|Gift Planning Tips|
Buy the Sports Car or Save for Retirement?
An estimated $59 trillion will pass from estates by 2061, according to a recent study by the Center on Wealth and Philanthropy at Boston College. However, many parents and grandparents fear that an inheritance will be squandered, rather than used for college expenses, first home purchase or retirement security. There are a number of options that allow the older generation to offer help that will achieve worthy goals for younger family members, while also benefitting charity.
Testamentary charitable remainder trusts – A grandparent’s estate plan could call for the funding of a charitable remainder trust that makes payments for life to grandchildren. The trust could pay to an individual for life or could be structured to last up to 20 years, with an independent trustee sprinkling annual payments to the class of grandchildren as needed for college expenses or down payments on a home, for example. If estate taxes are not an issue, a nonqualified charitable remainder trust could be used, giving the trustee the ability to invade corpus, defer payments in certain years, last longer than 20 years, make payments directly to a college on behalf of a beneficiary or distribute all the income in a year, not merely the stated trust percentage. When the trust ends, assets would pass to charity.
Testamentary charitable gift annuities – Funds could be left to charity at death to arrange charitable gift annuities for family members. If the annuitants are too young for immediate gift annuities under the charity’s guidelines, deferred gift annuities could be established. If an IRA is used to fund the gift annuities, a portion of the income tax that would be owed is avoided.
Testamentary charitable lead trusts – A lead trust allows a client to satisfy philanthropic goals while also giving the family beneficiaries time to “grow up.” Although lead trusts are commonly used to zero out transfer tax, even clients whose estate are not subject to estate tax might find lead trusts attractive. The client can create incentives, directing that the remainder pass only to those family members who have finished college, started a business, worked for a number of years or some other benchmark indicating maturity.
When It’s Time to Part with Collectibles
Slightly more than half of wealthy Americans (those with at least $1 million in investible assets) engage in hobby investing, according to a study by BMO Private Bank released last year. Coins, art and jewelry were the top three categories of collectibles. A big decision awaits, however, when it’s time to divest. The capital gains tax rate on collectibles is 28%, although if the assets are held until death, the stepped-up basis rules apply. For the client who wants to get rid of a collection, there are charitable options, but also cautions:
An outright gift can generate a deduction equal to fair market value.
Donors can give partial interests in tangible personal property – for example, a 25% undivided interest in a painting.
Tangible personal property can be used to fund an inter vivos charitable remainder unitrust.
(Note: If tangible personal property is used to fund a testamentary charitable remainder trust, the above two cautions do not apply.)
Attorneys rely on boilerplate language for some sections of wills they draft (e.g., revoking all prior wills and codicils, signatures of witnesses), but there are two more options that attorneys should ask clients about including:
Contingent charitable bequests – Individuals might want bequests to pass to named charities if the primary beneficiary predeceases the testator. This clause covers the possibility that all intended beneficiaries are predeceased or die in a common disaster and avoids the possibility that a client’s estate will pass to distant – perhaps unknown – relatives (or even escheat to the state) under intestacy laws. If the client’s estate is subject to estate tax, anything passing to charity under a contingent bequest qualifies for a charitable deduction.
Disclaimer language – Estate assets passing to charity under a qualified disclaimer [Code §2518] entitle the estate to a deduction. This allows a family member who feels he or she does not need all that a testator has provided to pass along all or part of a bequest to a worthwhile cause favored by the testator.
Not All Stepparents Are Wicked
With more and more blended families in the U.S., stepparents and stepchildren are a fact of life. Anyone thinking of marrying someone with children from another marriage, or anyone with children who is getting remarried, should revisit their estate plans.
Depending on state law, stepchildren may not be included under intestate succession, so the only way they can inherit would be through a will, living trust or beneficiary designation. If a stepparent wants to include stepchildren, it’s important to see an attorney about drafting or revising an estate plan.
Even existing estate plans may not include stepchildren under the umbrella language of “my children.” One way to assure that stepchildren inherit is to name them individually in the will. On the other hand, if clients don’t want to include stepchildren, it’s better to name them and indicate that they are being disinherited. Otherwise, the lack of reference to a stepchild may be interpreted as a mistake.
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