T&E TALK: Secure Your Philanthropic Legacy with a Charitable Remainder Trust

Posted by Scott T. Ditman, CPA/PFS on Oct 21, 2019 7:00:00 AM

Let’s say you’re charitably inclined but have concerns about maintaining a sufficient amount of income to meet your current needs. The good news is that there’s a trust for that: a charitable remainder trust (CRT). This type of trust allows you to support your favorite charity while potentially boosting cash flow, shrinking the size of your taxable estate, and reducing or deferring income taxes.

The CRT in Action

You contribute stock or other assets to an irrevocable trust that provides you — and, if you desire, your spouse — with an income stream for life or for a term of up to 20 years. (You can name a noncharitable beneficiary other than yourself or your spouse, but there may be gift tax implications.) At the end of the trust term, the remaining trust assets are distributed to one or more charities you’ve selected.

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T&E TALK: Is a Self-directed IRA Right for You?

Posted by Scott T. Ditman, CPA/PFS on Oct 14, 2019 7:00:00 AM

Traditional and Roth IRAs can be powerful estate planning tools. With a “self-directed” IRA, you may be able to amp up the benefits of these tools by enabling them to hold nontraditional investments that offer potentially greater returns. However, self-directed IRAs present pitfalls that can lead to unfavorable tax consequences. Consequently, you need to handle these vehicles with care.

Estate Planning Benefits

IRAs are designed primarily as retirement-saving tools, but if you don’t need the funds for retirement, they can provide a tax-advantaged source of wealth for your family.

Example: if you name your spouse as beneficiary, your spouse can roll the funds over into his or her own IRA after you die, enabling the funds to continue growing on a tax-deferred basis.

If you name someone other than your spouse as beneficiary, that person will have to begin taking distributions.

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T&E TALK: Family Businesses May Find Estate Tax Relief in Section 6166

Posted by Scott T. Ditman, CPA/PFS on Oct 7, 2019 7:00:00 AM

Fewer people currently are subject to transfer taxes than ever before. But gift, estate, and generation-skipping transfer (GST) taxes continue to place a burden on families with significant amounts of wealth tied up in illiquid closely held businesses.

Fortunately, Internal Revenue Code Section 6166 provides some relief, allowing the estates of family business owners to defer estate taxes and pay them in installments if certain requirements are met.

Sec. 6166 Benefits

For families with substantial closely held business interests, an election to defer estate taxes under Section 6166 can help them avoid having to sell business assets to pay estate taxes. It allows an estate to pay interest only (at modest rates) for four years and then to stretch out estate tax payments over 10 years in equal annual installments. The goal is to enable the estate to pay the taxes out of business earnings or otherwise to buy enough time to raise the necessary funds without disrupting business operations.

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T&E TALK: With AFRs Low — Take a Look at Your Gifting Plans

Posted by Scott T. Ditman, CPA/PFS on Sep 30, 2019 7:00:00 AM

AFRs (applicable federal rates) are interest rates published each month by the IRS. They are the lowest rates you can charge when making intra-family loans. Because they are taking a substantial dip in October (see chart), now may be a good time to accelerate any gifting you are planning.

AFR October September % Change
Short-Term 1.69% 1.85% 8.60%
Mid-Term 1.51% 1.78% 15.20%
Long-Term 1.86% 2.21% 15.80%
Section 7520 1.80% 2.20% 18.20%

These rates are the lowest for the year and, in the case of the long-term, the lowest in history.  While is it not clear whether rates will trend even lower, families should seriously consider the opportunity to pursue tax efficient wealth transfer strategies now.

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T&E TALK: The “Crummey” is Still Relevant

Posted by Scott T. Ditman, CPA/PFS on Sep 23, 2019 7:00:00 AM

Traditionally, trusts used in estate planning contain “Crummey” withdrawal powers to ensure that contributions qualify for the annual gift tax exclusion. Today, the exclusion allows you to give up to $15,000 per year ($30,000 for married couples) to any number of recipients.

Now that the gift and estate tax exemption has reached an inflation-adjusted $11.4 million, fewer people have to worry about gift and estate taxes. But, for many affluent people, the annual exclusion continues to be an important estate planning strategy. Thus, Crummey powers continue to be relevant.

Reasons to Make Annual Exclusion Gifts

Despite the record-high exemption, there are two important reasons to make annual exclusion gifts. First, if your wealth exceeds the exemption amount, an annual gifting program can reduce or even eliminate your liability for gift and estate taxes.

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T&E TALK: You Can Control How Your Charitable Gifts Are Used

Posted by Scott T. Ditman, CPA/PFS on Sep 16, 2019 7:00:00 AM

If philanthropy is important to your estate planning legacy, consider taking steps to ensure that your donations are used to fulfill your intended charitable purposes. Outright gifts can be risky, especially large donations that will benefit a charity over a long period of time.

Even if a charity is financially sound when you make a gift, there are no guarantees it won’t suffer financial distress, file for bankruptcy protection, or even cease operations down the road. The last thing you probably want is for a charity to use your gifts to pay off its creditors or for some other purpose unrelated to the mission that inspired you to give in the first place.

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T&E TALK: Take Intrafamily Lending to the Next Level - Establish a Family Bank

Posted by Scott T. Ditman, CPA/PFS on Sep 9, 2019 7:00:00 AM

One of the primary goals of estate planning is to put in writing how you want your wealth distributed to loved ones after your death. But what if you’d like to use that wealth to help a family member in need while you’re still alive? One way to do so is through intrafamily lending. If you’re considering making an intrafamily loan to your children or other family members, it’s worth a look at establishing a “family bank.”

Loan Structure is Important

Lending can be an effective way to provide your family financial assistance without triggering unwanted gift taxes. So long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift.

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T&E TALK: Expanded 529 Plans Offer Unique Estate Planning Benefits

Posted by Scott T. Ditman, CPA/PFS on Sep 3, 2019 7:00:00 AM

If you’re putting aside money for college or other educational expenses, consider a tax-advantaged 529 savings plan. Also known as “college savings plans,” 529 plans were expanded by the Tax Cuts and Jobs Act (TCJA) to cover elementary and secondary school expenses as well. And while these plans are best known as an educational funding vehicle, they also offer estate planning benefits.

What Do 529 Plans Cover?

529 plans allow you to contribute a substantial amount of cash (lifetime contribution limits can reach as high as $350,000 or more, depending on the plan) to a tax-advantaged investment account. While contributions are nondeductible on the federal level, some states such as New York, do allow deductions. Contributed funds accumulate tax-free and may be withdrawn tax-free provided they’re used for “qualified education expenses.”

Qualified expenses include tuition, fees, books, supplies, equipment, room and board and, under the TCJA, up to $10,000 per year in elementary or secondary school expenses. Earnings used for other purposes are subject to income tax and a 10% penalty.

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T&E TALK: Your Tax Apportionment Clause Should Be Carefully Worded

Posted by Scott T. Ditman, CPA/PFS on Aug 26, 2019 7:00:00 AM

Federal estate tax liability is no longer an issue for many families, now that the gift and estate tax exemption stands at $11.4 million for 2019. But there are still affluent individuals whose estates may be subject to hefty estate tax bills. If you expect your estate to have significant estate tax liability at your death, it’s critical to include a tax apportionment clause in your will or revocable trust.

An apportionment clause specifies how the estate tax burden will be allocated among your beneficiaries. Omission of this clause, or failure to word it carefully, may result in unintended consequences.

Apportioning Estate Taxes

There are many ways to apportion estate taxes. One option is to have all of the taxes paid out of assets passing through your will. Beneficiaries receiving assets outside your will — such as IRAs, retirement plans or life insurance proceeds — won’t bear any of the tax burden.

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T&E TALK: Your Will – Understand the Basics

Posted by Scott T. Ditman, CPA/PFS on Aug 19, 2019 7:00:00 AM

You probably don’t have to be told about the need for a will. But do you know what provisions should be included and what’s best to leave out? The answers to those questions depend on your situation and may depend on state law.

Basic Provisions

Typically, a will begins with an introductory clause, identifying yourself along with where you reside (city, state, county, etc.). It should also state that this is your official will and replaces any previous wills.

After the introductory clause, a will generally explains how your debts and funeral expenses are to be paid. The provisions for repaying debt generally reflect applicable state laws.

Don’t include specific instructions for funeral arrangements. It’s likely that your will won’t be accessed in time. Spell out your wishes in a letter of instructions, which is an informal letter to your family.

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