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. So would these other celebrities who died without a 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:
A great place for you to start is by filling out my free estate plan questionnaire. 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.
Looking at the different options, you may be confused as to which estate plan package is right for you. “Do you 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
In the free, one-hour consultation, we’ll talk about your 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
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 may 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.
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.
You know you need an estate plan, and as you can see above, this five-step process isn’t so bad! So, cast those excuses aside and get started on checking off step one of your checklist.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/Screen-Shot-2017-05-18-at-2.25.23-PM.png6961052Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2018-11-25 17:19:522020-05-18 11:28:50Estate Planning: Just Five Easy Steps from Start to Finish
Iowans’ retirement benefit plans hold tremendous wealth. Your IRAs, 401(k)s, 403(b)s, and so on, could have a huge impact on the charities you care about most.
Nonprofits should be aware that retirement benefit plans are incredibly underutilized for charitable giving. It’s in nonprofit stakeholders’ best interest to educate themselves and potential donors about the benefits of charitable giving of retirement benefit plans.
Categories of Charitable Giving
There are several ways to categorize charitable giving. For example:
Cash versus non-cash gifts
Planned giving versus “unplanned” giving
Income producing charitable gifts (such as charitable gift annuities and charitable remainder trusts) versus non income producing gifts
Gifts of different types or classes of assets
When discussing gifts of retirement assets, perhaps the most helpful categorization is lifetime gifts versus gifts at death. Lawyers sometimes call charitable gifts made during lifetime as inter vivos gifts and gifts at death as testamentary gifts.
Let’s start with testamentary gifts of retirement plan assets. This can be an easy and convenient way for your clients to support their favorite causes.
Testamentary Gifts of Retirement Plan Assets
Name charity as beneficiary
You can make a very meaningful gift simply by naming your favorite charity or charities as beneficiary of an IRA, 401(k), 403(b), or other retirement plan. Giving retirement assets in this way is quite easy. Just contact the institution holding your retirement plan, request a change of beneficiary form, fill the form out completely and correctly, and return the form. Typically naming a beneficiary in this way does not require drafting or amending a will or trust.
Keep in mind, however, that if the account holder is married, the spouse should be informed. Depending on the type and terms of the plan, the spouse may have to consent to the gift.
Tax rules may make testamentary gifts of retirement plan assets more favorable
Retirement plan assets are a good choice for testamentary gifts for tax reasons, too. In fact, the interplay of a few tax rules may make charitable gifts of retirement plan assets more attractive to you than charitable gifts of other kind of assets.
To understand why this might be so, we need to look at three important concepts:
Inheritance generally is not income.
Income in respect of a decedent (IRD)
Step-up in basis (also called, stepped up basis)
Inheritance is not income
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 simple, I’ll focus on federal tax.)
Income in respect of a decedent (IRD)
Most inherited property passes tax-free, but not all. IRD is income that the deceased was entitled to, but had not yet received, at the time of death. IRD can come from various sources, including:
Unpaid salary, fees, commissions, and/or bonuses;
Deferred compensation benefits;
Accrued but unpaid interest, dividends, and rent; and
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 refers to the readjustment of the 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 higher market value of the asset at the time of inheritance, not the value at which the original party purchased the asset.
Interplay Between Tax-Free Inheritance, IRD, and Step-Up in Basis
There can be interesting interplay between tax-free inheritance, IRD, and step-up in basis, which may make testamentary gifts of retirement benefit plans very attractive. Here’s a simple example:
Alex dies, with three surviving children, Brett, Casey, and Dana. At her death, Alex owned three major assets: a house, stock, and an IRA. She bequests each child one asset. What result?
Assume:
Alex’s house is worth $100,000. She purchased it for only $20,000.
Alex owns shares of stock in Acme Company, worth $170,000. She purchased the stock for just $50,000.
Alex’s IRA is worth $200,000.
Alex’s house is inherited by Brett. There’s no federal tax on this transfer. Brett sells the house shortly thereafter. Still no federal tax. Although Alex purchased the house for only $20,000, Brett receives a step up in basis. Brett’s basis is $100,000, the value of the house. Since she sells it for $100,000, there’s nothing to tax.
When Casey inherits the stock, no tax—as there’s no taxable event. Later, Casey sells the stock. Although Alex purchased the stock for only $50,000, Casey receives a step up in basis. Casey’s basis is $170,000, the value of the stock. Since Casey sells the stock for $170,000, there’s nothing to tax.
How about Dana and the IRA? The IRA was registered with Dana as beneficiary, but no money is taken out of it immediately, so no taxes. When Dana withdraws money from the IRA, however, Dana must pay federal income tax of up to 39.6 percent. (It is true that Dana could defer withdrawals from the IRA for a long time, and of course such deferral reduces the impact of taxes.)
To sum up, in this hypothetical, the house and stock passed to the beneficiaries without any taxable event. The IRA passed to the beneficiary, but the beneficiary will have to pay taxes when she withdraws funds.
As can be seen, testamentary gifts of retirement benefits to a worthy charity can be tax-savvy. Let’s move on to inter vivos gifts of retirement benefits to charity.
Inter Vivos Gifts of Retirement to Charity
A helpful way to discuss charitable gifts of retirement plan assets during lifetime is to break them down into three categories:
IRA Charitable Rollover;
Required Minimum Distributions (RMDs), and
Non–RMDs
IRA Charitable Rollover
The federal law known as the IRA Charitable Rollover allows individuals aged 70½ and older to donate up to $100,000 from their IRAs directly to charities without having to count the distributions as taxable income. This gift transfer is called a “qualified charitable distribution” or “QCD.”
To be a valid QCD, there are two threshold requirements. First, you must be age 70½ or older. Second, the retirement plan account must be an IRA.
Age requirement of 70½
Taxpayers who are 70½ and older are required to make annual distributions from IRAs which are then included in the taxpayers’ adjusted gross income (AGI) and subject to taxes. The IRA Charitable Rollover permits those taxpayers to make donations directly to charitable organizations from their IRAs without counting them as part of their AGI and, consequently, without paying taxes on them. You can be either an IRA participant donating from your own IRA, or a beneficiary donating from an inherited IRA.
Again, the IRA Charitable Rollover requires you (whether owner or beneficiary) to be age 70½ or older. This is based on the year you reach age 70½, not the day you reach that age.
IRA Charitable Rollover is for IRAs only
QCD can only be made from traditional IRAs or Roth IRAs. Charitable donations from 403(b) plans, 401(k) plans, pension plans, and other retirement plans are not eligible for the IRA Charitable Rollover law.
Annual cap of $100,000
Your total combined IRA Charitable Rollover contributions cannot exceed $100,000 in any one year. The limit is per IRA owner, not per IRA. Also, this amount is not portable between spouses.
Eligible charities
Under the IRA Charitable Rollover, charitable contributions from an IRA must go directly to a public charity that is not a supporting organization. Contributions to client-advised funds and private foundations, except in narrow circumstances, do not qualify for tax-free IRA rollover contributions.
I must emphasize that QCD must go directly to charity. You can’t withdraw the money, and then give it to charity – rather, the IRA administrator must send QCD straight to the charity.
IRA Charitable Rollover & quid pro quo
What about gifts to your client from a charity, in return for QCD? You cannot receive any goods or services in return for QCD to qualify for tax-free treatment.
IRA Charitable Rollover and IRS substantiation
The IRA Charitable Rollover requires substantiation for the IRS. You must obtain written receipt of each IRA rollover contribution from each recipient charity.
Specific tax advantages of QCD
Keep in mind the specific tax advantages of QCD under the IRA Charitable Rollover. For Iowans who don’t itemize deductions, and so thereby don’t get to deduct their charitable contribution, the IRA Charitable Rollover obviously helps. This is even more applicable after the passing of the new tax law.
For Iowans who are “itemizers,” it may also be tax-advantaged, particularly for those who practice strategies like “bunching” donations.
IRA Charitable Rollover and QCD can’t fund split interest gifts
QCD must be a contribution that would be 100 percent deductible if paid from the owner’s non-IRA assets, so a split-interest gift will not qualify. Therefore, IRA Charitable Rollover funds generally cannot be made to a charitable remainder trust, charitable gift annuity, or pooled income fund.
No federal income tax charitable deduction with IRA Charitable Rollover
QCD, from the IRA Charitable Rollover, are excluded from your gross income for all purposes. Of course, there is no charitable deduction for any IRA Charitable Rollover funds.
IRA Charitable Rollover helps with three notable challenges to lifetime giving
Speaking very generally, there are three notable challenges to lifetime giving:
First, consider taxpayers who don’t itemize. Most fundamentally, a taxpayer has to itemize to take advantage of the charitable deduction. A taxpayer who uses the “standard deduction,” rather than itemized deductions, of course wouldn’t see any tax benefit from the charitable deduction.
Second, look at AGI percentage limits on charitable deductions. The federal income tax charitable deduction is limited to a certain percentage of adjusted gross income. The percentage is either 30% or 50%, depending on the type of property given and the type of donee charity.
Third, remember the Pease limitation. The “Limitation on Itemized Deductions” (known as the “Pease limitation,” after Donald Pease, the Ohio congressman who helped create the law), reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions. The income thresholds for Pease vary by filing status.
You can readily see these three potential obstacles are just not at issue at all with the IRA Charitable Rollover. Again, simply put, QCD does not increase AGI.
IRA Charitable Rollover can fulfill RMDs
QCD, from the IRA Charitable Rollover, can fulfill RMDs. So, it’s an excellent way for Iowans over 70½ to both fulfill RMDs and help favorite causes.
Don’t confuse RMDs and QCDs
QCD and RMDs are actually completely different. It’s true that QCD counts toward RMDs, to the extent RMDs have not already been taken. But QCD can be taken, regardless of whether RMD for the year is more or less than $100,000; regardless of whether the plan participant has already taken RMD; and regardless of any other distributions from the IRA.
Charitable Giving and RMDS
The IRA Charitable Rollover applies only to IRAs. Generally, a retirement plan participant, aged 70½ or older, must take annual RMDs – whether the plan is an IRA, or a 401(k), another type of plan.
These RMDs would seem to be an ideal charitable gift. After all, if a plan participant must take an RMD anyway, why not use it to support her favorite causes?
A beneficiary who inherits a retirement benefit plan is also generally required to take annual RMDs. The same analysis would presumably apply.
Charitable Giving and Non-RMDs
Depending on individual circumstances, taxpayers may also choose to make lifetime charitable gifts using funds withdrawn from retirement benefit plans. Individuals over age 59½ may generally withdraw funds from retirement plans without penalty, make a gift with these funds, and then claim an offsetting charitable deduction. In most cases, charitable gifts made in this manner will be a “wash” for tax purposes.
Let’s Talk About Retirement
Whether you are a donor or a donee charity, I would be happy to visit with you about increasing your charitable giving. Please feel free to contact me any time for a free one-hour consultation. I am always available at gordon@gordonfischerlawfirm.com or 515-371-6077.
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Estate Planning: Just Five Easy Steps from Start to Finish
Estates & Estate PlanningYou 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. So would these other celebrities who died without a 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:
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. 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
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 seen here from this rate sheet.
Looking at the different options, you may be confused as to which estate plan package is right for you. “Do you 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
In the free, one-hour consultation, we’ll talk about your 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
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 may 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.
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.
You know you need an estate plan, and as you can see above, this five-step process isn’t so bad! So, cast those excuses aside and get started on checking off step one of your checklist.
If you have any questions or concerns about estate planning in your situation, please contact me any time. I can always be reached via email, gordon@gordonfischerlawfirm.com, or my cell phone, 515-371-6077.
Retirement Benefit Plans and Charitable Giving
Charitable Giving, Wills, Trusts & EstatesIowans’ retirement benefit plans hold tremendous wealth. Your IRAs, 401(k)s, 403(b)s, and so on, could have a huge impact on the charities you care about most.
Nonprofits should be aware that retirement benefit plans are incredibly underutilized for charitable giving. It’s in nonprofit stakeholders’ best interest to educate themselves and potential donors about the benefits of charitable giving of retirement benefit plans.
Categories of Charitable Giving
There are several ways to categorize charitable giving. For example:
When discussing gifts of retirement assets, perhaps the most helpful categorization is lifetime gifts versus gifts at death. Lawyers sometimes call charitable gifts made during lifetime as inter vivos gifts and gifts at death as testamentary gifts.
Let’s start with testamentary gifts of retirement plan assets. This can be an easy and convenient way for your clients to support their favorite causes.
Testamentary Gifts of Retirement Plan Assets
Name charity as beneficiary
You can make a very meaningful gift simply by naming your favorite charity or charities as beneficiary of an IRA, 401(k), 403(b), or other retirement plan. Giving retirement assets in this way is quite easy. Just contact the institution holding your retirement plan, request a change of beneficiary form, fill the form out completely and correctly, and return the form. Typically naming a beneficiary in this way does not require drafting or amending a will or trust.
Keep in mind, however, that if the account holder is married, the spouse should be informed. Depending on the type and terms of the plan, the spouse may have to consent to the gift.
Tax rules may make testamentary gifts of retirement plan assets more favorable
Retirement plan assets are a good choice for testamentary gifts for tax reasons, too. In fact, the interplay of a few tax rules may make charitable gifts of retirement plan assets more attractive to you than charitable gifts of other kind of assets.
To understand why this might be so, we need to look at three important concepts:
Inheritance is not income
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 simple, I’ll focus on federal tax.)
Income in respect of a decedent (IRD)
Most inherited property passes tax-free, but not all. IRD is income that the deceased was entitled to, but had not yet received, at the time of death. IRD can come from various sources, including:
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 refers to the readjustment of the 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 higher market value of the asset at the time of inheritance, not the value at which the original party purchased the asset.
Interplay Between Tax-Free Inheritance, IRD, and Step-Up in Basis
There can be interesting interplay between tax-free inheritance, IRD, and step-up in basis, which may make testamentary gifts of retirement benefit plans very attractive. Here’s a simple example:
Alex dies, with three surviving children, Brett, Casey, and Dana. At her death, Alex owned three major assets: a house, stock, and an IRA. She bequests each child one asset. What result?
Assume:
Alex’s house is inherited by Brett. There’s no federal tax on this transfer. Brett sells the house shortly thereafter. Still no federal tax. Although Alex purchased the house for only $20,000, Brett receives a step up in basis. Brett’s basis is $100,000, the value of the house. Since she sells it for $100,000, there’s nothing to tax.
When Casey inherits the stock, no tax—as there’s no taxable event. Later, Casey sells the stock. Although Alex purchased the stock for only $50,000, Casey receives a step up in basis. Casey’s basis is $170,000, the value of the stock. Since Casey sells the stock for $170,000, there’s nothing to tax.
How about Dana and the IRA? The IRA was registered with Dana as beneficiary, but no money is taken out of it immediately, so no taxes. When Dana withdraws money from the IRA, however, Dana must pay federal income tax of up to 39.6 percent. (It is true that Dana could defer withdrawals from the IRA for a long time, and of course such deferral reduces the impact of taxes.)
To sum up, in this hypothetical, the house and stock passed to the beneficiaries without any taxable event. The IRA passed to the beneficiary, but the beneficiary will have to pay taxes when she withdraws funds.
As can be seen, testamentary gifts of retirement benefits to a worthy charity can be tax-savvy. Let’s move on to inter vivos gifts of retirement benefits to charity.
Inter Vivos Gifts of Retirement to Charity
A helpful way to discuss charitable gifts of retirement plan assets during lifetime is to break them down into three categories:
IRA Charitable Rollover
The federal law known as the IRA Charitable Rollover allows individuals aged 70½ and older to donate up to $100,000 from their IRAs directly to charities without having to count the distributions as taxable income. This gift transfer is called a “qualified charitable distribution” or “QCD.”
To be a valid QCD, there are two threshold requirements. First, you must be age 70½ or older. Second, the retirement plan account must be an IRA.
Age requirement of 70½
Taxpayers who are 70½ and older are required to make annual distributions from IRAs which are then included in the taxpayers’ adjusted gross income (AGI) and subject to taxes. The IRA Charitable Rollover permits those taxpayers to make donations directly to charitable organizations from their IRAs without counting them as part of their AGI and, consequently, without paying taxes on them. You can be either an IRA participant donating from your own IRA, or a beneficiary donating from an inherited IRA.
Again, the IRA Charitable Rollover requires you (whether owner or beneficiary) to be age 70½ or older. This is based on the year you reach age 70½, not the day you reach that age.
IRA Charitable Rollover is for IRAs only
QCD can only be made from traditional IRAs or Roth IRAs. Charitable donations from 403(b) plans, 401(k) plans, pension plans, and other retirement plans are not eligible for the IRA Charitable Rollover law.
Annual cap of $100,000
Your total combined IRA Charitable Rollover contributions cannot exceed $100,000 in any one year. The limit is per IRA owner, not per IRA. Also, this amount is not portable between spouses.
Eligible charities
Under the IRA Charitable Rollover, charitable contributions from an IRA must go directly to a public charity that is not a supporting organization. Contributions to client-advised funds and private foundations, except in narrow circumstances, do not qualify for tax-free IRA rollover contributions.
I must emphasize that QCD must go directly to charity. You can’t withdraw the money, and then give it to charity – rather, the IRA administrator must send QCD straight to the charity.
IRA Charitable Rollover & quid pro quo
What about gifts to your client from a charity, in return for QCD? You cannot receive any goods or services in return for QCD to qualify for tax-free treatment.
IRA Charitable Rollover and IRS substantiation
The IRA Charitable Rollover requires substantiation for the IRS. You must obtain written receipt of each IRA rollover contribution from each recipient charity.
Specific tax advantages of QCD
Keep in mind the specific tax advantages of QCD under the IRA Charitable Rollover. For Iowans who don’t itemize deductions, and so thereby don’t get to deduct their charitable contribution, the IRA Charitable Rollover obviously helps. This is even more applicable after the passing of the new tax law.
For Iowans who are “itemizers,” it may also be tax-advantaged, particularly for those who practice strategies like “bunching” donations.
IRA Charitable Rollover and QCD can’t fund split interest gifts
QCD must be a contribution that would be 100 percent deductible if paid from the owner’s non-IRA assets, so a split-interest gift will not qualify. Therefore, IRA Charitable Rollover funds generally cannot be made to a charitable remainder trust, charitable gift annuity, or pooled income fund.
No federal income tax charitable deduction with IRA Charitable Rollover
QCD, from the IRA Charitable Rollover, are excluded from your gross income for all purposes. Of course, there is no charitable deduction for any IRA Charitable Rollover funds.
IRA Charitable Rollover helps with three notable challenges to lifetime giving
Speaking very generally, there are three notable challenges to lifetime giving:
First, consider taxpayers who don’t itemize. Most fundamentally, a taxpayer has to itemize to take advantage of the charitable deduction. A taxpayer who uses the “standard deduction,” rather than itemized deductions, of course wouldn’t see any tax benefit from the charitable deduction.
Second, look at AGI percentage limits on charitable deductions. The federal income tax charitable deduction is limited to a certain percentage of adjusted gross income. The percentage is either 30% or 50%, depending on the type of property given and the type of donee charity.
Third, remember the Pease limitation. The “Limitation on Itemized Deductions” (known as the “Pease limitation,” after Donald Pease, the Ohio congressman who helped create the law), reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions. The income thresholds for Pease vary by filing status.
You can readily see these three potential obstacles are just not at issue at all with the IRA Charitable Rollover. Again, simply put, QCD does not increase AGI.
IRA Charitable Rollover can fulfill RMDs
QCD, from the IRA Charitable Rollover, can fulfill RMDs. So, it’s an excellent way for Iowans over 70½ to both fulfill RMDs and help favorite causes.
Don’t confuse RMDs and QCDs
QCD and RMDs are actually completely different. It’s true that QCD counts toward RMDs, to the extent RMDs have not already been taken. But QCD can be taken, regardless of whether RMD for the year is more or less than $100,000; regardless of whether the plan participant has already taken RMD; and regardless of any other distributions from the IRA.
Charitable Giving and RMDS
The IRA Charitable Rollover applies only to IRAs. Generally, a retirement plan participant, aged 70½ or older, must take annual RMDs – whether the plan is an IRA, or a 401(k), another type of plan.
These RMDs would seem to be an ideal charitable gift. After all, if a plan participant must take an RMD anyway, why not use it to support her favorite causes?
A beneficiary who inherits a retirement benefit plan is also generally required to take annual RMDs. The same analysis would presumably apply.
Charitable Giving and Non-RMDs
Depending on individual circumstances, taxpayers may also choose to make lifetime charitable gifts using funds withdrawn from retirement benefit plans. Individuals over age 59½ may generally withdraw funds from retirement plans without penalty, make a gift with these funds, and then claim an offsetting charitable deduction. In most cases, charitable gifts made in this manner will be a “wash” for tax purposes.
Let’s Talk About Retirement
Whether you are a donor or a donee charity, I would be happy to visit with you about increasing your charitable giving. Please feel free to contact me any time for a free one-hour consultation. I am always available at gordon@gordonfischerlawfirm.com or 515-371-6077.
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