Personal Planning Ideas

Planned Giving

  • The Incredible Shrinking Estate Tax

    When the estate tax credit was raised in 2013, sheltering estates up to $5 million, it was estimated that only about 4,000 estates per year would be subject to the tax. The recently passed Tax Cuts and Jobs Act doubled the sheltered amount ($11.2 million in 2018, adjusted for inflation).  When combined with portability, which allows a surviving spouse to “inherit” the unused credit of a deceased spouse, married couples can shelter up to $22.4 million.  For all but a few estates per year, taxes are no longer a concern.

    Many people may decide to make current gifts, particularly gifts offering lifetime payments, and enjoy an income tax charitable deduction.  For example, David has a $2 million estate, so he will not be subject to estate tax, but he still wants to create a legacy at his favorite charity.  David decides to fund a charitable remainder unitrust from which he will receive payments for life.  When the trust ends, assets in the trust will pass to charity, just as if he had left a gift in his will.  Not only does David save income taxes, but he can use appreciated stock to fund his trust and save the 15% capital gains tax — and possibly the 3.8% net-investment income tax — that he would owe if he sold the shares for reinvestment.  His trust payments are based on the full value of the shares.

    While most donors won’t owe estate tax, many still own assets that generate income taxes at death.  IRAs, U.S. savings bonds and certain other assets are considered income in respect of a decedent, subject to income tax.  If these are left to charity, all income tax is avoided.  It’s also possible to use IRAs and savings bonds to fund charitable gifts that will make payments to loved ones for life.

    Standard Deductions Take Giant Leap

    As a result of increased standard deduction amounts for 2018, only about 5% of taxpayers will likely itemize in future years — down from about 30% in prior years.  For 2018, the deductions are as follows:

    Single taxpayers
    $13,600 (if age 65 or older)
    $13,600 (if blind)
    $15,200 (if age 65 or older and blind)

    Married taxpayers
    $25,300 (if one spouse is age 65 or older)
    $26,600 (if both spouses are age 65 or older)
    $25,300 (if one spouse is blind)
    $26,600 (if both spouses are blind)
    $29,200 (if both spouses are age 65 or older and blind)

    The deduction for home mortgage interest is now limited to interest on only up to $750,000 of indebtedness for first and second homes; the deduction for state and local taxes is capped at $10,000; deductions are gone for miscellaneous itemized expenses subject to a 2%-of-adjusted gross income threshold and for work-related moving expenses; unreimbursed casualty losses are restricted to disasters declared by the President. 

    Charitable contributions are still deductible, and in fact, the limit for cash gifts is increased from 50% of adjusted gross income to 60%.  Bunching several years’ worth of gifts into one year may enable some donors to exceed the standard deduction.  Another option is to fund life-income gifts (charitable remainder trusts, charitable gift annuities) to generate a larger deduction while retaining payments for life from your gift.

    Think Twice Before . . .

    Making withdrawals from your IRA — You’ll owe income tax on the amount withdrawn (unless it’s a qualified distribution from a Roth IRA) and possibly a 10% early withdrawal penalty if you’re under age 59½.  Although you’re required to begin taking distributions from your IRA after age 70½, consider instead having some of that required amount sent directly to charity.  You’ll avoid the income tax you would have owed.

    Selling stock that has gone up in value — There is a capital gains tax on the profit.  In most cases, you’ll lose 15%, although a few taxpayers may be taxed at 20%, plus a 3.8% net investment income tax.  The added income might also affect how Social Security benefits are taxed.  Ask your financial adviser about offsetting some of your gains by selling stock that has gone down in value.  Another satisfying option is to contribute the shares to charity, avoid all taxes and qualify for a charitable deduction that may allow you to itemize your deductions.

    Writing a check to children or grandchildren — Many people use annual gifts to family members (up to $15,000 per person in 2018) to shift family wealth.  Consider giving assets likely to appreciate in value.  Appreciated stock makes an excellent gift, since family members may pay capital gains tax when they ultimately sell of only 15% — or possibly even 0%.

    Relying on your state’s “estate plan” — Each state has a distribution plan for residents who die without drafting their own wills or living trusts.  But state laws don’t consider the special needs of family members and others who depend on you.  States’ “wills” don’t take advantage of opportunities to minimize taxes or distribute assets in the most tax-advantaged way.  You can seize these opportunities, however, by having your own estate plan prepared by a knowledgeable professional.

    Start 2018 on the Right Foot

    The tax landscape has changed dramatically for 2018.  To make the most of the changes — and avoid missteps — take time early in the year to review your tax situation.  In particular:

    • Check your withholding and estimated tax payments.  Your tax adviser can help you avoid overpaying the IRS.  A large refund at tax time means you gave the IRS an interest-free loan of your money.  Especially with new, lower tax rates in effect, you may want to adjust your payments.

    • Rebalance your investments.  The markets hit several new highs in 2017.  It may be time to sell to harvest gains or to keep your portfolio in balance with your risk tolerance.  Think about making your charitable gifts with shares that have gone up in value.

    • Conduct an insurance audit.  See if you are sufficiently covered for life, health, auto, home, disability and other hazards.  If you find you have more life insurance coverage than you need, consider making a gift of the policy to charity.  You’ll be entitled to an income tax deduction that might allow you to itemize your deductions.



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