Preparing for the Future

“Frank takes care of everything on the outside of the house – the yard, the garage and the car – and I do the cooking, housekeeping and bill paying.” – Betsy R.

Sound familiar? Frank and Betsy’s division of labors may not track 100% with the arrangements of other married couples, but oftentimes one spouse does end up being responsible for all the household bills and budgeting. Married couples need to ensure that both of them fully understand the financial side of their marriage. It’s just good estate planning to train the other partner so he or she can “carry on when the time comes.”

The “bookkeeper spouse” should maintain detailed records and instructions on family finances to help the other partner become self-sufficient, if need be. Self sufficiency may not always be possible if a spouse is not in good health. Many husbands and wives set up living trusts, or a power of attorney, that enable a third person to provide financial management if they become incapacitated.

 

 

Create Deductions When You Convert to a Roth IRA

Starting next year, anyone with a conventional IRA can convert to a Roth IRA and guarantee that future withdrawals will be free of income tax – both for themselves and their heirs. (This year your adjusted gross income must be under $100,000 to make the switch.) Disadvantage? Funds transferred from traditional IRAs are treated as taxable income.

The decision to convert to a Roth IRA depends on a variety of factors, and you should consult your advisers. But you might find the timing right for a charitable gift that would offset, in whole or in part, the cost of converting to a Roth IRA. Annual donors might consider “bunching” four or five years of future gifts into one large contribution in the year of a Roth IRA conversion. Donors who have carryover deductions from past years’ gifts can use up more of their old deductions when they convert to a Roth IRA. And you might want to consider arranging a gift that pays you lifetime income – and provides a significant deduction. Your income can start immediately, or be deferred several years into the future, resulting in larger deductions.

Please call our office if you would like more information on planning for large charitable deductions – for any purpose.

 

 

What is the Worst Tax You Can Imagine?

“I have a GST problem” may sound like a plea for medical attention, but it’s actually a rare – and severe – financial challenge known as generation-skipping transfer tax. Most people never have to worry about GST tax, but here are some signs for caution:

• You plan to make a gift, during life or through your estate plan, to a person who is more than one generation removed from you. What does that mean? Your spouse is always in the same generation as you, even if he or she is significantly younger. A child or niece is only one generation removed from you, so gifts and bequests to these people do not involve a “skip.” But transfers to grandchildren, grandnieces and grandnephews, or to “greats” may trigger GST tax. Certain exceptions may apply; for example, where you transfer funds to a grandchild whose parent has passed away. And transfers to unrelated persons may trigger tax if they are more than 37.5 years younger than you. Ask your advisers for specifics.

• Your lifetime gift to a grandchild or other “skip” person exceeds the $13,000 annual exclusion from gift taxes. Any lifetime gift under $13,000 avoids both gift tax and GST tax.

• Your total generation-skipping transfers, during life or at death, exceed $3,500,000. It’s the $3,500,000 exemption, plus the $13,000 annual tax break, that get most Americans off the hook regarding GST taxes. Married people each receive an exemption, and currently can pass $7,000,000 to grandchildren and others.

If the exclusions and exemptions don’t cover your gifts and bequests, how bad is the tax bite? The current GST tax rate is 45%, and the tax applies to direct gifts and bequests and transfers in trust. Furthermore, the tax is in addition to gift taxes or estate taxes. That all adds up to the most severe tax in America. What can people do who face GST taxes? One idea was made famous by the estate plan of Jacqueline Onassis. When Mrs. Onassis died, several newspapers and magazines made note of the fact that she left the bulk of her estate to a charitable lead trust – an unusual estate planning arrangement that could mean substantial benefit for charitable causes, tremendous savings in federal transfer taxes – including GST tax – and eventual benefit for Mrs. Onassis' grandchildren, although ultimately the trust was never funded.

Interest rates for calculating charitable deductions for lead trusts are currently at some of the most favorable levels in history. Obviously, you should seek out the counsel of your professional financial and estate planning advisers. Note: The GST tax was scheduled to be repealed for one year only in 2010, along with the federal estate tax, but Congress is almost certain to reinstate both of these taxes for 2010 and later years.

 

 

A Charitable Trust in Your Will?

A charitable gift from your will can be postponed until after the life of a person you wish to benefit – that is, a family member can receive lifetime income from the bequest property, and only later would any remaining funds be used to advance our programs. This plan can be accomplished by means of a charitable remainder trust or a bequest for a charitable gift annuity. Both techniques will produce estate tax charitable deductions. A “deferred bequest” can be made through any form of trust if an estate tax charitable deduction is not needed by your estate.

Why would our supporters be drawn to a “testamentary” charitable remainder trust or similar arrangement? A mother might want to leave something for our benefit at death, but hesitate for fear children might be disappointed if they did not receive 100% of her estate. Testamentary charitable remainder trusts let donors say to children: “You will receive everything from my estate, but as to part of it you will receive a lifetime income, with later benefit to a worthwhile cause.” A key selling point: potential tax savings for the family. For individuals who don’t have the estate tax marital deduction, testamentary trusts arguably can leave family members better off than if no charitable bequest had been made.

Testamentary charitable remainder trusts also offer the practical benefits of trusteeship for family members and others who need professional investment and money management. Additionally, donors may find testamentary charitable remainder trusts an ideal way to memorialize the life of a spouse, a family member or their own lives. Call our office for more details.

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