Monthly Planning Tips Archive

Play the Inheritance Game Show

A legendary TV game show gave contestants the opportunity to select a prize from behind “Door No. 1, Door No. 2 or Door No. 3.”  Suppose you had a rich uncle who, in the course of making his estate plans, telephoned with the following question:  “I’m planning to leave you $100,000, and it can come to you from a life insurance policy (Door No. 1), from my Series EE savings bonds (Door No. 2) or as a distribution from my 401(k) plan or IRA (Door No. 3):  Which do you prefer?”
           
Tax advisers generally would suggest picking Door No. 1 – the life insurance.  Why?  Because life insurance, like most assets in an estate, comes to beneficiaries free of any income taxes.  Funds received from U.S. savings bonds or a 401(k) plan or IRA, on the other hand, usually will be subject to income taxes.  Exceptions include distributions from tax-free Roth IRAs or Roth 401(k) plans.

Most of us don’t get to choose what we inherit, of course, but all individuals have the power to plan for a tax-wise distribution of their own estates.  Here’s a simple strategy:  Choose tax-burdened assets for benefiting any tax-exempt organizations you wish to help and leave assets that won’t create income tax liability to other beneficiaries.  Your charitable legacy may also save state and federal estate taxes.

Will 2011 Be a Year of Unusual Income? 

Taxpayers sometimes encounter a year when their incomes (and taxes) take a jump, caused by profit-taking on investments, receiving large distributions from retirement accounts, or selling a business. In 2011 and 2012, some taxpayers will have a large “bump” of income as a result of converting traditional IRAs to Roth IRAs in 2010.  (Funds that were moved from a traditional IRA to a tax-free Roth in 2010 are taxable one-half in 2011 and one-half in 2012.)

Maximizing itemized deductions can minimize taxes in a high-income year, and wise gift planning can help.  Here are some deduction-boosting techniques for assisting our programs, reducing taxes and securing other benefits, as well: 

• Charitable remainder trusts can provide donors with lifetime income plus deductions of 25% to 50% of the amounts they place in trust (call us for an illustration);

• Friends who have included us in their estate plans might consider “accelerating” their bequests into 2011 gifts that reduce this year’s taxes;

• Charitable gift annuities can provide large deductions, plus fixed payments for life; deductions can be magnified if donors elect to defer the start of payments for several years;

• Gifts of appreciated securities, owned more than one year, enable donors to deduct not just what they paid for their investments, but all their paper profits, as well – with no capital gains tax liability.

Why Are Gift Annuities So Popular with Women?

Charitable organizations have been offering charitable gift annuities for many years, and most report a common phenomenon: A majority of recipients are women.

Why should gift annuities have particular appeal to women?  Some historical records indicate that the first recipient of gift annuity payments, in the early 1830s, was a woman. Many women like annuities because they provide a secure, fixed income for life, no matter how long they may live.  Actuarial statistics tell us that women continue to live longer than men by roughly five years, so it’s all the more important for women to have “an income that a person cannot outlive.”
           
Unlike commercial annuities, charitable gift annuities do not discriminate between men and women when it comes to payout rates: Women receive the same payments as men of identical ages from charitable gift annuities, and charitable deductions are equal, as well, even though women stand to receive more benefits over their longer life expectancies.

What Is the Status of Your Health Care Directives?

Estate planning, broadly defined, should encompass everything related to the end of life, including a living will and health care power of attorney or proxy.
 
According to a report in the Journal of the American Medical Association, living wills and health care powers of attorney are unavailable 74% of the time when a patient needs medical decisions made on their behalf.  Everyone should make provision for health care decisions.  Furthermore, you should make sure responsible friends, family members and medical staff all have copies of your instructions.  Have a serious discussion with the person you name as your agent under your power of attorney for health care.

Like other components of your estate plan, your living will or power of attorney for health care (proxy) should be reviewed frequently to ensure that your needs and treatment wishes are unchanged – and that the person designated to make health care decisions for you is still willing and able to serve.   Pick a date – New Year’s Day or your birthday – as an occasion to review all your health care directives – and the rest of your estate plan, as well.

AARP reports that only 40% of adults age 45 or older have signed a health care power of attorney or living will, and a survey last year indicated that only 42% of Americans have wills or revocable living trusts.  These are distressing statistics, and we hope that all of our friends will take the steps this year to establish or review their own estate plans – with special attention to wills, living wills and health care powers of attorney. 

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