]
REQUIRED MINIMUM DISTRIBUTIONS
Example: Death at age 80?
PROPOSED: FIVE YEARS if >10 yrs younger
Age of Beneficiary Life Expectancy
30 5 years
40 5
50 5
60 5
70 5.9% 17.0
80 10.0% 10.2
90 10.00% 6.9 * [10.2 yrs]
SENATE PROPOSAL:
LIQUIDATE ALL INHERITED
IRAs IN FIVE YEARSEXCEPTIONS
-- Spouse -- minor child -- disabled
-- Person not more than ten years younger
TAX TRAP: Does naming a trust for a spouse
(e.g., QTIP trust; credit shelter trust) as an IRA
beneficiary mean required liquidation in 5 years?
SENATE PROPOSAL: LIQUIDATE ALL
INHERITED IRAs IN FIVE YEARS
IMPLICATIONS FOR CHARITIES
Donors more likely to consider
Outright bequests
Retirement assets to tax-exempt CRT
Child: income more than 5 years; then charity
Spouse only (marital estate tax deduction)
Spouse & children (no marital deduction)
2-GENERATION CHARITABLE
REMAINDER TRUST
Typically pays 5% to elderly surviving
spouse for life, then 5% to children for
life, then liquidates to charity
Like an IRA, a CRT is exempt from
income tax
Can operate like a credit-shelter trust for IRD assets [no marital deduction]
2-GENERATION CHARITABLE
REMAINDER TRUST
Can be a solution for second marriages when estate is top-heavy
with retirement assets. Example:
-- Half of IRA to surviving spouse
-- Other half of IRA to a CRT for 2nd
spouse and children from 1st marriage
2-GENERATION CHARITABLE
REMAINDER TRUST
TECHNICAL REQUIREMENTS
Minimum 10% charitable deduction
-- all children should be over age 40
CRUT – minimum 5% annual distrib
Not eligible for marital deduction
(see 2002 article on topic)
MANDATORY DISTRIBUTIONS
[Assume inherit IRA at age 80 and die at 92]
Own Accumulation Conduit
AGE IRA Trust Trust . C R T .
80 5.35% 9.80% 9.80% 5.00%
85 6.76% 19.23% 13.16% 5.00%
90 8.78% 100.00% 18.18% 5.00%
91 9.26% empty 19.23% 5.00%
92 9.81% empty 20.41% 5.00%
CHARITABLE BEQUESTS
FROM QRPs
Best type of bequest: taxable income !
Easier than formality of a will: Name
charity as beneficiary on form of plan
-- no need for attorney to draft
-- no need for witnesses, etc.
“You can’t make a charitable bequest
unless you have a will”
Wrong. A retirement plan is a trust with its
own beneficiary designations. Like other
trusts, assets can pass outside probate.
Name a charity as a beneficiary
- the cheapest “charitable remainder trust”
LIFETIME GIFTS: ONLY IRAsBEQUESTS: ANY QRP
1. Sec. 401 – Company plans
2. Sec. 408 – IRAs
-- SEP & SIMPLE IRAs
3. Sec. 403(b) & 457–Charities
4. Roth IRAs & 401(k)/403(b)
Avoiding Problems With
Charitable Bequests
* Let Other Beneficiaries
Have Stretch IRA*Keep IRD Off of Estate’s Income Tax Return
* Guarantee Offsetting Charitable Income Tax
Deduction if Have to Report Income
REQUIRED MIN. DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
“STRETCH IRAS”
Age of Beneficiary Life Expectancy
30 53.3 more years
40 43.6
50 34.2
60 25.2
70 17.0
80 10.2
90 6.9
Avoiding Problems With
Charitable Bequests
* Let Other Beneficiaries Have Stretch IRA
*Keep IRD Off of Estate’s Income
Tax Return
* Guarantee Offsetting Charitable
Income Tax Deduction if Have to
Report Income
WHAT CAN GO WRONG ?
TWO WAYS TO MAKE A CHARITABLE BEQUEST FROM A RETIREMENT ACCOUNT
#1 – NAME CHARITY AS BENEFICIARY OF THE ACCOUNT
#2 – PAY ACCOUNT TO ESTATE OR TRUST THAT THEN MAKES A CHARITABLE BEQUEST
Avoiding Problems With
Charitable Bequests
* Let Other Beneficiaries
Have Stretch IRA*Keep IRD Off of Estate’s Income Tax Return
* Guarantee Offsetting Charitable Income Tax
Deduction if Have to Report Income
WHAT CAN GO WRONG #1?
• Other beneficiaries cannot do stretch IRA if charity is beneficiary?
• Solutions:
* cash out charity’s share by Sept 30
or
* separate account for charity p. 39
WHAT CAN GO WRONG #2 ?
TWO WAYS TO MAKE A CHARITABLE BEQUEST FROM A RETIREMENT ACCOUNT
#1 – NAME CHARITY AS BENEFICIARY OF THE ACCOUNT
#2 – PAY ACCOUNT TO ESTATE OR TRUST THAT THEN MAKES A CHARITABLE BEQUEST
WHAT CAN GO WRONG #2?
Estate or trust has taxable income
from receiving IRA distribution,
but maybe there is no offsetting
charitable income tax deduction
when the IRA check is given to a
charity.
WHAT CAN GO WRONG?
IRS Chief Counsel Memorandum ILM 200848020
Decedent left his IRA to a trust that benefited his six children and several charities
Trust received cash from IRA; paid entire charitable share, leaving the six children as the only remaining beneficiaries of the trust.
IRS: “Taxable income from IRA, but nocharitable deduction.” Reason: trust had no instructions to pay income to charities p.39
WHAT CAN GO WRONG?
Solution #1 – Keep IRD off of
estate’s/trust’s income tax return
a. Name charity as beneficiary of IRA
b. “Distribute” IRA to charity if
document allows
Caution: IRS memo on danger of using
retirement accounts to satisfy pecuniary bequests p.41
WHAT CAN GO WRONG?
SOLUTION #2 – draft document to
get an offsetting charitable income tax
deduction in case estate or trust has
income
I instruct that all of my charitable gifts, bequests and
devises shall be made, to the extent possible, from
"income in respect of a decedent" ….. P.42