Category: Tax Planning

benefits of 529 college saving plans

Many Benefits of 529 Plans

There are many benefits of 529 college saving plans. You might think that tax-deferred savings is the main benefit, along with tax-free withdrawals for qualifying higher education expenses. However, there are also state tax incentives, such as tax deductions, credits, grants, or exemption from financial aid consideration from in-state schools in certain states.

Forbes’ recent article entitled “7 Benefits You Didn’t Know About 529 College Savings Plans (But Should)” says there are many more advantages to the college savings programs than simple tax benefits.

1) Registered Apprenticeship Programs Qualify. You can make qualified withdrawals from a 529 plan for registered apprenticeship programs. These programs cover a wide range of areas with an average annual salary for those that complete their apprenticeship of $70,000.

2) International Schools Usually Qualify. More than 400 schools outside of the US are considered to be qualified higher education institutions. You can, therefore, make tax-free withdrawals from a 529 plan for qualifying expenses at those colleges.

3) Gap Year and College Credit Classes for High School. Some gap year programs have partnered with higher education institutions to qualify for funding from 529 accounts. This includes some international and domestic gap year, outdoor education, study-abroad, wilderness survival, sustainable living trades and art programs. Primary school students over 14 can also use 529 funds for college credit classes, where available.

4) Get Your Money Back if Not Going to College. If your beneficiary meets certain criteria, it’s possible to avoid a 10% penalty and changing the plan from tax-free to tax-deferred. For this to happen, the beneficiary must:

  • Receive a tax-free scholarship or grant
  • Attend a US military academy
  • Die or become disabled; or
  • Get assistance through a qualifying employer-assisted college savings program.

Note that 529 plans are technically revocable. Therefore, you can rescind the gift and pull the assets back into the estate of the account owner. However, there are tax consequences, including tax on earnings plus a 10% penalty tax.

5) Private K–12 Tuition Is Qualified. 529 withdrawals can be used for up to $10,000 of tuition expenses at private K–12 schools. However, other expenses, such as computers, supplies, travel and other costs are not qualified.

6) Pay Off Your Student Loans. If you graduate with some money leftover in a 529 account, it can be used for up to $10,000 in certain student loan repayments.

7) Estate Planning. Contributions to a 529 plan are completed gifts to the beneficiary. These can be “superfunded” for up to $75,000 per beneficiary in a single year, effectively using five years’ worth of annual gift tax exemption up front. For retirees with significant RMDs (required minimum distributions) from qualified accounts, such as 401(k)s and traditional IRAs, the 529 plan offers high contribution limits across multiple beneficiaries, while retaining control of the assets during the lifetime of the account owner. Assets also pass by contract upon death, avoiding probate and estate tax.

Work closely with your financial advisor and estate planning attorney to ensure you are getting the most benefits out of your 529 college saving plans.

If you would like to read more about 529 plans, please visit our previous posts.

Reference: Forbes (July 15, 2021) “7 Benefits You Didn’t Know About 529 College Savings Plans (But Should)”

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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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The purpose of a credit shelter trust

The Purpose of a Credit Shelter Trust

The purpose of a credit shelter trust is for protecting assets from creditors, moving assets out of the estate to avoid probate and adding another layer of protection to a deceased spouse’s wishes. Only married couples can use credit shelter trusts, according to a recent article explaining it all: “How Does a Credit Shelter Trust Work?” from Yahoo! Finance.

The main reason to use a credit shelter trust is to minimize federal estate taxes on assets in the estate. Also known as “wealth transfer taxes,” the federal estate tax has been around since 1916. Estate tax rates are very high. Wealth more than $1 million over the exemption rate is taxed at 40%. While today’s federal estate tax exemption is very high—$11.7 million for individuals and $23.4 million for couples—it is generally understood that these numbers are not likely to remain at these historic levels. The current estate tax exemption expires in 2025, unless Congress acts to reduce it earlier.

Estate tax law changes often both at the federal and the state level, so estate planning attorneys continually track these changes to protect their clients.

The credit shelter trust, also known as a bypass trust, B trust, exemption trust or a family trust, is an irrevocable trust. As with all trusts, it is a contract between the trustor—the person who creates and funds the trust—and the trustee—the person in charge of the trust. The trust may contain any type of property, from cash, stocks, bonds and real estate to collectibles and artwork.

The credit shelter trust becomes effective upon the death of one of the spouses. Assets in the trust are not included in the estate of the surviving spouse. Depending upon the terms of the trust, these assets may pass to beneficiaries after the first spouse passes without incurring any tax liabilities. Alternatively, as long as the surviving spouse lives, they may receive income from assets in the trust.

Another purpose of a credit shelter trust is to protect the wishes of the decedent spouse. The trust document can be used to direct that some or all of the assets of the first spouse to die shall pass to the children of a first marriage or other specific beneficiaries.

Credit shelter trusts are one of many tools that can be used for estate planning. They have the added benefit of protecting assets from creditors and maintaining the family’s privacy, since assets in trust do not go through probate. Your estate planning attorney will know which kind of trust is best for your unique situation.

If you would like to read more about various types of trusts, please visit our previous posts.

Reference: Yahoo! Finance (Aug. 16, 2021) “How Does a Credit Shelter Trust Work?”

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keep the vacation home in the family

Keep the Vacation Home in the Family

There are several ways to keep the vacation home in the family and is not overly burdensome to any one member or couple in the family, according to the article “Estate planning for vacation property” from Pauls Valley Daily Democrat.

To begin, families have the option of creating a legal entity to own the asset. This can be a Family LLC, a partnership or a trust. The best choice depends upon each family’s unique situation. For an LLC, there needs to be an operating agreement, which details management and administration, conflict resolution, property maintenance and financial matters. The agreement needs to include:

Named management—ideally, two or three people who are directly responsible for managing the LLC. This typically includes the parents or grandparents who set up the LLC or Trust. However, it should also include representatives from different branches in the family.

Property and ownership rules must be clarified and documented. The property’s use and rules for transferring property are a key part of the agreement. Does a buy-sell agreement work to give owners the right to opt out of owning the property? What would that look like: how can the family member sell, who can she sell to and how is the value established? Should there be a first-right-of refusal put into place? In these situations, a transfer to anyone who is not a blood descendent may require a vote with a unanimous tally.

There are families where transferring ownership is only permitted to lineal descendants and not to the families of spouses who marry into the family.

Finances need to be spelled out as well. A special endowment can be included as part of the LLC or as a separate trust, so that money or investments are set aside to pay taxes, upkeep, insurance and future capital requirements. Anyone who has ever owned a house knows there are always capital requirements, from replacing an ancient heating system to fixing a roof after decades of a heavy snow load.

If the endowment is not enough to cover costs, create an agreement for annual contribut6ions by family members. Each family will need to determine who should contribute what. Some set this by earnings, others by how much the property is used. What happens if someone fails to pay their share?

Managing use of the property when there is a legal entity in place is more than a casual “Who calls Mom and Dad first.” The parents who establish the LLC or Trust may reserve lifetime use for themselves. The managers should establish rules for scheduling.

For parents or grandparents who create an LLC or Trust, be sure it works with your estate plan. If they intend to keep the vacation home in the family and wish to leave a bequest for its maintenance, for instance, the estate planning attorney will be able to incorporate that into the LLC or Trust.

If you would like to learn more about protecting property in estate planning, please visit our previous posts. 

Reference: Pauls Valley Democrat (July 29, 2021) “Estate planning for vacation property”

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selling a home in an irrevocable trust

Selling a Home in an Irrevocable Trust

A trustee should be aware that selling a home in an irrevocable trust for a parent who died means that generally, assets transferred to an irrevocable trust will be deemed a completed gift and will not be included in an estate for estate tax purposes.

Lehigh Valley Live’s recent article entitled “What happens to tax on a home sold from a trust?” explains that this means there wouldn’t be a step-up in basis to the fair market value upon the decedent’s death.

Remember that an irrevocable trust is a type of trust in which its terms can’t be modified, amended, or terminated without the permission of the grantor’s named beneficiary or beneficiaries.

Irrevocable trusts have tax-shelter benefits that revocable trusts to don’t.

However, an irrevocable trust can be created so that the settlor (the creator) of the trust keeps certain rights and powers, so that gifts to the trust are incomplete.

In that instance, the assets are included in the settlor’s estate upon death and obtain a step-up in basis upon the decedent’s death.

If the trust sells the asset in the trust, the trust may need to file Form 1041, U.S. Income Tax Return for Estates and Trusts, and the trust may be required to pay a tax.

If the trust distributes any income to the beneficiaries in the same tax year it receives that income, the income is passed through to the beneficiaries, and the beneficiaries must report it on the beneficiaries’ individual tax returns (Form 1040) and pay any tax due.

It’s generally a good idea to report and pay tax at the individual rate instead of at the trust or estate level.

That’s because the trust or estate will begin to pay tax at the highest rate at only $13,150. In comparison, an individual doesn’t pay tax at the highest rate until his or her income exceeds over $440,000.

Note that an irrevocable trust is a more complex legal arrangement than a revocable trust. Selling a home in an irrevocable trust can be a headache. As a result, there might be current income tax and future estate tax implications when using this type of trust. It’s wise to seek the assistance of an experienced estate planning attorney.

Reference: Lehigh Valley Live (Aug. 16, 2021) “What happens to tax on a home sold from a trust?”

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New Installment of The Estate of The Union Podcast

 

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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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Succession planning for family farm

Succession Planning for Family Farm

If you think it’s bad that 60% of farmers don’t have a will, here’s what’s even worse: 89% don’t have a farm transfer plan, as reported in the recent article “10 Farm Transition and Estate Planning Mistakes from Farm Journal’s Pork Business. Succession planning for the family farm is just as vital as any other business. Here are the ten most commonly made mistakes farmers make. Substitute the word “family-owned business” for farm and the problems created are identical.

Procrastination. Just as production methods have to be updated, so does estate planning. People wait until the perfect time to create the perfect plan, but life doesn’t work that way. Having a plan of some kind is better than none at all. If you die with no plan, your family gets to clean up the mess.

Failing to plan for substitute decision-making and health care directives. Everyone should have power of attorney and health care directive planning. A business or farm that requires your day-in-day-out supervision and decision making could die with you. Name a power of attorney, name an alternate POA and have every detail of operations spelled out. You can have a different person to act as your agent for running the farm and another to make health care decisions, or the same person can take on these responsibilities. Consult with an estate planning attorney to be sure your documents reflect your wishes and speak with family members.

Failing to communicate, early and often. There’s no room for secrecy, if you want your farm or family business to transfer successfully to the next generation. Schedule family meetings on a regular basis, establish agendas, take minutes and consider having an outsider serve as a meeting facilitator.

Treating everyone equally does not fit every situation. If some family members work and live on the farm and others work and live elsewhere, their roles in the future of the farm will be different. An estate planning attorney familiar with farm families will be able to give you suggestions on how to address this.

Not inventorying assets and liabilities. Real property includes land, buildings, fencing, livestock, equipment and bank accounts. Succession planning requires a complete inventory and valuation of all assets. Check on how property is titled to be sure land you intend to leave to children is not owned by someone else. Don’t neglect liabilities. When you pass down the farm, will your children also inherit debt? Everyone needs to know what is owned and what is owed.

Making decisions based on incorrect information. If you aren’t familiar with your state’s estate tax laws, you might be handing down a different sized estate than you think. Here’s an example: in Iowa, there is no inheritance tax due on shares left to a surviving spouse, lineal descendants or charitable, religious, or educational institutions. If you live in Iowa, do you have an estate plan that takes this into consideration? Do you know what taxes will be owed, and how they will be paid?

Lack of liquidity. Death is expensive. Cash may be needed to keep the family farm going between the date of death and the settling of the estate. It is also important to consider who will pay for the funeral, and how? Life insurance is one option.

Disorganization. Making your loved ones go through a post-mortem scavenger hunt is unkind. Business records should be well-organized. Tell the appropriate people where important records can be found. Walk them through everything, including online accounts. Consider using an old-fashioned three-ring binder system. In times of great stress, organization is appreciated.

No team of professionals to provide experience and expertise. The saying “it takes a village” applies to estate planning and farm succession. An accountant, estate planning attorney and financial advisor will more than pay for their services. Without them, your family may be left guessing about the future of the farm and the family.

Thinking your plan is done at any point in time. Like estate planning, succession planning for the family farm is never really finished. Laws change, relationships change and family farms go through changes. An estate plan is not a one-and-done event. It needs to be reviewed and refreshed every few years.

If you are interested in reading more about succession planning, please visit our previous posts. 

Reference: Farm Journal’s Pork Business (June 28, 2021) “10 Farm Transition and Estate Planning Mistakes

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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