In my ongoing efforts to break down the legalese barriers that tend to separate lawyers from the real world, and have increased quality communication, here’s another Fun with Legal Words post. Today’s word is “trust.”

In this context, and in the simplest terms, a trust is a legal agreement between three parties: settlor, trustee, and beneficiary. Let’s look at each of these three parties, and then delve more into how a trust works. 

Settlor

All trusts have a settlor, sometimes called the “donor” or “trustor.” The settlor creates the trust, and also has legal authority to transfer property to the trust. 

Man reading business section of paper

Trustee

The trustee can be any person or entity that can take title to property on behalf of a beneficiary. The trustee is responsible for managing the property according to the rules outlined in the trust document, and must do so in the best interests of the beneficiary.

Beneficiary

The beneficiary is the person or entity benefiting from the trust. The beneficiary can be one person/entity or multiple parties (true also of settlor and trustee). Multiple trust beneficiaries do not have to have the same interests in the trust property. Also, trust beneficiaries do not have to even exist at the time the trust is created (such as a future grandchild, or charitable foundation that hasn’t been set up yet).

Trust Property

A trust can be either funded or unfunded. By funded, we mean that trust property has been placed “inside” the trust. This property is sometimes called the “principal” or the “corpus.” A trust is unfunded until property are transferred into your name as trustee of the trust.

Any Asset

House

Any asset can be held by a trust. Trust property can be real estate, intangible property, business interests, and personal property. Some common examples of trust property include farms, buildings, vacation homes, money, stocks, bonds, collections, personal possessions, and vehicles.

“Imaginary Container”

We speak of putting assets “in” a trust, but assets don’t actually change location. Think of a trust as an “imaginary container.” It’s not a geographical place that protects something (such as a garage protects your car), but a form of ownership that holds it for your benefit. For instance, on your car title the owner blank would read “The John Smith Trust.” It’s common to put real estate (farms, homes, vacation condos) and entire accounts (savings, checking, credit union, and brokerage accounts) into a trust.

Baskets

After the trust is funded, the trust property will still be in the same place before the trust was created—your land where it always was, your car in the garage, your money in the bank, your stamp collection in the study… The only difference is the property will have a different owner: “The Jane Jones Trust,” not Jane Jones.

Transfer of Ownership

Putting property in a trust transfers it from personal ownership to the trustee, who holds the property for the beneficiary. The trustee has legal title to the trust property. For most purposes, the law treats trust property as if it were now owned by the trustee and trusts have separate taxpayer identification numbers.

But, trustees are not the full owners of trust property. Trustees have a legal duty to use trust property as provided in the trust agreement and permitted by law. The beneficiaries retain what is known as equitable title: the right to benefit from trust property as specified in the trust.

Assets to Beneficiary

The settlor provides terms in a trust agreement as to how the fund’s assets are to be distributed to a beneficiary. The settlor can provide for the distribution of funds in any way that is not against the law or against public policy.

Types of Trusts Almost Limitless

The types of trusts are almost limitless. Trusts may be classified by their purpose, duration, creation method, or by the nature of the trust property.

Benefits of Trusts

The potential benefits of trusts are immense. The benefits include avoiding probate (and other costs savings), privacy, and helping with every family’s unique needs. 

Avoid Probate

A major benefit of trusts is avoiding probate. This is because, upon death, the trust dictates how trust property will pass. Avoiding probate saves your loved ones both time and money as the probate process is time-consuming, taking anywhere from several months to a year to complete. Sometimes, depending on the size of the estate, it can take even longer. Probate can also be expensive. Attorney’s fees alone can amount to two percent of the total estate, or even more in extraordinary cases. For some, two percent of their assets can be a very high number. Often, the cost of creating a trust is considerably less expensive than the cost of probate would have been.

Privacy

When a will is filed with an Iowa court upon death, the will becomes a public record. Trusts, on the other hand, remain private documents. Many folks, especially in small towns, have a strong desire to keep business affairs private.

Second Marriages and Blended Families

Dad with kid on beach

Trusts are also helpful in situations involving second marriages or blended families. When married couples have children from previous relationships, the surviving spouse has the ability to disinherit stepchildren. A trust can remedy this situation by providing lifetime benefits to the surviving spouse but, after his or her death, leaving assets to children and stepchildren.

Special Needs Trusts

Families with members who have special care needs must take a careful estate planning approach. For example, when a person receives government assistance due to a disability, a gift or inheritance might result in denial of benefits. However, assets can be left in certain types of trusts (for example, a special needs trust), to provide for supplemental needs while still allowing persons with disabilities to continue to receive benefits.

Let’s Get Started

You probably still have some questions on trusts…which is why I’m here! Don’t hesitate to contact me. I offer a free one-hour consultation at which point we can discuss your personal situation, see if a trust is right for you, and set up the steps to take for success.

Three women talking

One of the worst-case scenarios for any family is to avoid estate planning conversations completely because you risk offending a loved one or family member.

I’ve known some couples who haven’t been able to agree on an important decision, such as who will take care of the children in the event of them both passing. Since they can’t reach an agreement they decide to bypass the conversation entirely and leave their children without a legal guardian. Which is, of course, the worst possible decision of all!

How you communicate your wishes to your family depends entirely on the family dynamic. One interesting concept I’ve heard of for family heirloom-decisions, is to give your beneficiaries monopoly money and have them bid against each other for different items in an auction format. While that could make for a fun (albeit competitive) game night, it’s important that your loved one realize the importance and finality of an estate plan.

No matter how you determine decisions such as property dispersal, a professional estate planner can help you fully understand all the implications of your estate plan.

Tricky Family Situations

I’ve seen variations of this potentially tricky situation many times.

Three brothers grow up on a farm. Eventually, two of the brothers moved to the city while the third continued to run the farm’s operations. When their parents passed away, the third brother who had managed the farm, inherited the entire property while the brothers received none of the farm assets. As you can imagine, even if two of the brother’s were not actively involved in the farm’s operations, if the parents died without discussing the estate arrangement with all of their children conflict could ensue between the siblings.

Then consider if the parents in this scenario divided out the farm assets between the brothers, whether or not they had a hand in helping manage the property. The brother who actually, actively manages the farm may feel slighted. Either way such situations are made thorny when there’s no up front, clear communication.

Bottom Line

Family talking

Estate planning can be an extremely difficult decision-making process. It is something that should be discussed with your loved ones, family members, and beneficiaries, especially when your choices may take them by surprise. Help everyone — yourself included — achieve peace of mind by seeking professional help to draft a sturdy estate plan. And then your estate planner can help you communicate your decisions to your loved ones.

Have questions? Need more information?

A great place to get started with any estate plan is with my free (no obligation) Estate Plan Questionnaire or feel free to reach out at any time.

Gordon Fischer speaking at event

One aspect of running my own firm that I love is getting out and teaching groups of people. Just like mission, my presentations center on maximizing charitable giving. Be it through estate planning education, nonprofit board training, or sharing tools and resources for professional advisors, I’m always open to speaking at different organizations and events across the state.

Gordon Fischer speaking at event

Here’s a great example (from the Basics of Estate Planning workshop hosted in April 2017) of the types of content I like to speak on. Of course, I modify my content so it’s applicable to event, organization, and audience.

So, if you’re in need of a speaker on estate planning, don’t hesitate to shoot me an email at gordon@gordonfischerlawfirm.com or give me a call at 515-371-6077 to discuss your upcoming event and potential speaking topics.

Estate planning together

You need an estate plan. You need an estate plan.

If I haven’t yet fully convinced you that you need an estate plan, consider many other reputable sources. Following the brutal infighting over his estate, Prince would probably tell you to make an estate plan. Fox Business emphasizes the critical importance of an estate plan, adding, “[y]ou don’t have to be rich to plan for your death.” U.S. News & World Report notes both the financial and emotional pain inflicted on loved ones when folks fail to plan. Fidelity cautions that too often, estate planning is a neglected, but important, part of overall financial planning. Forbes reminds us that, “Plain and simple, estate planning helps protect your family in the event that something bad happens to you.”

So, an estate plan is clearly critically important, but where to start? Keep reading for an easy five-step guide to get you where you need to go.

Estate Plan, Not Just a Will

Before I discuss the five easy steps, let’s get our terminology straight. Remember a will is NOT the same as an estate plan. While these two terms are (mistakenly) used interchangeably all the time, they are quite different.

An estate plan consists of several legal documents to prepare for your death or disability. Your will is just one of those documents, albeit a very important one. You need more than a will; you need an estate plan. With that settled, let’s discuss the five-step process of how I can craft your very own, individualized estate plan.

Honesty and Transparency

I work with my clients from a place of complete honesty and transparency. I’m upfront and open about my process of developing clients’ estate plans.

I’m always sure to inform potential clients of my five-step process:

  1. You download and fill out my free Estate Plan Questionnaire.
  2. We meet for a free one-hour consultation and discuss your completed Estate Plan Questionnaire.
  3. Based on the information you provided me, and our discussion, I draw up drafts of your estate planning documents.
  4. Once you are sure the estate planning documents are perfect, we sign the documents.
  5. About once a year we revisit your estate plan to ensure it’s aligned with your life changes.

That’s it. That’s really all there is to it.

STEP ONE: Estate Plan Questionnaire

A great place for you to start is by filling out my free Estate Plan Questionnaire. This PDF can be downloaded right here, by anyone, at any time. It’s completely free, with no obligation.

You can print off my Estate Plan Questionnaire and either fill it out by hand, or type in your information digitally. If filling it out on a computer, tablet, or smartphone, remember to “save” often and regularly. The Estate Plan Questionnaire collects essential information needed to craft a quality estate plan. This information includes contact information about your family and your professional advisors, assets, family, and specific property items.

Cost of an Estate Plan

Dollar

People thinking about completing an estate plan are often, quite understandably, concerned about its cost. No matter who you hire to draft or update your estate plan, make sure they’re completely up front with you about what it will cost. My own fees couldn’t be more obvious, as they are openly listed in my Estate Plan Questionnaire.

Wills table

Revocable Living Trusts

Some might look at this table and worry about which estate plan is right for them. “Do I need a revocable living trust? Or would a simple will package be enough?” To which I say, relax. We’ll figure it out together.

There is no such thing as a “one-size-fits-all” estate plan. Estate plans – their terms, coverages, ins and outs – depend on a myriad of individual circumstances and indeed preferences.

This is why filling out my Estate Plan Questionnaire is such a great first step. You can gather your own individual important and relevant information, all in one place, and think through decisions you’ll need to make when building your estate plan. Then, I can see from your responses what you might want and need. Once your Estate Plan Questionnaire is complete, we’ll meet for a free one-hour consultation.

STEP TWO:  Free, One-Hour Consultation

Gordon Fischer meeting with client

In the free, one-hour consultation, we’ll talk about the Estate Plan Questionnaire you completed. I usually meet clients in my office, but I’ve also met folks at coffee shops, restaurants, hospitals, and their houses. (I do make house calls!) I’ll listen carefully as you describe your intentions. I’ll answer all your questions. I’ll address all your concerns. Once we are both satisfied we understand each other, I’ll give you my recommendations. I’ll tell you in plain language what I think you need and why I think you need it. I’ll also tell you the exact cost. As you can see from my fee schedule above, I use a flat fee approach. So, you’ll get a 100% reliable figure.

STEP THREE: First Drafts of Estate Plan Documents

Glasses on estate planning documents

Once you and I agree about what documents and what terms in those documents should be included in your estate plan, I get to work. I draft a set of documents, unique to you and your needs. Once completed, I share this first draft with you.

How I share the draft with you depends entirely on your preference, which I ask about in the Estate Plan Questionnaire. Most folks are good with email. Some clients don’t have email, or don’t want these sorts documents sent through email. In such cases I would either snail mail the documents, or have the client could pick them up at my office.

However you receive the documents, you’ll spend time reviewing the first draft of your estate plan. You’ll make changes, ask questions, and raise concerns. This is all on your time frame. You take as much, or as little time, as you feel you need. I will move at the speed you want. We can go through one draft or we can go through twenty. The important thing is we won’t continue to the next step until you are completely satisfied with your estate plan in all aspects. Only when you are completely, totally, and 100 percent satisfied do we execute the documents.

STEP FOUR: Executing Your Estate Plan

We’ll set up an appointment to meet (again, usually my office, but could be another place you choose). We’ll need two witnesses. I’m a notary. We’ll go through and properly sign and notarize all the documents.

Only Then, My Bill

I talked about the cost of an estate plan, but I haven’t yet mentioned a bill. That’s because I don’t present you with a bill until the end of the process. Only once you have a fully executed (i.e., signed, notarized, and witnessed) estate plan, then and only then do I provide you my bill for legal services. The bill total will exactly match the figure I provided you earlier, during our free consultation. If it doesn’t match, frankly, you could simply not pay the bill. (I might keep the estate planning documents, though). Some clients write a check right on the spot. Other clients want to pay along with all their other bills, so they remit payment later. Yes, you may take the estate plan documents without paying—I trust you’ll pay me.

Yes, YOU Get the Original Documents

Some lawyers keep the original, signed documents. I don’t. I give you the original documents to keep safely. I can make copies (electronic, paper, or both) for you if you’d like. I do keep both a paper and electronic copy of the signed version of your estate plan. Copies of estate plans are great, just in case — but it’s the original that counts.

Short Client Satisfaction Survey

I should mention I’ll send you an online client satisfaction survey via email. The survey is super short, optional, confidential, and anonymous. The questions center on your satisfaction with me, the process, and the product. The survey allows you to voice your opinion on working with me and helps me improve and maintain a high-quality level of service.

STEP FIVE: Annual Follow-Up

The only constant in life? Change. As your life inevitably changes, your estate plan must adapt.

How often should you revisit your estate plan? I like to check in with my clients on an annual basis.

Some clients like revisiting their estate plan at the start of the year. Others prefer to review on a significant date, like a birthday or wedding anniversary. Some pick a random date we agree upon. The “default” date would be the annual anniversary of executing the estate planning documents.

Woman holding Calendar

At our decided-upon date, I’ll just do a quick check-in; typically, this is just a quick series of short emails. Only if there’s been a major life event, death of an heir or fiduciary; drastic change in health; significant change in assets; or the like, will we need to have a longer discussion. Of course, you don’t have to change anything you don’t want. I’ll simply provide advice.

Estate Plan Questionnaire

You know you need an estate plan, and as you can see above, this five-step process isn’t bad. Again, a great place to start the process is with my Estate Plan Questionnaire. You can download it for free and at no obligation.

If you have any questions or concerns with estate planning in general, please contact me any time. I can always be reached via email, gordon@gordonfischerlawfirm.com, or my cell phone, 515-371-6077.

Investment stones

With regard to charitable giving, not all assets are equal. For tax reasons, some assets may be better to pass on to heirs, while others may be better to give to your favorite causes. Consider the potential tax treatment of retirement benefit plans such as IRAs, 401(k)s, etc. A simple story illustrates why, for example, an IRA may make a better charitable gift, while other assets may be better for heirs, based on tax provisions.

Old Man Lear and his Four Beneficiaries

Consider the simple story of old man Lear and his four beloved daughters: Cordelia, Goneril, Regan, and Ashlee. (Feel free to take a break and go brush up on your King Lear!)Lear, no fool, engages in estate planning with the intention of helping each of his daughters in the future. He has four major assets: his house, stock, a painting, and his IRA. Each asset is worth roughly the same (plus/minus just a few dollars).

four sisters

  • Lear’s house is worth $100,003. He purchased it for only $20,000.
  • Lear owns shares of stock in Acme Company, valued at $100,002. He bought the stock for just $50,000.
  • Lear has a famous painting of a castle. It’s valued at $100,009; he purchased it for $35,000.
  • Lear has dutifully paid into an IRA that’s now up to $100,020.

Nothing if not fair, Lear divvies up the four assets to each daughter. Do all four daughters get more or less the same deal?

Three Tax Concepts

Before answering, we need to consider three important tax concepts:

(1)        Inheritance as income

(2)        Income in respect of a decedent

(3)        Step-up in basis (also called, stepped up basis)

The interplay of these concepts may make charitable gifts of retirement plan assets more attractive to your clients than charitable gifts of other kind of assets.

Inheritance as Income

Under our federal income tax rules, receipt of almost every type of asset counts as income. One of the rare exceptions in inheritance of property. Generally speaking, inheritance is not income, for federal tax purposes. Most inherited property passes tax-free. (It’s true there is an Iowa inheritance tax. To keep this article simple(r), I’ll focus on federal tax).

Income in Respect of a Decedent (IRD)

Of course, with every rule in federal tax law, there’s an exception. Most inherited property passes tax-free, but not all. IRD is income that the deceased was entitled to, but had not yet received, at time of death. IRD can come from various sources, including:

(1)        Unpaid salary, fees, commissions, and/or bonuses;

(2)        Deferred compensation benefits;

(3)        Accrued but unpaid interest, dividends, and rent; and

(4)        Distributions from retirement benefit plans

That’s right – retirement benefit plans are IRD.

Federal tax law provides for IRD to be taxed when it’s distributed to the deceased’s beneficiaries. IRD retains the character it would have had in the deceased’s hands.

Step-up in basis

Step-up in basis is a critically important concept. It refers to the readjustment of value of an appreciated asset for tax purposes upon inheritance. With a step-up in basis, the value of the asset is determined to be the market value of the asset at the time of inheritance, and not the value at which the original party purchased the asset.

Four Beneficiaries and Four Assets

Cordelia’s inherits the house. As we discussed, there’s no federal tax on inheritance. Cordelia sells the house for $100,003. Still, no federal tax. Although Lear purchased the house for only $20,000, recall that Cordelia receives a step up in basis. Cordelia’s basis is $100,003, the fair market value (FMV) of the house. Since she sells it for $100,003, there’s nothing to tax.

House key

When Goneril inherits the stock, there’s no tax—as there’s no taxable event. Soon, Goneril sells the stock. Although Lear purchased the stock for just $50,000, Goneril receives a step up in basis. Goneril’s basis is $100,002, the stock’s FMV. Since she sells the stock for its new stepped-up basis, there’s nothing to tax.

Stocks going up

Regan inherits the painting, with the same result. There’s no federal tax on inheritance of the painting. When Regan immediately sells the art for FMV, there’s nothing to tax, as the FMV, and step-up in basis, are the same.

Paintbrushes

How about Ashlee and the IRA? If Ashlee withdraws money from the IRA, it’s a different story. Ashlee will have to pay federal income tax of up to 39.6 percent. (It is true that Ashlee could defer withdrawals from the IRA for a long time, and of course such deferral reduces the impact of taxes.)

Ira egg in nest

To sum up, in this hypothetical, the house, stock, and art passed to the beneficiaries without any taxable event, and the daughter were able to sell without tax consequences. The IRA passed to the fourth daughter, but she will have to pay taxes when she withdraws funds.

When considering charitable gifts, also consider the tax code. And, considering talking to your kids about these issues. After all, not all assets are equally beneficial to heirs. In this case, retirement benefits plans may make an ideal gift to your favorite cause.

Magnifying glass over charity

Hand clicking on computer mouse

This month’s issue of GoFisch is out! Give it a readsubscribe, and pass it along to someone you know who could benefit from the information.

Missed past issues? Here are the April and March editions.

Corn field

For donors who actively engage in farming on a cash basis [1], significant tax savings can be found through donating grain directly to a favorite charity such as a public library, church, or university. Yes, you read that right. Grain. In short, the charities make money by selling the donated grain and the donors get tax deductions at a better rate than just cash donations.

Who Qualifies?

Keep in mind the tax benefits of gifting grain don’t apply to everyone, so not everyone who works in agriculture may qualify. As discussed more fully below, only cash basis farmers are able to reap these benefits.

Farmer in field

Crop Share Landlords Not Eligible

There are two major kinds of farm leases: cash share leases and crop share leases (as well as hybrids of the two) [2]. A crop share landlord would not be eligible to receive the tax benefits discussed here. A crop share landlord’s share of crops is considered rental income and must be reported as such on the landlord’s tax return.

Tax Benefits

Tax Savings

Cash gifts to a charity are deductible if a donor itemizes deductions on Schedule A. Many farmers, however, take the standard deduction [3].

As many farmers take the standard deduction, no tax benefit is gained by making charitable gifts of cash. However, by directly donating grain to a charity organization the cash basis farmer can exclude the sale of the grain from income, which can result in a triple tax savings. The tax savings can include:

  • Federal income tax savings (up to 39.6 percent)
  • State income tax savings (up to 8.98 percent in Iowa)
  • Self-employment tax savings (15.3 percent)

Expenses Related to Production

For most farm operators, the expenses related to the production of the donated grain are deductible on Schedule F [4]. The charitable donation of grain reduces the income that is reportable on Schedule F.

No Charitable Contribution Deduction

Donors of grain should not report the donation on Schedule A. There is no additional deduction allowed since the tax benefit comes from the deduction of production expenses and not reporting a sale on Schedule F.

Timing of Gift

Another great benefit of donating grain is that it doesn’t matter if the donation is made in the year of production or a later year. Gifts of grain can be donated from the current year or previous years’ harvests.

Fewer Forms

Yet another great benefit of donating grain: fewer forms! Generally speaking, if the total of your donated property is more than $500, you have to file an additional form with your return, Form 8283: Noncash Charitable Contributions. For property valued at more than $5,000, generally, you have to produce a qualified appraisal by a qualified appraiser.

However, with gifts of grain, as mentioned above, there is no charitable deduction taken. Therefore, the donor of grain doesn’t need to provide Form 8283 or a qualified appraisal. So, gifts of grain can be easier gifts than other types of property.

Field rows

Cautionary Notes

Take note of these few considerations regarding prior sale commitments; physical delivery; giving up control; and storage, transportation, and risk.

No Prior Sale Commitment

To receive the tax benefits discussed in this article, farmers cannot sell the grain and then order the sales proceeds to be sent to the charity. The gift must be from unsold grain inventory with no prior sale commitment.

Physical Delivery

This is similar to the point made directly above regarding no prior sale commitment. The commodity should be put into the name of the charity when it is delivered to the elevator and a warehouse receipt should be issued in the name of the charity. For grain stored on the farm, the farmer should deliver to the charity a notarized letter of transfer.

Tractor in field

Giving Up Control

The farmer must give up dominion and control over the grain and cannot offer any guidance as to when to sell the grain. The charity must direct the sale and the original sales invoice must list the charity as the seller.

Storage, Transportation, and Risk

After the transfer, the charity assumes the full costs of storage, transportation, and marketing, and bears completely the risk of any loss.

Use Professional Advisors

Donors should always consult with their professional tax and/or legal advisors to determine tax implications specific to their situation prior to making the gift.

Case Study of Tax Savings from Gift of Grain

Pat, a cash-basis grain farmer who takes the standard deduction every year, donates 1,000 bushels of corn to her favorite charity, a local hospital. Her cost of production is $2,000, and the proceeds from the sale of the corn by the hospital is $5,000.

Pat is entitled to deduct her $2,000 of production expenses on Schedule F. In addition, she will not be required to report the proceeds from the sale of the corn as income. Assuming that Pat is in the 25% federal and 8.98% Iowa tax bracket, the following are the tax savings that result when Pat reduces her taxable income by making a gift of the corn to a charity:

$1,250            Federal income tax ($5,000 x 25%)

$449               State income tax ($5,000 x 8.98%)

$765               Self-employment tax ($5,000 x 15.3%)

=$2,464         Tax savings

By donating the corn rather than selling it outright and making a cash gift, Pat saves $2,464 in taxes. In addition, she can still deduct the $2,000 of production expenses she incurred to grow the corn.

(Note: If Pat itemizes her deductions rather than claiming the standard deduction, her additional tax savings through making a gift of corn rather than cash would be limited to the savings on self-employment tax.)

Steps to Make a Gift of Grain to Your Favorite Charity

Field with hay bales

Be sure to consult with your tax preparer or financial advisor to determine the tax implications prior to making a charitable gift of grain. Staff of potential recipient charities are also usually more than happy to assist!

Contact the intended charity recipient of their intention to make a gift. (Some charities actually has forms specific to gifts of grain.)

  1. Donors will deliver the grain to the elevator and tell the elevator of the wish to transfer ownership of X number of bushels (or X fraction of the load) to the donee charity.
  2. Clients will need to request the elevator to issue a warehouse storage receipt in the name of the charity and send it to them. The donor should instruct the elevator not to sell the grain until they are contacted by the receiving charity.
  3. The receiving charity should be notified that the grain is at the elevator.The charity will then contact the elevator to direct the sale of the grain and will send the farmer (donor), an acknowledgment letter.

As you can see, it is very important for professional advisors and the recipient charity to be consulted before making the gift.

Every Iowan and every farm is unique. Be sure to consult with your own professional advisor. This article is not to be construed as legal advice, and is provided merely as general information.

Additional Information

[1] There are several methods of accounting for income. Farmers have been given an advantage in the Internal Revenue Code by being allowed to use the cash method of accounting. Most farmers choose the cash method because of the tax advantages. The cash method of accounting allows (many) farmers to claim the expenses of the current year’s crops while postponing the recognition of income. Under the cash method, all income is included in the year it is actually or constructively received. Farm business expenses are deductible in the year in which they are paid. For much more on farming, income issues, and the IRC, find a wealth of information here on IRS.gov.

[2] In a cash rent lease, generally, the tenant usually pays a fixed dollar amount in rent (either on a per acre or whole farm basis). These types of leases may be modified depending on crop yield (i.e., increase in good years and decrease in bad years). With cash rent leases, the landlord is not as involved in crop production, thereby giving the tenant more autonomy.

In a typical crop share lease, the landlord will share input costs (including but not limited to seed, fertilizer, and fuel), while the tenant provides all of the labor and remaining input costs. Once harvested, proceeds will be divided according to the agreement (which may range from, say, 25/75 to 50/50). With crop share leases, most often both parties share the risks.

Of course, there are hybrid arrangements. In any case, it’s important for both parties to make sure they have competent legal and tax counsel drafting the lease agreements.

[3] You can either claim the standard deduction or itemize your deductions—whichever lowers your taxes the most. The standard deduction is a fixed dollar amount that reduces the income you’re taxed on. Your standard deduction varies according to your filing status.

Three noteworthy items about the standard deduction:

  1. Standard deduction allows you a deduction even if you have no expenses that qualify for claiming itemized deductions.
  2. It eliminates the need to itemize deductions, like medical expenses and charitable donations.
  3. The standard deduction allows you to avoid keeping records and receipts of your expenses.

The benefit of itemizing is that it allows you to claim a larger deduction that the standard deduction. However, it requires you to complete a Schedule A attachment to your return and to maintain records of all your expenses.

Itemized deductions include a range of expenses that are not otherwise deductible. Common expenses include the mortgage interest you pay on up to two homes, your state and local income or sales taxes, property taxes, medical and dental expenses that exceed 7.5 percent of your adjusted gross income, and the charitable donations you make. Itemized deductions also include miscellaneous deductions such as work-related travel. Once you decide to itemize, you are eligible to claim all of them.

[4] If you earn a living as a self-employed farmer, then you most probably need to include a Schedule F attachment with your tax return to report your profit or loss for the year. The IRS defines “farmer” in a very broad sense and can apply whether you grow crops, raise livestock, or even breed fish!

In addition to money earned from selling crops and livestock, Schedule F also reports other types of farming income, such as any crop insurance payouts, including: federal disaster payments; money you earn through a farming cooperative; and payments you get from an agricultural program.

Cash basis farmers can deduct any cost incurred that’s an ordinary and necessary expense of farming on Schedule F to reduce the profit—or increase the loss—on which you’ll owe taxes. Some of the expenses farmers commonly deduct cover the cost of livestock and feed, seeds, fertilizer, wages paid to employees, interest paid during the year on farm-related loans, depreciation to recover a portion of equipment costs, utilities, and insurance premiums.

Young couple holding hands

So, WHO needs an estate plan, anyway?

Who needs to be most concerned with estate planning? What age group? Ask Iowans this question, and I’ll bet most would conjure up the image of a retiree who just spent 50+ years working hard to acquire significant assets. Of course, it’s important for this demographic to have a quality estate plan, that’s fairly obvious.

But, imagine a young, married couple. They both have good jobs, live in a fine starter home, and have a baby.

crying newborn baby

This young couple tries to put away a little bit of money for savings, in a 529 college fund, and for retirement. Why should they worry about estate planning?

The truth is, this young couple should be just as concerned–arguably, even more concerned–with estate planning as the retiree.

Here are four reasons why:

  • Choosing guardians for minor children. In an estate plan, you can choose the guardians of minor children (e.g., children under age 18). If you should become incapacitated, or even die without any estate plan, an Iowa court would have no choice but to appoint a guardian for your children – but it may not be who you wanted or would have chosen. Better to have plenty of time to consider and make a careful, well-reasoned choice.

 

  • Save on fees, court costs, and taxes. A good estate plan can save you and your estate money on fees, court costs, and taxes—perhaps even achieve substantial savings. These savings can be even more critically important for a smaller estate (more likely when you’re younger), than for larger estate (more likely as you grow older). Often, young folks actually have the greatest need to save money to pass along the greatest amount they possibly can to family and loved ones.

 

  • Help favorite charities. Young people often are passionate about one or more causes. Having an estate plan means that you can put into place much needed help for your favorite charities.

 

  • Life is uncertain. It may be awkward to talk about, but life isn’t guaranteed for any of us, young or old. There’s an old saying in estate planning circles that goes, “People don’t always die when they are supposed to.” Wives usually outlive their husbands, parents usually outlive their children, and so on, but not always. It is best to be prepared for anything and everything.

Mom and daughter hugging

Who should be most concerned with estate planning? I actually think young people should be!

Do you agree? Why or why not? I’d be very interested in your thoughts. Email me at gordon@gordonfischerlawfirm.com.

Whatever your age, if you are interested in estate planning, a good place to start is my free Estate Planning Questionnaire. You can download it (for free) by simply clicking here.

gifts-to-charity-form

Save $$$ and help your favorite charities even more.

Some say it’s better to give than receive. I say, it’s better to give and receive. You can both give and receive by using the federal income tax charitable deduction.

A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions. Assuming the gifts are deductible, the actual cost of your gift is reduced by your tax savings.

Charitable deduction tax savings

In short, as of March 2017, there are seven federal income tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. (For a general discussion of tax brackets, see my post called bracketology.)

The charitable deduction can result in significant tax savings. For example, assume a donor in the 33% tax bracket gives to her favorite qualified charitable organization a donation of $100. The charity still receives the full gift of $100. But, for the donor, the actual out-of-pocket cost of the gift is only $67, and the donor saves $33.

Let’s make these assumptions for all tax brackets and see the savings which result:

Bracket          Donation                 Savings                           Actual cost
10%                     $100                               $10                                       $90
15%                     $100                               $15                                       $85
25%                     $100                               $25                                       $75
28%                     $100                               $28                                       $72
33%                     $100                               $33                                       $67
35%                     $100                               $35                                       $65
39.6%                  $100                               $39.60                                $60.40

This is a good deal for you and a good deal for your favorite causes. So why not consider using the charitable deduction?

The charitable deduction requires you to be organized in your giving and maintain records. Generally speaking, the greater the deduction, the more detailed the records you are required to keep.

The basics of substantiation of your charitable deduction

Here’s a simple explanation of IRS record keeping rules for the charitable deduction:

  • Gifts of less than $250 per donee — you need a cancelled check or receipt
  • $250 or more per donee — you need a timely written acknowledgement from the donee
  • Total deductions for all property exceeds $500 — you need to file IRS Form 8283
  • Deductions exceeding $5,000 per item — you need a qualified appraisal completed by a qualified appraiser

Wait, you ask, is it really that simple? Actually, no, not really. Let’s go through these categories and dig deeper.

Substantiation requirements for monetary gifts less than $250

Donate button on keyboard

A federal income tax deduction for a charitable contribution in the form of cash, check, or other monetary gift is not allowed unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution.

Meaning of “monetary gift”

For this purpose, the term “monetary gift” includes, of course, gifts of cash or by check. But monetary gift also includes gifts by use of:

  • credit card;
  • electronic fund transfer;
  • online payment service;
  • payroll deduction; or
  • transfer of a gift card redeemable for cash.

Meaning of “bank record”

Again, to claim the charitable deduction for any monetary gift, you need a bank record or written communication from the donee. The term “bank record” includes a statement from a financial institution, an electronic fund transfer receipt, a cancelled check, a scanned image of both sides of a cancelled check obtained from a bank website, or a credit card statement.

Meaning of “written communication”

The term “written communication” includes email. Presumably it also includes text messages. But, again, the written communication, whether paper or electronic, it must show the name of the donee, the date of the contribution, and the amount of the contribution.

Substantiation of gifts of $250 or more

Hands raising to give to charity

For any contribution of either cash or property of $250 or more, a donor must receive contemporaneous written acknowledgment from the donee. Two keys here: “contemporaneous” and “written acknowledgement”; both have very specific meanings in this context.

Requirements of written acknowledgment

The written acknowledgment must include:

  1. The date of the gift and the charity’s name and location.
  2. Whether the gift was cash or a description of the noncash gift.
  3. A statement that no goods or services were provided by the organization in return for the contribution, if that was the case.
  4. A description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution.
  5. A statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

“Contemporaneous”

For a written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of: the date on which the donor actually files his or her individual federal income tax return for the year of the contribution or the due date (including extensions) of the return.

Noncash gifts of more than $500

If you make a total of more than $500 worth of noncash gifts in a calendar year, you must file Form 8283, Noncash Charitable Contributions, with your income tax return.

You’ll only have to fill out Section A of Form 8283 if:

  • the gifts are worth less than $5,000, or
  • you’re giving publicly traded securities (even if they’re worth more than $5,000).

Otherwise, you’ll be required to fill out Section B of Form 8283 and all that entails.

Noncash gifts of more than $5,000

Kids holding a "Give"" sign

If you donate property worth more than $5,000 ($10,000 for stock in a closely held business), you’ll need to get an appraisal. The information goes in Section B of Form 8283, “Noncash Charitable Contributions.”

An appraisal is required whether you donate one big item or several similar items which have a total value of more than $5,000. For example, if you give away a hundred valuable old books, and their total value is more than $5,000, you’ll need an appraisal even though you might think you’re really making a lot of small gifts. The rule applies even if you give the items to different charities.

Requirements for “qualified appraisal” and “qualified appraiser”

Again, noncash gifts of more than $5,000 in value, with limited exceptions, require a qualified appraisal completed by a qualified appraiser. The terms “qualified appraisal” and “qualified appraiser” are very specific and have detailed definitions according to the IRS.

“Qualified appraisal”

A qualified appraisal is a document which is:

  1. made, signed, and dated by a qualified appraiser in accordance with generally accepted appraisal standards;
  2. timely;
  3. does not involve prohibited appraisal fees; and
  4. includes certain and specific information.

Let’s further examine each of these four requirements.

“Qualified appraiser”

Appraiser education and experience requirements

An appraiser is treated as having met the minimum education and experience requirements if she is licensed or certified for the type of property being appraised in the state in which the property is located. In Iowa, for a gift of real estate, this means certification by the Iowa Professional Licensing Bureau, Real Estate Appraisers.

Further requirements for a qualified appraiser include that she:

  1. regularly performs appraisals for compensation;
  2. demonstrates verifiable education and experience in valuing the type of property subject to the appraisal;
  3. understands she may be subject to penalties for aiding and abetting the understatement of tax; and
  4. not have been prohibited from practicing before the IRS at any time during three years preceding the appraisal.

Also, a qualified appraiser must be sufficiently independent. This means a qualified appraiser cannot be any of the following:

  1. the donor;
  2. the donee;
  3. the person from whom the donor acquired the property [with limited exceptions];
  4. any person employed by, or related to, any of the above; and/or
  5. an appraiser who is otherwise qualified, but who has some incentive to overstate the value of the property.

Timing of appraisal

The appraisal must be made no earlier than 60 days prior to the gift and no later than the date the return is due (with extensions).

Prohibited appraisal fees

The appraiser’s fee for a qualified appraisal cannot be based on a percentage of the value of the property, nor can the fee be based on the amount allowed as a charitable deduction.

Specific information required in appraisal

Specific information must be included in an appraisal, including:

  1. a description of the property;
  2. the physical condition of any tangible property;
  3. the date (or expected date) of the gift;
  4. any restrictions relating to the charity’s use or disposition of the property;
  5. the name, address, and taxpayer identification number of the qualified appraiser;
  6. the appraiser’s qualifications, including background, experience, education, certification, and any membership in professional appraisal associations;
  7. a statement that the appraisal was prepared for income tax purposes;
  8. the date (or dates) on which the property was valued;
  9. the appraised FMV on the date (or expected date) of contribution;
  10. the method of valuation used to determine FMV;
  11. the specific basis for the valuation, such as any specific comparable sales transaction; and
  12. an admission if the appraiser is acting as a partner in a partnership, an employee of any person, or an independent contractor engaged by a person, other than the donor, with such a person’s name, address, and taxpayer identification number.

Appraiser’s dated signature and declaration

Again, a qualified appraisal must be signed and dated by the appraiser.  Also, there must be a written declaration from the appraiser that he/she is aware of the penalties for substantial or gross valuation.

Work with professional on taxes

The charitable deduction can result in significant tax savings. But, substantiation rules, as you’ve seen, can be complicated. Also, all Iowans are unique, so be sure to contact the appropriate tax professional for personal advice and counsel.

I provide trainings for nonprofits and their staffs, board members, and stakeholders. Reach out to me any time by emailing me at gordon@gordonfischerlawfirm.com or call 515-371-6077. I’d love to hear from you!

 

Gordon Fischer giving presentation

The Community Foundation of Carroll County, along with the Kuemper Catholic School, New Hope Village, and St. Anthony Foundations, teamed up to sponsor the Professional Advisor Continuing Education Program, in Carroll, Iowa. And, I’m excited to say I’ll be the featured speaker!

Lawyers, accountants, insurance agents, and financial advisors are invited to attend.

  • This seminar was approved for 2.0 CE Credits by the Iowa Insurance Division, course #10168.
  • This seminar was approved for 2.0 CE Credits by the CFP Board, program #238762.
  • Thisevent was approved for 2.0 total hours of Continuing Legal Education (CLE) credit, including .5 hours of ethics. The CLE Activity ID is 257823.

My presentation will include example of tools and concepts advisors can utilize with clients such as the Endow Iowa Tax Credit Program (now available through the Community Foundation of Carroll County).

There is no charge for the lunch or program and all area professional and financial advisors are invited and encouraged to attend! Please RSVP to foundation@stanthonyhospital.org or call Stacey Vonnahme at (712) 794-5287 so the event organizers can prepare adequately for lunch and handout materials.

Details

Who: Professional & financial advisors

Date: Wednesday, May 24, 2017

Time: 10:30 a.m.-1:15 p.m.

Where: St. Francis & Clare Meeting Rooms*, St. Anthony Regional Hospital. Park in the St. Anthony parking garage and take an elevator to the 4th floor of the Surgery Center. (Note: do not enter the main hospital building.) Event hosts will greet you as you exit the elevator.