Category: Retirement Planning

What should women know about long-term care

What Should Women Know about Long-Term Care?

A longer retirement increases the odds of needing long-term care. An AARP study found more than 70% of nursing home residents were women, says Kiplinger’s recent article entitled “A Woman’s Guide to Long-Term Care.”  What should women know about long-term care?

Living longer also increases the chances of living it alone because living longer may mean outliving a spouse. According to the Joint Center for Housing Studies of Harvard University, “In 2018, women comprised 74% of solo households age 80 and over.”

The first step is to review your retirement projections. It’s wise to look at “what-if” scenarios: What-if the husband passes early? How does that impact their retirement? What if a female client lives to 100? Will she have enough to live on? What if a single woman needs long-term care for dementia? Alzheimer’s and dementia can last for years, eating up a retiree’s nest egg.

Medicare and Medicaid. Government programs, such as Medicare and Medicaid, are complicated. For instance, Medicare may cover some long-term care expenses, but only for the first 100 days. Medicare doesn’t pay for custodial care (at home long-term care). Medicaid pays for long-term care. However, you must qualify financially.

Planning for long-term care. If a woman has a high retirement success rate, she may want to self-insure her future long-term care expenses. This can mean setting up a designated long-term care investment account solely to be used for future long-term care expenses. If a woman has a modest degree of retirement success, she may want to lower her current expenses to save more for the future. She may also want to look at long-term care insurance.

Social Security. Women can also think about waiting to claim Social Security until age 70. If women live longer, the extra benefits accrued by waiting can help with long-term care. Women with a higher-earning husband may want to ask the higher-earning spouse to delay until age 70, if possible. When the higher-earning spouse dies, the widow can step into the higher benefit. The average break-even age is generally around 77-83 for Social Security. If an individual can live longer than 83, the more dollars and sense it makes to delay collecting until age 70.

Estate Planning. Having a comprehensive estate plan is a must. Women (and men) should have a power of attorney (POA). A POA gives a trusted agent the ability to write checks and send money to pay for long-term care.

When it comes to long-term care, women should know their own health and the potential drain on the retirement savings. Work with a financial advisor and estate planning attorney to make sure your later years are secure.

If you would like to learn more about long-term care, please visit our previous posts.

Reference: Kiplinger (July 11, 2021) “A Woman’s Guide to Long-Term Care”

 

how to handle an inherited IRA

How to Handle an Inherited IRA

You can’t leave the money in an original IRA inherited from the deceased. There are several ways you can take the funds after inheriting either a traditional or Roth IRA. However, your options will be restricted by several factors. Note that failure to handle an inherited IRA properly can lead to a significant penalty from the IRS.

Kiplinger’s recent article entitled “I Inherited an IRA. Now What?” says you should understand what type of beneficiary you are under the new SECURE Act, what options are available to you and how they fit into your tax and investment profile.

There are several different ways to handle an inherited IRA. The first step after being left an IRA is getting the details about the account. This includes whether it’s a traditional IRA or a Roth IRA. Unlike Roth IRAs, traditional IRAs require the owner to take minimum withdrawals or “Required Minimum Distributions” (RMDs), when they turn 72. As a result, if the original account owner was older than 72 when they died, be certain that the RMD has been taken for the year. If not, there’s a potentially significant IRS penalty. You should also identify when the account was opened. This may exempt you from taxes later on, if you inherited a Roth IRA. It is also recommended that you verify that you are the sole beneficiary.

Spousal Heirs Can Transfer the Funds to a New IRA. Spousal heirs can transfer the assets from the original owner’s account to their own existing or a new IRA. You can do this even if the deceased was over 72 and was taking RMDs from a traditional IRA. With your existing or new account, you can delay RMDs until you reach 72. You can also complete this type of transfer with a Roth. Since these accounts don’t require RMDs, you don’t need to worry about withdrawals. This is a good option for beneficiaries who are younger than their deceased spouses and don’t need the income at that point. Transferring the funds to your own traditional IRA lets you delay taking RMDs. However, if you’d like to withdraw the funds from the new IRA before you are 59½, you’ll be subject to the 10% early-withdrawal penalty.

Spousal Stretch IRA. Spousal heirs who inherit either a traditional or a Roth IRA can transfer the assets into an inherited IRA, which is different than a spousal transfer. The original account owner’s financial institution will require you to open the inherited IRA with them, but you can also move the funds to a new institution. First, open an inherited IRA at the original owner’s institution and then open an inherited IRA at the institution to which you want to move the account. Request a direct IRA-to-IRA transfer. When titling the account, follow the format: “[Decedent’s Full Name], for benefit of [Beneficiary’s Full Name]” or “[Beneficiary’s Full Name], as beneficiary of [Decedent’s Full Name].”

Once you have a handle on the inherited IRA, you can withdraw the funds in two ways: (i) the life expectancy method is where you take annual distributions based on your own life expectancy, not the original owner’s (also known as a “stretch IRA”); or (ii) the 10-year method, where you must withdraw all funds within 10 years.

Non-Spousal Heirs Have Limited Choices. The SECURE Act of 2019 got rid of the stretch IRA for non-spousal heirs who inherit the account on or after Jan. 1, 2020. The funds from the inherited IRA – either a Roth or a traditional IRA – must be distributed within 10 years of the original owner passing away, even if the deceased person died before or after the year in which they reach age 72. There are exceptions, such as when the heir is a minor, disabled, or more than a decade younger than the original account owner. In these cases, they can withdraw the funds using the stretch IRA method.

If you’re required to take out the funds within 10 years, you don’t need to withdraw a certain amount of money each year from an inherited IRA. You can leave the funds to grow in the account tax deferred the entire time and then withdraw the funds at the end. However, if you withdraw too much in one year, it could move you into a higher tax bracket.

Lump Sum. All beneficiaries can take the funds in one large distribution, either from a traditional or Roth IRA. However, this is generally discouraged for those with traditional IRAs because they’ll have to pay income taxes on the distribution all at once and may move to a higher tax bracket.

Plan for Taxes. If you inherit a Roth IRA, you shouldn’t have to pay taxes on distributions if the original account was opened at least five years ago, or a conversion from a traditional IRA to a Roth occurred at least five years ago. Determine when the original account was opened to see if some of the distribution will be taxable. Make sure you know how to handle an inherited IRA. Talk with an estate planning attorney today.

If you would like to read more about IRAs and other retirement accounts, please visit our previous posts. 

Reference: Kiplinger (Aug. 4, 2021) “I Inherited an IRA. Now What?”

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taking Medicare or keep my employer's health plan

Taking Medicare or Employer’s Health Plan

As we get older, a common dilemma approaches: Do I consider taking Medicare or keep my employer’s health plan? Let’s say that you work full time and have a very good medical insurance plan, but it’s costly, especially if you also have been covering the rest of your family. Say that the spouse is 60 and permanently disabled and has been told he’s eligible for Medicare. A common question is whether the working spouse should remove the disabled spouse from the employer’s coverage and go with Medicare. What’s the best option?

NJ Money Help’s recent article entitled “Should we take Medicare or keep an employer health plan?” explains that there are different components of Medicare to cover specific services: Medicare Part A, Part B, and Part D.

Medicare Part A helps pay for hospital and facility costs. Medicare Part B helps pay for medical costs, like doctors and medical supplies. Medicare Part D is for prescription drug coverage. Most people don’t pay a monthly premium for Part A, but there are premiums associated with Part B and Part D coverage.

If an individual is 65 and has received disability benefits from Social Security for 24 months or has received certain disability benefits from the Railroad Retirement Board for 24 months, he or she will automatically get Medicare Part A and Part B.

You should also know that you can decide to delay Medicare Part B by contacting Social Security after you become eligible, and you receive the card. Discuss this option with your employer’s health care benefit department to understand how Medicare may or may not work with your current coverage. This is because there are some plans and health benefit plans (especially those with fewer than 20 employees) that become secondary to Medicare, when an enrollee becomes eligible for Medicare.

If you decide to participate in Medicare Part B, understand that there’s a cost. The premium is based on your income, and the standard Part B premium in 2021 is $148.50 per month, if your income was $176,000 or less in 2019 for a married filing joint return. The Medicare Part B premium increases as your income increases.

Medicare Part B pays for many of your medical bills. However, not all the costs for covered health care services and supplies are included. As a result, many seniors buy a supplemental insurance plan, called Medigap. This plan will pay for some of the remaining health care costs, like co-payments, coinsurance and deductibles that are not covered by Medicare.

Remember that it’s important to enroll in Medigap coverage within six months following Medicare Part B enrollment. Medigap is an additional cost along with your Medicare Part B premium and is sold through a private insurance company. To determine what will be more cost effective, you’ll need to compare the Medicare costs with your employer plan. There are many things to consider when taking Medicare or your employer’s health plan. Consulting with an experienced Elder Law attorney who has worked with Medicare coverage and knows the ins and outs.

If you would like to learn more about Medicare coverage, please visit our previous posts. 

Reference: NJ Money Help (Aug. 13, 2021) “Should we take Medicare or keep an employer health plan?”

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the most common Medicare mistake

The most common Medicare Mistake

Although not everyone is required to enroll in Medicare at the age of eligibility, many people must do so or risk lifelong late-enrollment penalties. CNBC’s article entitled “If you’re still working when you turn 65, be sure to avoid costly mistakes with Medicare” says the most common Medicare mistake is to believe that you don’t need Medicare and to miss enrolling in it when the time comes.

Approximately 10 million workers are in the 65-and-older group, or 17.9% of that age group, according to the Bureau of Labor Statistics. The general rule for Medicare enrollment is that unless you satisfy an exception, you are allowed a seven-month enrollment window that begins three months prior to your 65th birthday month and ends three months after it.

One exception? If you have qualifying insurance with your employer.

Original, or basic, Medicare includes Part A (hospital coverage) and Part B (outpatient care coverage). Part A doesn’t have a premium, provided you have at least a 10-year work history of contributing to the program through payroll (or self-employment) taxes. Part B has a standard monthly premium of $148.50 for 2021, although higher-income beneficiaries pay more through monthly adjustments. About half (43%) of individuals opt to get their Parts A and B benefits delivered through an Advantage Plan (Part C), which typically includes prescription drugs (Part D). It may have a premium.

The rest go with basic Medicare and may pair it with a Medigap policy and a stand-alone Part D plan. Note that higher-income beneficiaries also pay more for drug coverage.

It’s crucial to understand that this common Medicare mistake creates late-enrollment penalties that can last a lifetime. For Part B, the surcharge is 10% for each 12-month period you could’ve had it but didn’t sign up. For Part D, the penalty is 1% of the base premium ($33.06 in 2021) multiplied by the number of full, uncovered months you didn’t have Part D or creditable coverage.

The general rule for workers at companies with at least 20 employees is that you can delay your enrollment in Medicare, until you lose your group insurance (when you retire). Many people with large group health insurance wait with Part B but sign up for Part A because it’s free. It also doesn’t hurt you to have it. However, if you have a health savings account and a high-deductible health plan through your employer, you can’t make contributions after you enroll in Medicare, even if only in Part A.

If you remain with your current coverage and delay all or parts of Medicare, make certain that the plan is considered qualifying coverage for both Parts B and D. If you’re unclear if you need to enroll, ask your human resources department or your insurance carrier to confirm.

However, some 65-year-olds with younger spouses also might want to keep their group plan. Unlike your company’s option, spouses are required to qualify on their own for Medicare, regardless of your own eligibility.

If you have health insurance through a company with fewer than 20 employees, you should sign up for Medicare at 65, whether or not you stay on the employer plan. If you do choose to remain on it, Medicare is your primary insurance. However, it may be more cost-effective in that scenario to quit your employer coverage and purchase a Medigap and a Part D plan (or alternatively, an Advantage Plan,) rather than keeping the work plan as secondary insurance.

Workers at small companies frequently pay more in premiums than employees at larger firms. The average premium for single coverage through employer-sponsored health insurance is $7,470, research shows. However, employees contribute an average of $1,243 — or about 17% — with their company covering the remainder. At small firms, the employee’s share might also be far higher. The bottom line is this: Don’t forget to enroll when it is your time.  This most common Medicare mistake could lead to a financial disaster.

If you would like to learn more about Medicare policies and how to manage your coverage, please visit our previous posts. 

Reference: CNBC (July 22, 2021) “If you’re still working when you turn 65, be sure to avoid costly mistakes with Medicare”

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women should plan for long-term care

Women should plan for Long-Term Care

Women face some unique challenges as they get older. The Population Reference Bureau, a Washington based think tank, says women live about seven years longer than men. This living longer means planning for a longer retirement. While that may sound nice, a longer retirement increases the chances of needing long-term care. Thus, women should consider how to plan for long-term care.

Kiplinger’s recent article entitled “A Woman’s Guide to Long-Term Care” explains that living longer also increases the chances of going it alone and outliving your spouse. According to the Joint Center for Housing Studies of Harvard University, in 2018 women made up nearly three-quarters (74%) of solo households age 80 and over.

Ability to pay. Long-term care is costly. For example, the average private room at a long-term care facility is more than $13,000/month in Connecticut and about $11,000/month in Naples, Florida. There are some ways to keep the cost down, such as paying for care at home. Home health care is about $5,000/month in Naples, Florida. Multiply these numbers by 1.44 years, which is the average duration of care for women. These numbers can get big fast.

Medicare and Medicaid. Medicare may cover some long-term care expenses, but only for the first 100 days. Medicare does not pay for custodial care (at home long-term care). Medicaid pays for long-term care, but you have to qualify financially. Spending down an estate to qualify for Medicaid is one way to pay for long-term care but ask an experienced Medicaid Attorney about how to do this.

Make Some Retirement Projections. First, consider an ideal scenario where perhaps both spouses live long happy lives, and no long-term care is needed. Then, ask yourself “what-if” questions, such as What if my husband passes early and how does that affect retirement? What if a single woman needs long-term care for dementia?

Planning for Long-Term Care. If a female client has a modest degree of retirement success, she may want to decrease current expenses to save more for the future. Moreover, she may want to look into long-term care insurance.

Waiting to Take Social Security. Women can also consider waiting to claim Social Security until age 70. If women live longer, the extra benefits accrued by waiting can help with long-term care. Women with a higher-earning husband may want to encourage the higher-earning spouse to delay until age 70, if that makes sense. When the higher-earning spouse dies, the surviving spouse can step into the higher benefit. The average break-even age is generally around age 77-83 for Social Security. If an individual can live longer than 83, the more dollars and sense it makes to delay claiming benefits until age 70.

Estate Planning. Having the right estate documents is a must. Both women and men should have a power of attorney (POA). This legal document gives a trusted person the authority to write checks and send money to pay for long-term care.

Living longer means women should plan for long-term care. Work with your estate planning attorney and financial advisor to craft a plan that ensures you are well cared for should long-term care be needed.

If you would like to learn more about long-term care, and other related issues, please visit our previous posts.

Reference: Kiplinger (July 11, 2021) “A Woman’s Guide to Long-Term Care”

Photo by Matthias Zomer from Pexels

Episode 6 of The Estate of The Union podcast is out now

 

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Managing financial issues after death of a spouse

Managing Financial issues after Death of Spouse

Managing financial issues that arise after the death of a spouse range from the simple—figuring out how to access online bill payment for utilities—to the complex—understanding estate and inheritance taxes. The first year after the death of a spouse is a time when surviving spouses are often fragile and vulnerable. It’s not the time to make any major financial or life decisions, says the article “The Financial Effects of Losing a Spouse” from Yahoo! Finance.

Tax implications following the death of a spouse. A drop in household income often means the surviving spouse needs to withdraw money from retirement accounts. While taxes may be lowered because of the drop in income, withdrawals from IRAs and 401(k)s that are not Roth accounts are taxable. However, less income might mean that the surviving spouse’s income is low enough to qualify for certain tax deductions or credits that otherwise they would not be eligible for.

Surviving spouses eventually have a different filing status. As long as the surviving spouse has not remarried in the year of death of their spouse, they are permitted to file a federal joint tax return. This may be an option for two more years, if there is a dependent child. However, after that, taxes must be filed as a single taxpayer, which means tax rates are not as favorable as they are for a couple filing jointly. The standard deduction is also lowered for a single person.

If the spouse inherits a traditional IRA, the surviving spouse may elect to be designated as the account owner, roll funds into their own retirement account, or be treated as a beneficiary. Which option is chosen will impact both the required minimum distribution (RMD) and the surviving spouse’s taxable income. If the spouse decides to become the designated owner of the original account or rolls the account into their own IRA, they may take RMDs based on their own life expectancy. If they chose the beneficiary route, RMDs are based on the life expectancy of the deceased spouse. Most people opt to roll the IRA into their own IRA or transfer it into an account in their own name.

The surviving spouse receives a stepped-up basis in other inherited property. If the assets are held jointly between spouses, there’s a step up in one half of the basis. However, if the asset was owned solely by the deceased spouse, the step up is 100%. In community property states, the total fair market value of property, including the portion that belongs to the surviving spouse, becomes the basis for the entire property, if at least half of its value is included in the deceased spouse’s gross estate. Your estate planning attorney will help prepare for this beforehand, or help you navigate this issue after the death of a spouse.

It should be noted there is a special rule that helps surviving spouses who wish to sell their home. Up to $250,000 of gain from the sale of a principal residence is tax-free, if certain conditions are met. The exemption increases to $500,000 for married couples filing a joint return, but a surviving spouse who has not remarried may still claim the $500,000 exemption, if the home is sold within two years of the spouses’ passing.

There is an unlimited marital deduction in addition to the current $11.7 million estate tax exemption. If the deceased’s estate is not near that amount, the surviving spouse should file form 706 to elect portability of their deceased spouse’s unused exemption. This protects the surviving spouse if the exemption is lowered, which may happen in the near future. If you don’t file in a timely manner, you’ll lose this exemption, so don’t neglect this task. Managing financial issues after the death of your spouse can be overwhelming. Work closely with an experienced estate planning attorney who is familiar with complex financial issues related to probate.

If you would like to read more about issues related to probate, please visit our previous posts. 

Reference: Yahoo! Finance (July 16, 2021) “The Financial Effects of Losing a Spouse”

 

Roth IRA a good choice for retirement

Roth IRA a Good Choice for Retirement

While it may seem like only the ultra-wealthy benefit from a Roth IRA, this retirement tool is an excellent tax shelter that anyone can use, reports CNBC.com in the recent article “The ultra-wealthy have made full use of Roth individual retirement accounts. Here’s how you can do the same.” One of PayPal’s founders, Peter Thiel, had $5 billion in a Roth IRA as of 2019, according to a ProPublica report. It said that he used a self-directed Roth account, which allows the owner to hold alternative assets, like shares in a private company or real estate that generally can’t be placed in a regular Roth. A Roth IRA is a good choice for retirement income.

Traditional 401(k) plans and IRAs offer a tax break, when contributions are made. Taxes are paid upon withdrawal, which is supposed to happen only after a certain age when you’ve retired. By contrast, the Roth versions of the 401(k) and IRA don’t have the tax break up front—you have to pay taxes on the money or assets when making contributions—but there are no taxes paid upon withdrawal, and there are no required withdrawals, as there are with a traditional IRA and 401(k)s.

You pay income taxes on the money placed into the account, and then it grows tax free. You can take it out anytime, as long as the account has been owned for at least five years and you are age 59½ or older. Self-directed Roth IRAs permit tax-free growth and untaxed distributions plus investments can be made that are not available in regular Roth accounts.

Theil had private company shares in his self-directed Roth IRA, before PayPal was a publicly traded company. He benefited from both timing and savvy investment skills.

A self-directed Roth IRA is generally available only through specialized custodians. Brand-name financial companies don’t offer them. The custodians that hold self-directed IRAs do not manage the account or police what investments are placed into the accounts, so you’ll need the advice of a tax-savvy estate planning attorney to be sure you are following the rules. Note that there can also be valuation issues. The value of alternative assets is not as clear as publicly traded securities. You’ll need to get the value right, so you don’t break any tax laws. Once assets are in the account, you can sell them and use the proceeds to purchase other instruments in the account, all under the same tax-free Roth protection.

Even if you don’t use a self-directed Roth IRA, the standard Roth IRA yields many benefits. We don’t know what the future tax environment will be, but tax-free withdrawals in the future, combined with high-growth assets, make the Roth IRA a good choice for retirement nest eggs.

If you would like to read more about Roth IRAs and other retirement accounts, please visit our previous posts. 

Reference: CNBC.com (June 24, 2021) “The ultra-wealthy have made full use of Roth individual retirement accounts. Here’s how you can do the same”

Episode 6 of The Estate of The Union podcast is out now

 

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Who inherits IRA if the Beneficiary passes?

Who Inherits IRA if the Beneficiary Passes?

Retirement accounts need to have beneficiary designations to determine who inherits the funds when you pass. But who inherits an IRA if the beneficiary passes? Which estate would get the IRA when a non-spouse beneficiary inherits an IRA account but dies before the money is put in her name with no contingent beneficiaries can be complicated, says nj.com in the recent article entitled “Who gets this inherited IRA after the beneficiary dies?”

IRAs are usually transferred by a decedent through a beneficiary designation form.

As a review, a designated beneficiary is an individual who inherits an asset like the balance of an IRA after the death of the asset’s owner. The Setting Every Community Up for Retirement Enhancement (SECURE) Act has restricted the rules for designated beneficiaries for required withdrawals from inherited retirement accounts.

Under the SECURE Act, a designated beneficiary is a person named as a beneficiary on a retirement account and who does not fall into one of five categories of individuals classified as an eligible designated beneficiary. The designated beneficiary must be a living person. While estates, most trusts, and charities can inherit retirement assets, they are considered to be a non-designated beneficiary for the purposes of determining required withdrawals.

Provided there is a named beneficiary, and the named beneficiary survived the owner of the IRA account, the named beneficiary inherits the account.

The executor or administrator of the beneficiary’s estate would be entitled to open an inherited IRA for the beneficiary because the beneficiary did not have the opportunity to open it before he or she passed away.

Next is the question of who inherits the IRA from the named beneficiary if she passes before naming her own beneficiary.

In that instance, the financial institution’s IRA plan documents would determine the beneficiary when no one is named. These rules usually say that it goes to the spouse or the estate of the deceased beneficiary.

If you are interested in learning more about beneficiary designations, please visit our previous posts.

Reference: nj.com (June 1, 2021) “Who gets this inherited IRA after the beneficiary dies?”

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consider taking RMDs at regular intervals

Consider taking RMDs at regular Intervals

There have been a number of changes to the requirements for RMDs—Required Minimum Distributions—from traditional retirement accounts, says a recent article titled “2 Essential Strategies for Taking Your RMDs” from Kiplinger. In 2019, the age for RMDs was raised from 70½ to 72. In 2020, they were waived altogether because of the pandemic. Now they’re back, and you want to know how to make good decisions about them. You might consider taking RMDs at regular intervals.

Most people take the default approach, taking a lump sum of cash at the start or the end of the year. This is not the best approach. Investment markets and your own need for income are better indicators for how and when to take your RMD. If you can at all avoid it, never take an RMD from a declining market.

You can take your RMD anytime during the calendar year, from January 1 to December 31. If it’s the first time you’ve taken an RMD, you get a bonus: you can wait until April 1 of the year after your 72nd birthday. The RMD is calculated, by dividing the account balance on December 31 of the preceding year by your life expectancy factor, based on your age. You can find it in the IRS’s Uniform Lifetime Table.

2021 distributions will be bigger, and not just because of the market’s 2020 performance. Instead, distributions will be bigger because of how the accounts are designed, with RMDs becoming a larger percentage over time. It starts as a small percentage and eventually becomes the entire account, which is then depleted. Remember, the sole purpose of the RMD is to force retirees to take money out of their retirement accounts and pay taxes on the money.

Many retirees take RMDs because they need the money to live on. Here’s where money management gets tricky. It’s far easier to take smaller amounts of money at regular intervals, kind of like a paycheck, than taking a big amount once a year. We’re creatures of habit and are used to receiving income and managing it that way.

Distributions on a regular basis also fosters a better sense of how much money you have to live on, encouraging you to create and adhere to a budget.

If you don’t need the income, consider taking RMDs at regular intervals. It’s like the opposite of dollar-cost averaging. Instead of putting money into the market in small increments over time to even out market ups and downs, you’re taking money out of the market at regular intervals. You’re not cashing out at the market’s lowest point, or at the highest. And if you’re reinvesting RMDs in a taxable account, this strategy works especially well.

If you would like to learn more about RMDs and other topics related to retirement accounts, please visit our previous posts. 

Reference: Kiplinger (June 10, 2021) “2 Essential Strategies for Taking Your RMDs”

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charitable options to reduce estate taxes

Charitable options to Reduce Estate Taxes

Increasing tax changes for the wealthy are coming, and motivation to find ways to protect the wealth is getting increased attention, according to a recent article from CNBC entitled “Here’s how to reduce exposure to tax increases with charitable contributions.” Charitable remainder trusts (CRTs) and Donor Advised Funds (DAFs) are options for people who are already charitably inclined to reduce estate taxes. The CRT is complicated, requiring estate planning attorneys to create them and accountants to maintain them. The DAF is simpler, less expensive and is growing in popularity.

Both enable income tax deductions, in the current year or carried forward for five years, on cash contributions of up to 60% of the donors’ AGI and up to 30% of AGI on contributed assets. These contributions also reduce the size of taxable estates.

CRTs funnel asset income into a tax-advantaged cash stream that goes to the donor or another designated non-charitable beneficiary. The income stream flows for a set term or, if desired, for the lifetime of the non-charitable beneficiary. The trusts must be designed, so that at the end of the term, at least 10% of the funds remain to be donated to a charity, which must be designated at the outset.

No tax is due on proceeds from the sale of trust assets, until the cash makes its way to the non-charitable beneficiary. When assets are held by individuals, their sale creates capital gains tax in the year they are sold.

CRT donors can fund the trusts with highly appreciated assets, then manage them for optimal returns while minimizing tax exposure by adjusting the income stream to spread the tax burden over an extended period of time. If capital gains tax rates are raised by Congress, this would be even better for high earners.

DAFs do not allow dispersals to non-charitable beneficiaries. All gains must ultimately be donated to charity. However, the DAF provides advantages. They are easy to create and can be set up with most large financial service companies. Their cost is lower than CRTs, which have recurring fees for handling required IRS filings and trust management. Charges from financial institutions typically range from 0.1% to 1% annually, depending upon the size, and a custodial fee for holding the account.

DAFs can be created and funded by individuals or a family and receive a deduction that very same year. There is no hurry to name the charitable beneficiaries or direct donations. With a CRT, donors must name a charitable beneficiary when the trust is created. These elections are difficult to change in the future, since the CRT is an irrevocable trust. The DAF allows ongoing review of giving goals.

Funding a DAF can be done with as little as $5,000. The DAF contribution can include shares of privately owned businesses, collectibles, even cryptocurrency, as long as the valuation methods used for the assets meet IRS rules. Donors can get tax deductions without having to use cash, since a wide range of assets may be used.

The DAF is a good way for less wealthy individuals and families to qualify for itemizing tax deductions, rather than taking the standard deduction. DAF donations are deductible the year they are made, so filers may consolidate what may be normally two years’ worth of donations into a single year for tax purposes. This is a way of meeting the IRS threshold to qualify for itemizing deductions.

Both charitable options are effective ways to reduce estate taxes. Which of these two works best depends upon your individual situation. With your estate planning attorney, you’ll want to determine how much of your wealth would benefit from this type of protection and how it would work with your overall estate plan.

If you would like to learn more about charitable contributions, please visit our previous posts. 

Reference: CNBC (April 20, 201) “Here’s how to reduce exposure to tax increases with charitable contributions.”

 

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact The Wiewel Law Firm to schedule a complimentary consultation.
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