Archive for the ‘Taxes’ Category
Robert D. Cavanaugh, CLU asked:
Charitable remainder trusts can increase your income, avoid capital gains taxes, lower or eliminate estate taxes, serve as another type of retirement plan, serve humanity and put a warm feeling in your heart. Here is an example that applies to anyone contemplating selling a highly appreciated asset.
In the Path of Progress
Clarence and Mildred had a farm that has been in the family since 1930. They raised corn and had a few cattle. However, the farm has been inactive since Clarence died 10 years ago.
The farm used to be out in the country. Over the years, the neighboring city has expanded to the point that its boundaries have almost reached the farm.
A real estate development firm with an offer she finds difficult to believe has recently contacted Mildred. They want to build a giant shopping mall on her property. Moreover, they are willing to pay 14 million dollars for her 80 acres.
As much as Mildred is tied to her home of 40 years and the lifestyle, this is an easy decision. The farm was originally homesteaded and has no basis. How can she minimize the capital gain tax?
The procedure would call for her to gift the farm to a charitable remainder trust. The trust would then sell the property to the real estate developer. She should employ an estate planning attorney to assure that the gift to the trust and the subsequent sale to the real estate developer are not construed as a pre-arranged series of transactions.
Using a charitable remainder trust gives Mildred the following benefits:
1. She does more than minimize the capital gain tax; she avoids it altogether. If the capital gain rate is 15%, this saves $2,100,000 in capital gains taxes. Mary is frugal. She has saved every button that has ever come off a shirt, blouse or shirt. She is also leery. She figures she can put that $2,100,000 to better use than the people in Washington D.C.
2. A charitable remainder trust mandates an annual payout of at least 5%. That’s $700,000 a year. She is set for life and can take all the grandchildren to Disneyland every year.
3. She will get a huge tax deduction based on her charitable contribution to the trust. It will be so big that the IRS will let her carry the unused portion forward for a total of six years. It’s a good bet she will pay no income tax for the next six years.
4. She can name any number of charities to receive the 14 million in the trust when she dies. Ultimately, she could have a new church building, a wing on the hospital or scholarships named after her and Clarence for her generosity. The number of people who would benefit in the future is too many to count.
5. If she is concerned about disinheriting her heirs, she can use some of the income to buy a life insurance policy and name her children and grandchildren beneficiaries. She could also gift up to (currently) $12,000 per year to as many people as she wants without any gift tax implications.
6. No estate tax will be due at her death.
7. The 14 million will be professionally managed inside the charitable remainder trust. She has no investment worries and can set the trust up so she has a guaranteed income. Downturns in the economy, weather catastrophes or world events will have no effect on her income.
It’s true that Mildred could simply sell the farm and pay the capital gains tax. Aside from the capital gains tax, coming into this large sum of money could create more problems.
She would have to invest it while fending off suggestions from well-meaning relatives. She would have some estate planning to do to avoid half of her estate going to the government in taxes when she dies.
When you put the charitable remainder trust on the table as an option, most of these problems vanish and many additional benefits appear.
Marcelo Dimuzio
Charitable remainder trusts can increase your income, avoid capital gains taxes, lower or eliminate estate taxes, serve as another type of retirement plan, serve humanity and put a warm feeling in your heart. Here is an example that applies to anyone contemplating selling a highly appreciated asset.
In the Path of Progress
Clarence and Mildred had a farm that has been in the family since 1930. They raised corn and had a few cattle. However, the farm has been inactive since Clarence died 10 years ago.
The farm used to be out in the country. Over the years, the neighboring city has expanded to the point that its boundaries have almost reached the farm.
A real estate development firm with an offer she finds difficult to believe has recently contacted Mildred. They want to build a giant shopping mall on her property. Moreover, they are willing to pay 14 million dollars for her 80 acres.
As much as Mildred is tied to her home of 40 years and the lifestyle, this is an easy decision. The farm was originally homesteaded and has no basis. How can she minimize the capital gain tax?
The procedure would call for her to gift the farm to a charitable remainder trust. The trust would then sell the property to the real estate developer. She should employ an estate planning attorney to assure that the gift to the trust and the subsequent sale to the real estate developer are not construed as a pre-arranged series of transactions.
Using a charitable remainder trust gives Mildred the following benefits:
1. She does more than minimize the capital gain tax; she avoids it altogether. If the capital gain rate is 15%, this saves $2,100,000 in capital gains taxes. Mary is frugal. She has saved every button that has ever come off a shirt, blouse or shirt. She is also leery. She figures she can put that $2,100,000 to better use than the people in Washington D.C.
2. A charitable remainder trust mandates an annual payout of at least 5%. That’s $700,000 a year. She is set for life and can take all the grandchildren to Disneyland every year.
3. She will get a huge tax deduction based on her charitable contribution to the trust. It will be so big that the IRS will let her carry the unused portion forward for a total of six years. It’s a good bet she will pay no income tax for the next six years.
4. She can name any number of charities to receive the 14 million in the trust when she dies. Ultimately, she could have a new church building, a wing on the hospital or scholarships named after her and Clarence for her generosity. The number of people who would benefit in the future is too many to count.
5. If she is concerned about disinheriting her heirs, she can use some of the income to buy a life insurance policy and name her children and grandchildren beneficiaries. She could also gift up to (currently) $12,000 per year to as many people as she wants without any gift tax implications.
6. No estate tax will be due at her death.
7. The 14 million will be professionally managed inside the charitable remainder trust. She has no investment worries and can set the trust up so she has a guaranteed income. Downturns in the economy, weather catastrophes or world events will have no effect on her income.
It’s true that Mildred could simply sell the farm and pay the capital gains tax. Aside from the capital gains tax, coming into this large sum of money could create more problems.
She would have to invest it while fending off suggestions from well-meaning relatives. She would have some estate planning to do to avoid half of her estate going to the government in taxes when she dies.
When you put the charitable remainder trust on the table as an option, most of these problems vanish and many additional benefits appear.
Marcelo Dimuzio
Joseph J. Dadich, CPA, Esq., LLM asked:
In the complex world of taxes, you have a number of choices when it comes to selecting a beneficiary (or beneficiaries) for your IRA. Some are appropriate. Unfortunately, some are major mistakes and can lead to delays and expenses in getting the funds to your desired recipients.
Some may even exclude some of your desired beneficiaries. In addition, some elections are for estate planning purposes. Let’s take a look at your options.
If you have No Beneficiary
Not recommended. This mandates your IRA be distributed according to your will, if you have one. If you don’t, each state has “intestate” rules that divide your estate up in ways you wouldn’t ever want. I had a client out of New Jersey who’s dad had this issue when he died and unfortunately caused a $1.45mm tax over 5 years and no compounding effect. An IRA with no beneficiary must be distributed within five years. By contrast, a named beneficiary can spread the distribution out over the balance of their life expectancy.
If you only name Your Estate
This has the same effect as the beneficiary is the same as not naming one. The rules require a “named” beneficiary. Now your IRA goes through the probate process. This costs money, takes time and subjects your IRA to your creditors.
The IRS has complex guidelines on how a Trust can qualify as a beneficiary of your Trust. Do you really want to leave this to chance? What’s more, is why would you pay money to be represented by an attorney and have a judge in some probate court decide whom your beneficiary will be? Why should your beneficiaries have to wait around for your estate to be closed? What if your will is challenged? What if you have a big estate with estate taxes due and the IRS is questioning the valuation of your business?
I have seen estates open for as long as ten years as the debate goes back and forth between your attorney and the IRS. The worst case I can think of is your IRA completely eaten up by legal fees inasmuch it may be the only liquid asset.
Name your spouse as primary
This is the most common designation and makes the most sense for a number of reasons.
If the spouse is the sole beneficiary, he or she can elect to treat the IRA as his or her own. This opens up the possibility of delaying the start of the required minimum distributions (RMDs). This could be the spouse’s age 70 1/2, or for a Roth IRA, all the way to the death of the spouse. It also allows further “stretching” of the IRA as the spouse can spread the RMDs over their lifetime plus the lifetime of a beneficiary.
If the spouse is more than 10 years younger than a non-Roth IRA owner, their life expectancy can be used. Beneficiaries other than the spouse, who are more than ten years younger than the IRA owner, are treated as being no more than ten years younger for RMD purposes. This is another “stretching” advantage for naming the spouse as beneficiary.
Naming Children
If there is more than one child named, the youngest age is used for RMD purposes. However, if the children are beneficiaries of a trust, the oldest age is used.
If children are beneficiaries, they can take the RMDs over their life expectancy. Since the RMDs are very low at the younger ages, the account can grow substantially over the years. For example, a $100,000 IRA could distribute literally millions of dollars over the lifetime of a young beneficiary.
Grandchildren
Naming a grandchild gets into the generation skipping transfer tax area. But each person has a lifetime generation-skipping transfer tax lifetime exemption of $2,500,000 (in 2009). In any case, I would consult a tax attorney to make sure this beneficiary election coordinates with the balance of your estate plan.
Because grandchildren are even younger than children are, the lifetime income potential from RMDs would floor you. I can show you an example of the same $100,000 IRA used above as an example that would pay out 20 million dollars to a grandchild over their lifetime under the right circumstances.
The information was provided by Joseph J. Dadich, Esq. Expert Author/Attorney/CPA Creator of ‘Emergency Estate Planning Documents’™ Get your FREE CD and $2,188 in Bonuses at www.1estateplanningmichigan.com or www.15criticalpoints.com
Carey Swygert
In the complex world of taxes, you have a number of choices when it comes to selecting a beneficiary (or beneficiaries) for your IRA. Some are appropriate. Unfortunately, some are major mistakes and can lead to delays and expenses in getting the funds to your desired recipients.
Some may even exclude some of your desired beneficiaries. In addition, some elections are for estate planning purposes. Let’s take a look at your options.
If you have No Beneficiary
Not recommended. This mandates your IRA be distributed according to your will, if you have one. If you don’t, each state has “intestate” rules that divide your estate up in ways you wouldn’t ever want. I had a client out of New Jersey who’s dad had this issue when he died and unfortunately caused a $1.45mm tax over 5 years and no compounding effect. An IRA with no beneficiary must be distributed within five years. By contrast, a named beneficiary can spread the distribution out over the balance of their life expectancy.
If you only name Your Estate
This has the same effect as the beneficiary is the same as not naming one. The rules require a “named” beneficiary. Now your IRA goes through the probate process. This costs money, takes time and subjects your IRA to your creditors.
The IRS has complex guidelines on how a Trust can qualify as a beneficiary of your Trust. Do you really want to leave this to chance? What’s more, is why would you pay money to be represented by an attorney and have a judge in some probate court decide whom your beneficiary will be? Why should your beneficiaries have to wait around for your estate to be closed? What if your will is challenged? What if you have a big estate with estate taxes due and the IRS is questioning the valuation of your business?
I have seen estates open for as long as ten years as the debate goes back and forth between your attorney and the IRS. The worst case I can think of is your IRA completely eaten up by legal fees inasmuch it may be the only liquid asset.
Name your spouse as primary
This is the most common designation and makes the most sense for a number of reasons.
If the spouse is the sole beneficiary, he or she can elect to treat the IRA as his or her own. This opens up the possibility of delaying the start of the required minimum distributions (RMDs). This could be the spouse’s age 70 1/2, or for a Roth IRA, all the way to the death of the spouse. It also allows further “stretching” of the IRA as the spouse can spread the RMDs over their lifetime plus the lifetime of a beneficiary.
If the spouse is more than 10 years younger than a non-Roth IRA owner, their life expectancy can be used. Beneficiaries other than the spouse, who are more than ten years younger than the IRA owner, are treated as being no more than ten years younger for RMD purposes. This is another “stretching” advantage for naming the spouse as beneficiary.
Naming Children
If there is more than one child named, the youngest age is used for RMD purposes. However, if the children are beneficiaries of a trust, the oldest age is used.
If children are beneficiaries, they can take the RMDs over their life expectancy. Since the RMDs are very low at the younger ages, the account can grow substantially over the years. For example, a $100,000 IRA could distribute literally millions of dollars over the lifetime of a young beneficiary.
Grandchildren
Naming a grandchild gets into the generation skipping transfer tax area. But each person has a lifetime generation-skipping transfer tax lifetime exemption of $2,500,000 (in 2009). In any case, I would consult a tax attorney to make sure this beneficiary election coordinates with the balance of your estate plan.
Because grandchildren are even younger than children are, the lifetime income potential from RMDs would floor you. I can show you an example of the same $100,000 IRA used above as an example that would pay out 20 million dollars to a grandchild over their lifetime under the right circumstances.
The information was provided by Joseph J. Dadich, Esq. Expert Author/Attorney/CPA Creator of ‘Emergency Estate Planning Documents’™ Get your FREE CD and $2,188 in Bonuses at www.1estateplanningmichigan.com or www.15criticalpoints.com
Carey Swygert