Year-End Gift Ideas Worth Considering

Tax law changes over the years have made it harder for taxpayers to accomplish much with year-end tax planning. Important deductions have been curtailed or eliminated and sizable standard deductions have caused many Americans to lose the ability to “itemize” their deductions. For people who do itemize, there are positive steps they can take right now, before the end of the year, to reduce taxes. Charitable contributions can be an important part of such a strategy.

Every dollar you give before January 1, 2010, will be deductible up to 50% of your adjusted gross income. Any excess deductions can be carried over and deducted in future years. A $1,000 contribution saves $350 for a person in the 35% tax bracket, $250 for someone in the 25% bracket. Tax savings are not the reason people give to worthwhile organizations, of course, but they do enable them to do more than they might have thought possible.

Gifts That Increase Income. It’s December 2009 and John (who is in the 35% tax bracket) is looking for additional tax deductions. John has some stocks and bonds he could use for a charitable contribution but doesn’t feel he can afford to give up any income right now. One solution is to transfer his securities to a trust that will pay him a specified income for life, with the property benefiting our programs after his death. John receives a charitable deduction on next April’s tax return for a large portion of what he puts into the trust. And the trust is arranged so that his income is actually higher than before his gift.

Marketable Securities. If possible, contributors should make their gifts with stocks, bonds and mutual funds in which they have a large paper profit (long-term capital gain). The profit escapes tax, and the charitable deduction will be the investment’s full fair market value, if held more than one year. Note: Gifts of securities may be deducted up to 30% of your adjusted gross income, with a five-year carryover for excess deductions. Hasn’t the downturn in the stock market impaired this gift opportunity? If you do own stock that has gone down in value, you might sell the stock and contribute the proceeds. You’ll receive a gift deduction plus a capital loss deduction. But many “buy-and-hold” investors still own stock with significant appreciation. Other assets that have gone up in value may make good gifts, including collectibles, stock in closely held corporations and real estate.

Remember that the date of delivery of gifts to qualified organizations is the test of whether a gift will be deductible for 2010. A check will be considered delivered, however, on the date you mail it – even as late as December 31, 2009. The same rule applies when you mail securities in the proper form. Special charitable giving opportunities also exist if you own a life insurance policy that is no longer needed for the security of your family, or if you are interested in a plan for distributing your estate with minimum shrinkage from death taxes and other costs.

 

 

Time to Review Estate Plans

The approach of a new year is also a good time to review your will and other estate planning arrangements – especially in light of changed economic conditions. Take the case of Meredith, who last updated her estate plan in mid-2007. According to that plan, her three children would receive the following:

• Suzanne, her oldest, was left a $100,000 stock portfolio (2007 value) under Meredith’s will;
• Meredith’s son, Tim, was named beneficiary of a $100,000 IRA (2007 value);
• Olivia, the youngest, is beneficiary of a $100,000 life insurance policy.

Meredith thought she was treating all the children equally, but today the stock portfolio is worth only $83,000. The $100,000 IRA has declined to $91,000, and Meredith has also learned that Tim will have to pay income tax on everything he receives from the account – which is not true of the other children’s inheritances. Olivia comes out the best; the $100,000 life insurance policy maintains its value, although the death benefit will never grow in value, either.

Meredith decides that it might be better to arrange her estate plan so that each child receives a proportionate share of all her assets, which will evenly divide the risks and rewards that each investment poses.

 

 

Leave Us Your “Tax-Burdened” Assets

Certain assets may be heavily taxed if you leave them to family members. These items will produce so-called income in respect of a decedent (IRD) and may cost heirs both income taxes and “death taxes.” We are a tax-exempt organization, of course, and would keep 100% of the proceeds from these items, while another beneficiary might end up with only 30¢ or 40¢, after taxes. Here are some examples:

• Savings Bonds: Your Best Bequest. Many people have some U.S. savings bonds, tucked away in a bureau drawer or safe deposit box. Bonds are a savings tool used by millions of Americans – in part because income taxes on the interest are generally postponed until the bonds are redeemed. Bonds may be subject to heavy federal income taxes and state and federal “death taxes” in a person’s estate, however. Heirs will owe income tax whenever they cash savings bonds, and 45% estate taxes may take an even larger slice (on estates over $3.5 million). You can erase all taxes on savings bonds at death by changing your will or revocable living trust to specifically leave bonds for our benefit.

• Making the Most of Your IRA. People who own IRAs and other retirement accounts may be shocked to learn that 60% to 70% of their accounts can be lost to taxes. A combination of “death taxes” and income taxes can nearly confiscate your savings, with little remaining for your heirs. But you can make us the beneficiary of your IRA and escape taxes 100%. It’s also possible to use your IRA to benefit both family members and our future, with excellent tax results. Retirement death benefits can be transferred to a trust that would pay income for 10, 15 or 20 years to a beneficiary, with eventual benefit to our programs. The trust would greatly reduce state or federal taxes upon your death.

• Other Tax Burdened Assets. Here are some other IRD items that should be selected for charitable bequests: accounts receivable of a professional or business owner, renewal commissions of insurance agents, deferred compensation, last salary check, bonuses and distributions from employee benefit plans, accrued royalties under a patent license, a deceased partner’s distributive share of partnership income up to date of death, payments on installment notes, such as land sale contracts, commercial annuities and employee stock options.

 

 

When Financial Accounts “Go Missing”

The U.S. Treasury has instituted a program to locate owners of U.S. savings bonds that are lost or expired. Bank accounts sometimes suffer the same fate as “lost” savings bonds, although these days, the IRS matches tax information on depositors furnished by banks with interest shown on tax returns. So the bank might hear from the IRS and discover the owner’s identity. However, you should make a record of all your bank deposits and financial holdings and give the information to your executor, storing a copy with your will.

Joint checking or savings accounts are another way to avoid “losing” an account. Typically, the surviving joint owner becomes the sole owner of a joint account. The transfer to the surviving joint owner doesn’t require a will, and the probate process is avoided as well. Several types of joint accounts are available. Decide what financial goals you want to accomplish and then talk with your banker about the different deposit agreements that are offered.

If your aim is simply to pass the bank account to another at death, you can do so without resorting to a joint account. Most areas permit P.O.D. (payable on death) accounts. Depositors generally may indicate that their deposits be “P.O.D.” to a particular person or charity. The P.O.D. designation can be revoked at any time and in no way affects your control over the deposit. In some areas, these arrangements are set up as “self-declaration trusts” (check with your banker).

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