Monthly Planning Tips Archive

Cancel a Tax Curse through Wise Estate Planning

Halloween is just around the corner, which is a good time for a reminder that the tax collector may one day be playing “trick or treat” with some of your assets.  We’re talking about a “tax curse” known as income in respect of a decedent – IRD for short – that may cost your heirs both income taxes and estate taxes on U.S. savings bonds, retirement plan assets and certain other items in your estate.  That’s the “trick.”

The “treat” occurs if you leave such items to provide for our programs. As a tax-exempt organization, we would keep 100% of every dollar of your bequest, while another beneficiary might end up with only 30% or 40%, after subtracting state and federal estate taxes, state and federal income taxes, or even generation-skipping transfer taxes.  Some or all of these taxes may apply depending on your net worth, state of residence, and the state of residence of your beneficiary.  Here are some additional IRD items that should be selected for estate gifts to worthwhile organizations:

• • 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

Note:  IRA owners who are age 70½ or older can make qualified charitable distributions, up to $100,000 in 2011, that can avoid the taxes listed above and even reduce 2011 income taxes, up to the amount of their required minimum distributions.  Call us for details.

Using IRAs for Charitable Bequests Helps Nontaxable Estates, Too

Under current law, only estates that exceed $5 million are subject to federal estate tax, reducing some of the tax benefits of making charitable bequests from retirement accounts.  But individuals with smaller estates may still find that retirement accounts are their best resource for charitable giving from their estates.  

Take the case of Robert, a widower with a $2 million estate – which includes $100,000 in an IRA.  Robert is planning to leave us a gift from his estate, and $100,000 is about the amount he has in mind.  The rest of the estate would pass to his son Jeffrey.  Jeffrey is in a 28% federal income tax bracket and lives in a state where he pays 9% state income tax.

Taxes on the IRA, if it passes to Jeffrey, will add up to $9,000 in state income tax and $25,480 federal (the state income tax is a deduction on his federal tax return).  All told, $34,480 would be lost to income taxes, leaving Jeffrey with only $65,520 from the $100,000 IRA.

On the other hand, if Robert leaves the IRA for our benefit, we would keep every penny of the $100,000, free of income taxes, meaning more funds for our programs and less for the tax collector.  The rest of his estate, which contains no other items qualifying as “income in respect of a decedent,” can pass to Jeffrey free of income tax.

Minimize Taxes from “Like-Kind” Exchanges

Jean is a real estate investor who has done well over the years trading property on a tax-deferred basis – so-called “like-kind exchanges.”  As a result, she owns several parcels of highly appreciated land, each with a very low cost basis.  Jean wants to cash in on her investment success and use the proceeds to live well in retirement.  But she faces severe capital gains taxes if and when she sells. 

Jean might consider, prior to any sale, contributing some of her property, such as one parcel currently worth $800,000.  She could give us a fractional interest – a portion worth $100,000, for example – and deduct $100,000 without owing capital gains taxes.  The deduction would save $28,000 in taxes in her 28% tax bracket.  If the capital gain on the part she retained were $200,000, her capital gains tax would be $30,000, which is nearly eliminated by her charitable deduction tax savings.

An even better idea for Jean may be to transfer part or all of her land to a tax-exempt charitable remainder trust, avoid all capital gains taxes, retain an income for life and receive a sizable tax deduction in the bargain.  Call us for details on how charitable remainder trusts can create deductions and enable conversion of low-yield investments to a higher payout, without loss from capital gains taxes.

Touch the Future with Your Estate Plan

There’s no law that says you have to make a will or other estate plans.  But most us, as mature adults, feel a tug of responsibility and the desire to be kindly judged by those who carry on after us.  So we plan for generations we will never know . . . and plant trees under whose shade we will never sit.
           
Why have a will?  A will enables you to make a truly thoughtful distribution of assets that took a lifetime to accumulate.  A will empowers you to minimize “estate shrinkage” – from death taxes and other costs – that can rob your family of precious assets.  It lets you nominate guardians or trustees to shelter and protect family members.  It allows you to make a very personal statement of how you wish the assets accumulated with a lifetime of work to be distributed.  And a will lets you to take into account the special needs of your beneficiaries.  Your will, in effect, gives you the opportunity to improve the quality of life for your family and others for several generations. 
           
Your estate plan can even leave the world a better place, through charitable bequests, trusts and beneficiary designations.  You can perpetuate your support for our programs through:

• • a gift from your will or living trust;

• • a beneficiary designation on an insurance policy, a retirement plan, savings or brokerage account.

Our staff would be pleased to explain all the ways by which you can add great personal satisfaction to your estate plans – plans that make the statement: “I was here; my life was important...I made a difference.”

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