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I KEEP six honest serving-men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who.– Rudyard Kipling

I’ll use all six “serving men”—what, why, when, how, where, and who, albeit sometimes in slightly different order—to explain three broad topics: (1) estate planning; (2) trusts; and (3) business succession planning. If you’re unsure of any of the three topics listed, this is the blog post for you.

man taking notes in notebook

WHAT is an Estate Plan, Anyway?

What do we talk about when we talk about estate planning? There are six documents that should be part of everyone’s estate plan. Additionally, you should also keep these six documents updated and current. It’s also important you take note of assets with beneficiary designations (such as those on IRAs and bank accounts).

WHO Needs an Estate Plan? Everyone!

Everyone needs an estate plan. If you’re young, healthy, unmarried, have no children, and have no significant or unusual assets, perhaps you could talk me into the idea that you don’t entirely need an estate plan. Even in such exceedingly rare cases, I strongly recommend making sure your beneficiary designations are completed and up-to-date.

For example, beneficiary designations can be found on your checking and savings accounts and on your retirement benefit plan. But, if you’re married, and/or have kids, and/or have significant or unusual assets, and/or own part or all of a business, you most definitely need an estate plan.

WHY Do You Need an Estate Plan?

Estate planning is not exactly material for scintillating conversation. In fact, I’d bet most of us like to avoid this topic because it can be confusing, and requires lots of decision-making. And, yes, it forces one to think about the mortality of loved ones and the self. Estate planning, after all, is a roadmap about what you want to happen after you move on from this life. While it may not be a fun topic, it is indeed a necessary one. If you die without an estate plan, there are several negative consequences.

Without an estate plan, you cannot choose who receives your estate assets.

If you die without a will, you leave the decision of who will receive your property, in what amount, and when up to the Iowa legislature and/or Iowa courts. With this situation, there is always the very real possibility that the distribution of your estate will be greatly different than if you had chosen it through an estate plan.

Without an estate plan, you cannot choose a guardian for your minor children.

If you die without an estate plan, Iowa courts will choose guardians for your children. One of the most important aspects of a will is that it allows you to designate who will be the guardian for your children. This can ensure that your children are cared for by the person that you want, not who the court chooses for you.

Without an estate plan, Iowa courts will choose your estate’s executor.

If you die without an estate plan, the probate court is forced to name an executor. The executor of your estate handles tasks like paying your creditors and distributing the rest of your assets to your heirs. If the probate court has to pick who will be your estate’s executor, there is always a chance that you would not have approved of that person if you had been alive. If you have an estate plan, your will names a trusted executor who will carry out all of your final wishes, pay your bills, and distribute your assets as you intended.

Without an estate plan, you can’t help your favorite nonprofits.

If you die without an estate plan, all your assets— house, savings, retirement plans, and so on—will pass to your heirs at law as specified under Iowa’s statutes. If you have an estate plan, you can include gifts to your favorite nonprofits and see that they are helped for many years to come.

HOW Do You Structure Your Estate Plan?

light bulb on post-it note

Again, there are six basic documents that should be part of everyone’s estate plan:

  1. Estate Planning Questionnaire
  2. Last will and testament
  3. Power of attorney for health care
  4. Power of attorney for finance
  5. Disposition of personal property
  6. Disposition of final remains

We’ll go through each document briefly, so you have a sense of what each entails.

Estate Planning Questionnaire

Estate planning involves facing heavy questions, and depending on the number of assets and beneficiaries you have, may take quite a bit of time and thought. I recommend clients (and even those who aren’t my clients) complete an Estate Plan Questionnaire. An Estate Plan Questionnaire is a simple way to get all of your information in one place and makes it easier for your attorney to build your estate plan.

As with any project, it helps “to begin with the end in mind.” A questionnaire can help get you there.

hand holding orb

Last Will and Testament

Now let’s discuss your last will and testament. In sum, you’ll be answering three major questions:

Q1. Who do you want to have your stuff?

This includes both tangible and intangible things. An example of a tangible item would be your coin collection. An example of an intangible asset would be stocks.

Q2. Who do you want to be in charge of carrying out your wishes as expressed in the will?

The “executor” is the person who will be responsible for making sure the will is carried out as written.

Q.3. If you have kids under age 18: who do you want to take care of your minor children?

You’ll want to designate a legal guardian(s) who will take care of your minor children until they are adults.

Power of Attorney for Health Care

A power of attorney (POA) for health care designates someone to handle your healthcare decisions for you if you become unable to make those decisions for yourself. A healthcare POA can govern any kind of decision that is related to your health that you want to address. A healthcare POA may include decisions related to organ donation, hospitalization, treatment in a nursing home, home health care, psychiatric treatment, and more.

For example, if you don’t want to be kept alive with machines, you can make this clear in your POA for healthcare. But, keep in mind your POA for health care isn’t just about end-of-life decisions, again, it can cover any medical situation.

Power of Attorney for Finance

The power of attorney for financial matters is similar to the health care document just discussed, only your designated agent has the power to make decisions and act on your behalf when it comes to your finances. This gives them the authority to pay bills, settle debts, sell property, or anything else that needs to be done if you become incapacitated and unable to do this yourself.

It might be obvious by now, but I’ll state it just in case: choosing an agent for a power of attorney requires that you think long and hard about who would be best suited for the job and who can be trusted.

woman on laptop on patio

Disposition of Personal Property

Now, let’s get to the disposition of the personal property. This is where you get specific about items you want particular people to have. If you’re leaving everything to one or two people, then you may not need to fill this out. But, if you know you want your niece Beth to have a specific piece of jewelry, and your cousin Karl to have that bookshelf he loved, then you’d say so in this document.

Disposition of Final Remains

The disposition of final remains document is where you get to tell your loved ones exactly how you want your body to be treated after you pass away. It can be as general as simply saying “I want to be cremated and scattered in my garden,” or it can be specific and include details of plots you’ve already purchased or arrangements you’ve already made.

Beneficiary Designations

Along with the six basic estate planning documents, don’t forget about your assets with beneficiary designations.

Common accounts with beneficiary designations include savings and checking accounts, life insurance, annuities, 401(k)s, pensions, and IRAs are all transferred via beneficiary designations. These beneficiary designations actually trump your will!

Regarding assets with beneficiary designations, you must make sure that designations are correctly filled out and supplied to the appropriate institution. Remember to keep these beneficiary designations updated and current.

WHEN Do You Update Your Estate Plan?

Let’s say you’ve gone to an estate planning lawyer, and these six basic estate planning documents have been drafted and signed. What else? You need to keep these documents updated and current. If you undergo a major life event, you may well want to revisit with your estate planning lawyer, to see if this life event requires changing your estate planning documents.

What do I mean by a major life event? Some common events would include:

  • Selling or buying land
  • Birth or adoption of a child or grandchild
  • Marriage or divorce
  • Illness or disability of your spouse
  • Purchasing a home or other large asset
  • Moving to another state
  • Large increases or decreases in the value of assets, such as investments
  • If you or your spouse receives a large inheritance or gift
  • If any family member, or another heir, dies, becomes ill, or is incapacitated

This is just a short list of life events that should cause you to reconsider your estate plan. There are many others; if you think you might have undergone a major life event, check with your estate planning lawyer.

WHERE Do You Keep Your Estate Plan?

You should store your estate planning documents in a safe place, such as a fireproof safe at home, or a safety-deposit box. Another option in our digital era is storage on the “cloud.” Just make sure the important agents under your estate plan—say, for example, the executor of your will, or power of attorney representative—can access the documents if and when the need arises. For most folks, that’s enough: the six documents, keeping the documents current and remembering about those assets with beneficiary designations.

Don’t Forget About Benefiting Charities!

Perhaps most importantly, through proper estate planning, you can help your favorite charities in ways large and small. One common way grantors elect to support the causes and organizations they care about is by naming them as a beneficiary of a certain amount or percentage of the estate’s assets.

Time for a Trust?

Wait a second…what do you mean by “for most folks, that’s enough?” Indeed, for most Iowans what I’ve outlined here is enough. There may be folks who have a high net worth, or who have complex assets (for example, more than one piece of real estate), or own part or all of a robust business, or otherwise have unusual situations. In such cases, a trust may be helpful. That’s considered more “advanced” estate planning and will mean additional conversations and collaboration on what estate planning tools work best for the situation.

See? That wasn’t so bad!

Whether it’s complicated or simple, it does require some thought and time. But, it’s worth the investment. A proper estate plan can save you and your estate costs and fees, help your family and friends, and provide you peace of mind.

Do you have an estate plan? Why or why not? I’d love to hear from you in the comments below. You can reach me at any time at 515-371-6077 or gordon@gordonfischerlawfirm.com.

Everyone has unique needs and thus every estate plan needs to be personalized. Online templates for estate plans won’t cover the nuances of your life, wishes, and assets. The best place to start on your personalized estate plan is with my Estate Planning Questionnaire.

wealthy dollar bills

There is a rumor that has been floating around that only the rich need estate planning. That is extremely false. Everyone needs an estate plan, but the wealthy don’t need estate planning as much as the middle-class and working-class folks. If this contradicts everything you’ve ever thought about estate planning allow me to explain.

The Case of Kingston Lear

Suppose Kingston Lear (get it?!), a wealthy Iowan, decides he doesn’t need a qualified and experienced estate planner, he can do it himself, or use an online, one-size-fits-all service. Hey, Lear figures, this way he’s saving both time and money. Also, nothing is going to happen to him for a while, he can get around to doing a proper estate plan with a proper estate planning professional “someday.”

Of course, “someday” never comes, but Lear’s death does. His three daughters are aghast that Lear has no real estate plan. The template resembling an estate plan is completely inadequate for the size and complexity of Lear’s assets.

A Matter of Trusts

Lear could have easily, with the help of a professional advisor, set up a trust (even a plain, “vanilla” revocable living trust would have worked) to avoid probate. But, the online service he used didn’t even explain the difference between wills and trusts. So, Lear’s assets all must go through probate. This means that the time and money Lear though he was saving is gone in a flash.

Probate Costs and Fees, If You Please

Probate fees are going to equate to at least 2% cut of Lear’s estate. Remember, Lear’s estate is large and complex and valued at $10 million, so the actual figure is probably going to be more like four percent.

Using 4% as the figure for probate fees means a loss of $40,000 ($10 million X .04 = $400,000). This is $400,000 that could have been passed down to his daughters through a trust, or split generously between his heirs and charitable organizations near and dear to Lear’s heart.

Also, court costs may amount to another 1%, or loss of $10,000 more ($10 million X .01 = $100,000).

Loss of Privacy

Another major benefit of a trust—again, not explained to Lear because didn’t seek any individualized advice—is privacy. A will (or most any document that goes through probate, absent very special circumstances) is simply a public document. Anyone can read, copy, share, and write about it.

Consider one of Lear’s major assets was an ongoing business—a Shakespearean-themed jousting complex, where families could have fun practicing jousting.

horses at fence

Unfortunately, in some of the probate papers, it was disclosed that there had been numerous complaints by the Iowa Horse Association about the treatment of horses. It isn’t long until this hits the blogs, and some of the more sensational aspects of the report (though hotly disputed) goes viral. The jousting park, which had been quite profitable, is now eschewed by all the good people of the area. The daughters are forced to sell the business asset to preserve the family’s good name (or what’s left of it) and sell at a loss. While the jousting park had been worth as much as $1 million, the daughters have to sell, so there’s a “paper loss,” but nonetheless less a loss, of another $900,000.

Loss of Future Profits

The $900,000 is a conservative figure; it doesn’t include lost future profits. If not for the scandal becoming public, who knows how long the jousting park could have remained really popular and this profitable. Years? Decades? It’s quite difficult to quantify, but it’s certainly probable that there are some lost profits. The question is: how much?

Costs of Cases

Because Lear’s will wasn’t drafted by professional, there are many ambiguities and loopholes. It’s not long before the three daughters begin fighting and, with unclear direction from their father, they wind up suing each other.

Taking a court case all the way to trial can easily mean $50,000 in attorney’s fees, plus each daughter will want and need her own attorney. So, another $150,000 is lost to attorney’s fees!

Total Losses Equal?

Lear could have had his estate plan done by an Iowa professional for a few thousand dollars. Instead, he lost a total far greater than that:

  • Probate Fees: $400,000
  • Probate Court Costs: $100,000
  • Loss on Sale of Jousting Park: $900,000
  • Loss of Future Profits of Jousting Park: Incalculable?
  • Attorney’s Fees for Daughters’ Litigation $150,000

This is a hit for the inheritance of $1.55 million, leaving $8.5 million (rounded up), or a little less than $3 million per daughter. But you know what? That still leaves an inheritance of $8.5 million to be split amongst three sisters.

The Rich Can Afford Bad Estate Planning

crown silver

Lear acted unwisely, arguably recklessly! A great deal of his money was wasted that could have been used for great charitable work in Iowa through local nonprofit organizations. But, for all his foolishness, Lear’s daughters still end up with $3 million each. Will the daughters incur much suffering with “only” $3 million? No.

That’s the rub; the rich can afford to make big (and small) estate planning mistakes.

You Can’t Afford Poor Quality Estate Planning

Let’s look at this from a normal Iowan perspective. At least 2% in probate costs and fees, a huge drop in value in a key asset, attorney’s fees for litigation…can a middle-class estate merely shrug these kinds of losses off? Not a chance.

The rich aren’t like you and me. They can badly botch estate planning. You and I can’t afford to make mistakes with our estates; there’s no room (and not enough money!) for error.

Need an estate plan but aren’t sure where to start? It’s easy from start to finish. Fill out my obligation-free Estate Plan Questionnaire or contact me.

hands in huddle

Did you know that April is National Volunteer Month? Celebrate and make an impact at the same time by donating your time, energy, and skills to the causes you care most about.

However, unlike the charitable contribution deduction on federal income tax for cash and non-cash assets, the IRS does not count volunteering time as a part of that deduction. However, out-of-pocket expenses relating to volunteering are deductible.

Out-of-pocket expenses are deductible if the expenses are:

  • unreimbursed;
  • directly connected with the services;
  • expenses you had only because of the services you gave; and
  • not personal, living, or family expenses.

Out-of-pocket charitable expenses which might be deductible include the cost of transportation (including parking fees); travel expenses while you are away from home performing services for a charitable organization; unreimbursed uniforms or other related clothing worn as part of your charitable service; and supplies used in the performance of your services.

As with other donations, keep good records…documentation is key!

love your neighbor hat

If you have any questions I would love to be of assistance. (After all, the mission at Gordon Fischer Law Firm is to maximize charitable giving, which certainly includes volunteer time!) Reach out to me at any time via email or by phone (515-371-6077)

Victorian House

Your most valuable asset? Most would say their home.

Could your home benefit your favorite charity? Yes, and with a retained life estate, you can give away your house, keep the keys, and get a current tax deduction.

Under a retained life estate, the donor irrevocably deeds a personal residence or farm to charity, but retains the right to live in it for the rest of his/her life, a term of years, or a combination of the two. The term is most commonly measured by the life of the donor, or of the donor and the donor’s spouse.

When the term ends, typically when the last of one or more tenants dies, the charity can either keep the property for its own use, or sell the property and use the proceeds as designated by the donor.

Keep in mind that donating a personal residence doesn’t mean it has to be the donor’s primary residence. It can be a vacation home or any other structure the donor uses as a residence. A farm can include raw farm land, as well as farmland with buildings on it.

tractor on farmland

The blog post dives in deep to the details of what makes the retained life estate a viable and valuable charitable giving tool. If you’re a donor exploring this option, or a nonprofit leader looking for more information on how to facilitate this type of gift, read on and then contact me to discuss your individual situation.

Definitions

Again, the donor irrevocably deeds a personal residence or farm to charity, but retains the right to live in it for a certain term, such as the life or lives of individuals, term of years, or a combination of the two. At the end of the measuring term, all rights to the real estate are transferred to the charity. In this scenario, the donor is called the “life tenant,” who has a “life use” of the real estate, and is transferring a “remainder interest” to the charity. The charity is called the “charitable remainderman.”

Necessary: Detailed Gift Agreement

When a retained life estate is used for charitable purposes, for protection of both the donor and the charity, a detailed gift agreement should be worked out. Lots of legal issues should be resolved, regarding a wide variety of responsibilities, including [but hardly limited to]:

  • real estate taxes;
  • liability and casualty insurance;
  • utilities;
  • maintenance and minor repairs;
  • remodeling and major repairs;
  • process for evaluating leases and lessees, should life tenant rent farmland;
  • rights of charitable remainderman to enter and inspect farmland with proper notice given;
  • procedures for removal of the personal property of the life tenant upon the end of the tenancy; and
  • a comprehensive dispute resolution process.

Let’s address several of these items further.

Liability and casualty insurance

Presumably, a donor would want to maintain insurance. The charity may want to consider adding life estate properties to its master insurance list. Also, the charity may want the life tenant to provide the charity an annual certification that appropriate insurance is in place and that premiums have been paid.

Maintenance and repairs

The life tenant is generally responsible for expenses customarily borne by the donor of real property, such as routine maintenance. However, expenses for improvements which benefit, or even might benefit, the charitable remainderman, can and should be addressed in the gift agreement. For example, capital improvements which will last beyond the life tenant’s use of the property, such as a new barn, will benefit both the life tenant and the charitable remainderman. Again, this needs to be handled by agreement between the parties.

Repair center sign

Process for evaluating leases and lessees

The life tenant retains all “beneficial lifetime rights” in the property, which includes, for example, the ability to rent the property and receive rental income. The well-drafted gift agreement should establish responsibilities for property management and maintenance by lessees. The charity, as remainder interest owner, has a huge interest in making certain the real estate is appropriately maintained. It is therefore not uncommon in gift agreements for the charity to have a right of approval over parties who would lease the real estate, and by what terms.

Comprehensive dispute resolution process

The relationship between the donor and the charity can change over time for any number of reasons. Having an agreed-upon and formal process for resolving disputes in place from the outset, should help if issues arise. All parties should consider adding in the agreement a mandatory mediation or arbitration clause.

mediation discussion

Options for flexibility

Should there be a change, such as the life tenant no longer wanting to live in the residence, a life estate provides several options for flexibility. Let’s discuss the most common alternatives.

Joint sale

The donor and the charity can enter into a joint sale. Under a retained life estate, the real estate is owned in part by the donor and in part by the charity. Just as with any other type of joint ownership, the parties can agree together to sell and divide the proceeds.

Gift of life estate

How we live typography paper

The donor could decide to donate the life estate to the charity. In such an event, the charity would then own both the remainder value and the life estate and could sell the farmland (if applicable). The donor would receive a charitable deduction for the gift of the remainder interest.

Charitable remainder unitrust

Another alternative: the donor could contribute his/her life interest to a charitable remainder unitrust [CRUT]. Since a life interest is a valid property interest, if the donor transfers his/her entire retained ownership into the CRUT, they’ll receive a charitable deduction for a gift of appreciated property.

No pre-arranged obligations

Under these alternatives, there can be no pre-arranged binding obligation to select any one of possible options. If a binding obligation exists, the charitable deduction will be denied.

Federal income tax charitable deduction

A federal income tax deduction is permitted for the present value of the remainder interest. As with all charitable contributions, the tax deduction for gifts involving appreciated property is limited to 30 percent of the donor’s adjusted gross income [AGI]. However, any unused portion can be carried over for up to five additional years.

For gifts of a remainder interest in real estate, the donor is entitled to a charitable deduction in an amount equal to the net present value of the charitable remainder interest. The computation is performed under guidelines described in Treas. Reg. § 1.170A-12 and is based on the following factors:

  • the fair market value of the property [including improvements] on the date of transfer;
  • the fair market value of depreciable improvements attached to, or depletable resources associated with the property on the date of transfer;
  • the estimated useful life of the depreciable improvements;
  • the salvage value of the depreciable improvements at the conclusion of their useful life;
  • measuring term of the agreement [if measured by the life of one or more individuals, the date of birth of the individuals]; and
  • the Applicable Federal Midterm Rate [in effect for the month of transfer or during either of the two preceding months].

Let’s look at two additional factors:

Measuring terms

As discussed earlier, retained life estates are most commonly measured by the lifetime of one or more individuals; however, life estates can also be measured by a term of years, or by the longer of the life or lives of individuals and a term of years, etc.

If the life estate is measured by one or more lives, the individuals must be in being at the time the life estate is created. If the life estate is measured by a fixed term of years, there is no minimum or maximum term for federal tax purposes.

Applicable Federal Midterm Rate

The Applicable Federal Midterm Rate [AFR] in effect for the month of the life estate gift is used as the interest component for present value computation purposes. At the donor’s election, the AFR in effect for either of the two months preceding the life estate gift can be substituted. This is an obvious opportunity for good planning.

In short, the lower the AFR, the higher the charitable deduction. Historically speaking, then, this is a very positive time for life estates.

Cautionary note

This article is presented for informational purposes only, not as tax advice or legal advice.

All individuals, families, businesses, and farms are unique and have unique legal and tax issues. If you are considering a retained life estate you certainly should speak with a trusted legal professional. Same goes if you’re a nonprofit leader looking facilitate the gift of a retained life estate. I’m happy to help; reach out to me at any time via email (gordon@gordonfischerlawfirm.com) or by cellphone at 515-371-6077.

2019 taxes

Minneapolis, Minnesota may have the Final Four, but Iowa has such generous tax benefits for charitable gifts. In fact, in Iowa, donors can receive four amazing tax benefits for charitable gifts. Your March Madness bracket may be busted already, but these benefits are ones you can bank on.

Appreciated, long-term property

For donors and potential donors, the ideal asset for charitable donations will depend on a whole range of factors. But, when donating to charity, one type of asset to seriously consider is appreciated, long-term property. Common examples of such property would include publicly traded stock, real estate, and farmland. First, a couple of terms to be clear on:

  • Appreciated: simply means increased in value.
  • Long-term: property held for more than one year (e.g., 366 days).

Give now, rather than later

The four tax benefits I’ll outline are only available when the charitable gifts are made during a lifetime. It’s been said, “You should be giving while you are living, so you’re knowing where it’s going.” Many Iowans have philanthropic intentions to donate to their favorite causes eventually, usually at death through their estate plan, will, and testamentary trust. Why not give now? You can have more say about your charitable gifts while you are still alive, and also feel the joy that comes with helping the causes you care about most. Again, there are also lots of good tax reasons for giving now rather than later. 

fan of dollars

Benefits of gifting appreciated, long-term property

While not celebrated as much as the Final Four, there are four genuinely exciting tax benefits for charitable gifts of appreciated, long-term property. 

Double Federal Tax Benefit

When you gift appreciated, long-term property (ALTP) to a charity during lifetime, you may receive a double federal tax benefit. First, you can receive an immediate charitable deduction on your federal income tax, which is equal to the fair market value of the property. Second, assuming, of course, you have owned the property for more than one year, when you donate the property, you avoid the long-term capital gain taxes you would have owed if you sold the property.

Let’s look at a concrete example to make this clearer. Pat owns appreciated, long-term property (such as stocks, real estate, or farmland) with a fair market value of $100,000. Pat wants to use the property to help favorite causes in the local community. Which would be better for Pat–to sell the property and donate the cash, or give the property directly to favorite charities? Assume that the property was originally purchased at $20,000 (basis), Pat’s income tax rate is 35%, and the capital gains tax rate is 20%. 

ALTP table

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise your personal situation on these matters.

Again, a gift of appreciated, long-term property, made during your lifetime, is doubly beneficial. You receive a federal income tax charitable deduction equal to the fair market value of the property. You also avoid the capital gains tax. In Iowa, there is even a greater potential benefit. You may receive a 25% state tax credit for such charitable gifts, lowering the after-tax cost of your gift even further.

25% Endow Iowa Tax Credit

Under the Endow Iowa Tax Credit program, gifts during lifetime can be eligible for a 25% tax credit. There are three requirements to qualify.

  1. The gift must be given to, or receipted by, a qualified Iowa community foundation.
  2. The gift must be made to an Iowa charity.
  3. The gift must be endowed—that is, a permanent gift. Under Endow Iowa, no more than 5% of the gift can be granted each year. The rest is held by and invested by a local community foundation.

Let’s look again at the case of Pat, who is donating appreciated, long-term property per the table above. If Pat makes an Endow Iowa qualifying gift, the tax savings are very dramatic:

donating altp

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise your personal situation on these matters.

Pat gave a significant and generous gift to a charity of $100,000. But using the Endow Iowa Tax Credit, coupled with the federal income tax charitable deduction and capital gains savings, the after-tax cost of the gift of $100,000 is less than $20,000. Plus, because the gift was endowed, it will be invested by Pat’s local community foundation and will presumably grow through its investment. Thus, it will continue benefiting the charities Pat cares about most!

Note again Pat’s huge tax savings. In this scenario, by giving appreciated, long-term property during lifetime, Pat receives $35,000 as a federal charitable deduction, avoids $16,000 of capital gains taxes, and gains a $25,000 state tax credit, for a whopping total tax savings of $76,000.

Gift Tax Considerations

Yet another benefit: charitable gifts are exempt from federal gift tax. In fact, charitable contributions made to qualifying charities are not the only deductible on itemized tax returns, but you may also deduct the value of your charitable donations from any amount of gift taxes you owe.

Areas of Caution

Going back to our example, this is a great deal for Pat and a great deal for Pat’s favorite causes. But, could anything go wrong with this scenario? There are a few areas of caution.

Charitable Deduction Capped

The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of an appreciated, long-term property is limited to 50% of your adjusted gross income (AGI) to public charities and 30% of AGI to private foundations. You may, however, carry forward any unused deduction amount for an additional five years.

Endow Iowa Capped

Endow Iowa Tax Credits are also capped both statewide and per individual. Iowa sets aside a pool of money for Endow Iowa Tax Credits and it is first come, first served. In 2018, approximately $6 million in tax credits were available annually through Endow Iowa. This means it’s not only is it important to make your gift but to fill out and return your Endow Iowa application as quickly as possible. Donors who do not receive tax credits in the year the gift is made will be first in line for the new supply of the next tax year’s credits. (Here’s the 2019 Endow Iowa Tax Credit Application.)

There is also a cap on Endow Iowa tax credit per individual. Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million (if both are Iowa taxpayers). (Since the inception of the Endow Iowa Tax Credit Program, Iowa Community Foundations have leveraged more than $215 million in permanent endowment fund gifts!)

IRS Requirements for Non-Cash Gifts

Additionally, to receive a charitable deduction for non-cash gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. You need to engage the right professionals to be sure all requirements are met. A notable exception to the appraisal requirement is appreciated long-term, publicly traded stock.

Advice Needs to be Individualized

Finally, all individuals, families, businesses, and farms are unique and have unique tax issues. This article is presented for informational purposes only, not as tax advice or legal advice. Make a fast break to consult a legal professional for personal advice.


All of this can be a bit confusing as you’re working out your planned giving strategy. Do not hesitate to contact me and we can work together to maximize your tax-wise giving.

open magazine

The April 2019 issue of The Iowa Lawyer magazine is out and I’m happy to say that it includes Gordon Fischer Law Firm’s latest piece on smart charitable giving strategies and tools under the amended tax code that went into effect in 2018. Entitled “April Showers Bring…Charitable Giving Strategies Under the Revised Tax Law” the article overviews the increased federal income standard deduction and its potential impact on charitable giving. It also highlights planned giving options like donor-advised funds, the IRA charitable rollover, and Endow Iowa Tax CreditScroll to page 17 to read more.

Iowa Lawyer April 2019

Also in the Iowa State Bar Association’s publication are stories on Big Law practice in the state, Iowa’s business specialty court system, and workman’s compensation claims involving hearing loss, among others.

If you’re interested in reading GFLF’s previously published articles in past editions, click here to scan through the archives.

The #SweetSixteen is a time of celebration for teams which made the elite group. Similarly, with charitable gift annuities (CGAs), donors can experience the joy of giving to their favorite causes. But, unlike making the Sweet Sixteen, CGAs aren’t hard, they are relatively easy to understand and execute. Also unlike the Sweet Sixteen, CGA donors don’t have to be part of an elite group; all donors, regardless of income, or class, or status, can enjoy the many benefits CGAs offer.

ABCs of CGAs

A CGA is easy to understand, about as easy as a fast break lay-up. A CGA, put simply, is a contract. Specifically, a CGA is a contract in which a charity agrees to pay a fixed amount of money to one or two individuals for their lifetime(s), in return for a transfer of assets (such as, say, cash, stocks, or farmland).

A person who receives payments is called an “annuitant” or “beneficiary.” After the annuitant(s) die(s), or the term of the contract ends, the charity keeps the remainder of the gift.

Sixteen Sweet Benefits of a CGA

Before we go deep into CGAs, I’ve listed 16 key advantages of CGAs.

  1. CGAs are simple to execute.
  2. CGAs are (relatively) easy to understand and explain.
  3. CGAs avoid management responsibilities.
  4. CGAs may be executed during lifetime (called an inter vivos transfer), or by operation of a will (called a testamentary transfer).
  5. CGAs allow a donor to provide a consistent stream of income for others.
  6. CGAs pay lifetime income to one or two individuals, part of which is (most often) a return of principal and free from income tax.
  7. CGAs provide an immediate income tax charitable deduction for the donor for the gift portion.
  8. When appreciated property (such as stock or real estate) is provided to fund a CGA, and the donor is an annuitant, some of the capital gain is spread over the donor’s life expectancy, and the rest is never recognized because it is attributed to the gift portion.
  9. Depending on all the circumstances, CGAs can possibly save a donor taxes on Social Security benefits.
  10. The income payout from CGAs can begin immediately or can be deferred.
  11. The income payout from CGAs is guaranteed.
  12. The income payout from CGAs is fixed (e.g., same amount is paid each payment period).
  13. The charity’s obligation to make the income payout is backed by the general assets of the charity.
  14. For some donors, especially in today’s low-interest environment, CGAs may present an attractive alternative to CDs.
  15. In certain situations, CGAs can supplement retirement income.
  16. CGAs provide the joy of giving to your favorite causes.

basketball court with ball in hoop

Three More Points on the Scoreboard—Three Types of CGA Agreements

1. Immediate Gift Annuity

Under an immediate gift annuity, the annuitant(s) start(s) receiving payments at the start/end of the payment period immediately following the contribution. Payments can be made monthly, quarterly, semi-annually, or annually.

2. Deferred Gift Annuity

Under a deferred payment gift annuity, the annuitant(s) start(s) receiving payments at a future time, the date chosen by the donor, which must be more than one year after the date of the contribution. As with immediate gift annuities, payments can be made monthly, quarterly, semi-annually, or annually.

3. Flexible Annuity

Under a Flexible Gift Annuity (also known as a Deferred Payment Gift Annuity), the donor need not choose the payment starting date at the time of her contribution. The annuitant (who, remember, may or may not be the donor) can choose the payment starting date based on their retirement date or other considerations.

Jump Ball—Choosing Start Date of Deferred CGA

Under an immediate gift annuity, annuity payments begin no later than one year after the initial contribution.

A deferred gift annuity allows the donor to delay the start date of annuity payments. This delay will increase the annuity amount when payments begin and result in a larger income tax charitable deduction which is available in the year of the contribution (subject, as are all charitable donations, to Adjusted Gross Income (AGI) limits).

A deferred gift annuity can produce current tax savings during high-earning years while creating a supplemental retirement income. Generally, the donor sets a date for the deferred gift annuity to begin. However, the IRS approved a deferred gift annuity which did not specify a fixed starting date for the annuity payments [IRS Ltr. Rul. 9743054].

Don’t Foul Out—Charities Issuing CGAs Must Follow Certain Rules

CGAs are an exception to the general rule that charities cannot issue commercial insurance contracts. As such, charities which issue CGAs must comply with several rules. The basics of the rules may be simplified as follows:

  • The present value of the annuity must be less than 90 percent of the total value of the property transferred in exchange for the annuity. In other words, the charitable interest must be at least 10 percent.
  • The annuity cannot be payable over more than two lives, and the individual(s) must be alive at the time the gift annuity is set up.
  • The gift annuity agreement cannot specify a guaranteed minimum, nor a maximum, number of annuity payments.
  • The actual income produced by the property transferred in exchange for the gift annuity cannot affect the amount of the annuity payments.

Four Point Play—Tax Advantages

In basketball, a four-point play is a rare occasion when a player makes a three-point shot while being fouled. Similarly, it is rare for a charitable gift to offer four potential tax advantages to donors, as the CGA does. The CGA can have a positive effect on the donor’s charitable deductions, income taxes, capital gains taxes, and gift taxes.

slam dunk with a basketballFederal Income Tax Charitable Deduction

A CGA is considered part gift and part sale, as the donor contributes property in exchange for annuity payments from the charity. The donor who itemizes deductions on her taxes may take an income tax charitable deduction for the gift portion (i.e., the value of the transferred property minus the present value of the annuity).

This income tax charitable deduction is subject to the same limits as an outright gift of cash or property. For example, if cash is transferred for the CGA, the limitation of the deduction is 50 percent of the donor’s AGI. Or, if long-term capital gain property is transferred the limitation is 30 percent of AGI. Any deduction in excess of the applicable percentage limitation may be carried forward for five years.

Taxation of Payouts

The annuity payments by the charity under a CGA are treated for income tax purposes as follows:

  1. Tax-free return of principal
  2. Long-term capital gain
  3. Ordinary income

Let’s break each of these categories down.

Tax-Free Return of Principal

A portion of each payment received by the donor, or another annuitant, is a tax-free return of principal until the cost of the annuity is fully recovered when the annuitant reaches life expectancy. Put another way, a portion of the payments is considered to be a partial tax-free return of the donor’s gift, which are spread in equal payments over the life expectancy of the annuitant(s).

The assumed cost of the annuity does not include the gift portion of the transaction. The donor’s cost basis must be allocated between the gift and sale portions in accordance with the respective proportions of the value of the property transferred.

Long-Term Capital Gain

When a taxpayer sells long-term, appreciated property, such as stocks or real estate, she generally pays capital gains on the appreciation. If long-term, appreciated property funds a CGA, a portion of each payment will be taxed as long-term capital gain. This will reduce the income tax-free return of the principal portion of the annuity payments.

Under general tax rules, long-term capital gain is recognized in the year the property is sold. Capital gain is recognized only on the sale portion of the transaction and with the basis allocation previously described. However, with a CGA, the donor may spread the gain over life expectancy, assuming either a sole annuitant or the donor has another individual named as a survivor annuitant. It’s obviously beneficial for a donor to be able to defer capital gains taxes.

Ordinary Income

After the capital gain and tax-free portions of the annuity payment have been determined, the balance of the payment will be taxed as ordinary income.

Gift and Estate Taxation

If the donor is the sole annuitant, there are no gift or estate tax issues because both the annuity is her own and the annuity terminates at death. If the donor names anyone other than herself as an annuitant, gift and estate tax issues may arise.

Regarding the gift tax, if the donor names another person as an annuitant, the gift is the value of the annuity. An exception exists for a spouse under the gift tax marital deduction. Another alternative to avoid gift tax: the donor could retain the right to revoke when the named annuitant has a survivor interest.

Regarding the estate tax, if the donor names another person as an annuitant, the remaining value in the annuity is considered part of the donor’s estate. An exception exists for a joint annuity using only the donor’s life as the measuring life. Of course, there is also an estate tax marital deduction available if surviving annuitant is a spouse.

Low-Interest Rates = Higher Tax-Free Income

The Applicable Federal Rate (AFR) selection decision is more nuanced for gift annuities than for other planned gift tools. A donor who wants to maximize their deduction will select the highest rate available, but this reduces the overall value of the annuity and increases the amount of the charitable gift. Conversely, a donor who wants to maximize the income tax-free portion of the annuity payments will select the lowest available rate.

When the Clock Runs Out—Testamentary CGAs

If carefully planned, it is possible to arrange a CGA through a will. The IRS approved a testamentary gift annuity in Ltr. Rul. 8506089. It is crucial that both the bequest amount and annuity payout are made clear by the terms of the will.

A donor should engage an expert estate planning expert to handle the careful drafting needed for a testamentary CGA. A donor, together with his estate plan professional, should address two issues:

  1. What if the designated annuitant(s) predecease(s) the testator? (The testator is the person who makes the will).

The donor may want to specify a contingent annuitant or provide for an outright bequest to the charity.

2.    What about the payout rate?

The donor could (or should) leave the charity some flexibility in the payout rate, to assure the 10 percent minimum charitable interest requirement can be met in the future.

Winning Point

Donors and nonprofits can both score big with CGAs and this charitable tool can be a slam dunk for all parties!


The mission of Gordon Fischer Law Firm, P.C. is to promote and maximize charitable giving in Iowa. I offer training on complex gifts, like CGAs, for nonprofit boards, staff, and stakeholders. Contact me for a free one-hour consultation; I can always be reached at Gordon@gordonfischerlawfirm.com or at 515-371-6077.

charitable contribution money

Spring ushers in so many great things: baseball season, blooming flowers, and baby animals. But, it also brings tax season (which can be a metaphorical rain cloud or rainbow depending on your personal situation). The Tax Cuts and Jobs Act, passed at the end of 2017, ushered in many federal changes that affect both estate planning and charitable giving. I’ve blogged about many of the provisions that can impact your estate planning (and why you should definitely review any existing estate plan), but what about some of the aspects of the new tax law that impact charitable giving? Because we’re not all tax attorneys or CPAs, let’s take this piece by piece and first explore the charitable deduction limitation increase for cash gifts and how it differs under federal and state law.

Differences Between Federal and State Tax Laws

While federal law has made several modifications, Iowa has not conformed to most of the recent changes to the charitable contribution deduction for state tax purposes. Quite obviously, this can cause confusion when strategically calculating planned giving.

Under federal tax law, the charitable deduction limitation, specifically for cash contributions to certain public charities and private foundations, has increased from 50% to 60% of an individual’s adjusted gross income (AGI) for the year.

This increase does not apply for Iowa tax purposes, however. If an individual’s federal deduction for cash contributions to qualifying public charities and public foundations exceeds 50% of the taxpayer’s AGI for the year, the individual must recalculate the charitable deduction to apply the 50% limitation for Iowa purposes.

If this is still a bit confusing, fear not. We can work out a plan so that you can meet your charitable giving goals in a tax-beneficial way for the tax years moving forward. I offer a free, no-obligation consult, so don’t hesitate to contact me.

four leaf clover

In the spirit of St. Patrick’s Day, pour yourself a pint and read up on some simple, yet smart, charitable giving strategies. Whether you want to support the great work of an Oscar Wilde literary foundation or an Irish heritage association, tools and benefits that align with your charitable giving goals can help to stretch your green and make a difference in the causes you care about.

Top O’ the Morning Giving: Now Rather than Later

It’s been said, “you should be giving while you are living, so you’re knowing where it’s going,” so let’s explore a few options in the case of a hypothetical Irish Iowan, Sinead O’Sullivan.

Sinead O’Sullivan intends to donate to charity eventually, at death through her will and estate plan. But why not give now? Sinead can have more say about the use of gifts while she’s alive, and also feel the joy that comes with helping worthy causes. There are also positive tax benefits for Sinead to give now rather than later. Let’s look at these potential positive tax benefits.

green beer

Faith and Begorrah: Double Federal Tax Benefit!

Gifts of long-term capital assets, such as stock, real estate, and farmland (where leprechauns may live!), can receive a double federal tax benefit.

First, Sinead can receive an immediate charitable deduction off federal income tax, equal to the fair market value of the stock, real estate, or farmland. Even with the increased standard deduction under the Tax Cuts and Jobs Act, this is still a valuable consideration give the value of charitable donation would exceed the standard deduction. (It would be especially beneficially if Sinead is considering “bunching” as a tax saving strategy.)

Second, assuming Sinead owned the asset for more than one year when the asset is donated, Sinead can avoid the long-term capital gain taxes which would have been owed if the asset was sold.

Guinness door

Let’s look at a concrete example to make this clearer. Sinead owns shares of publicly-traded stock in Diageo (Guinness‘ parent producer and distributor company), with a fair market value of $100,000. She wants her stock to help her favorite causes. Which would be better for Sinead (a single taxpayer) to do—sell the stock and donate the cash, or give the stock directly to her favorite charities? Assume the stock was originally purchased at $20,000 (basis), Sinead’s federal income tax rate is 37%, and her capital gains tax rate is 16%.

Donating cash versus donating long-term capital gain assets  Donating cash proceeds after sale of stock Donating stock
Value of gift $100,000 $100,000
Federal income tax charitable deduction ($37,000) ($37,000)
Federal capital gains tax savings $0 ($16,000)
Out-of-pocket cost of gift $63,000 $47,000

NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.

Again, a gift of long-term capital assets, such as stocks, real estate, or farmland, made during lifetime, can be doubly beneficial. Sinead can receive a federal income tax charitable deduction equal to the fair market value of the asset and also avoid capital gains tax.

In Iowa, however, there is an even more potential tax benefit.

Saints Preserve Us: 25% Iowa Tax Credit

Under the Endow Iowa Tax Credit program, gifts made during lifetime can be eligible for a 25% tax credit. There are only three requirements to qualify.

  1. The gift must be given to, or receipted by, a qualified Iowa community foundation (there’s a local community foundation near you).
  2. The gift must be made to an Iowa charity.
  3. The gift must be endowed – that is, a permanent gift. Under Endow Iowa, no more than 5% of the gift can be granted each year – the rest is held by, and invested by, your local community foundation.

Let’s look again at the case of Sinead, who is donating stock per the table above. If Sinead makes an Endow Iowa qualifying gift, the tax savings are very dramatic. There are potentially huge tax benefits of donating long-term capital gain assets, such as stocks, real estate, and farmland while claiming the Endow Iowa Tax Credit:

Value of gift $100,000
Federal income tax charitable deduction ($37,000)
Federal capital gains tax savings ($16,000)
Endow Iowa Tax Credit ($25,000)
Out-of-pocket cost of gift $22,000

NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.

Put another way, Sinead made a gift of $100,000 to her favorite charity, but the out-of-pocket cost of the gift to her was less than $25,000.

This is a great deal for Sinead and a great deal for Sinead’s favorite tax-exempt organizations. But, to be a smart donor you must also of course consider the potential areas of caution as well as the benefits.

Cautionary Ballads

The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of stock, real estate, and farmland is limited to 30% of adjusted gross income. A taxpayer may, however, carry forward any unused deduction amount for an additional five years.

Additionally, records are required to obtain a federal income tax charitable deduction. The more the charitable deduction, the more detailed the recording requirements. For example, to receive a charitable deduction for certain gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. It’s a wise idea to engage the right financial and legal professionals to be sure all requirements are met.

Endow Iowa Tax Credits are also capped – both statewide and per individual. Iowa sets aside a pool of money for Endow Iowa Tax Credits, and it’s available on a first-come, first-serve basis. Submitting an application at the beginning of the tax year is advised, as tax credits often run out toward year’s end. In fact, this year approximately $6 million in tax credits were awarded and there are no more available credits to be granted. However, you can submit your application to be placed on the waitlist for 2020 tax credits.

Endow Iowa also has a cap per individual. Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million.

Finally, all individuals, families, businesses, and farms are unique and have unique tax issues.  This article is presented for informational purposes only, not as tax advice or legal advice. Consult your own professional for personal advice.

Sláinte!

rainbow

Our case study subject, Sinead, found the pot o’ gold at the end of the charitable giving rainbow by working with a qualified attorney who specializes in complex donations. You may not be in the same tax bracket as Sinead or have stocks valued at the same rate, but regardless, I would recommend to all donors with large gifts (especially assets of the non-cash variety). Want to discuss your giving goals and options for long-term capital assets? I offer a free consult to all, so don’t hesitate to contact me.

women talking about philanthropy

March is Women’s History Month and to celebrate, I’d like to highlight just a few of the many women who have made their mark on history by practicing smart, impactful charitable giving. Undoubtedly these women believe in advancing philanthropy through “walking the walk” and moving the needle forward on what the modern philanthropy looks like. No longer is philanthropy limited to signing a big check, today’s do-gooders are creative, dedicated, and using social entrepreneurship to draw attention to pressing concerns of the world.

Melinda Gates

Gates, who has received her MBA from Duke, co-founded the Bill & Melinda Gates Foundation in 2000 with her husband. The couple has donated more than $36 billion to different charitable initiatives! Gates has been integral in expanding the reach of the foundation to include areas of focus ranging from global education to developing preventive measures and treatments for life-threatening illnesses, like malaria, tuberculosis, and HIV/AIDS. At the helm of the Foundation, Gates has persistently worked to combat global poverty and has raised awareness about important issues that demand practical solutions like “time poverty.”

Oprah Winfrey

No surprises here! The benevolent media mogul has given hundreds of millions to educational causes (including establishing the Oprah Winfrey Leadership Academy for Girls), endowed her own charitable foundation, and has supported a wide range of other charities ranging in fields from environmental, to arts and culture, to humanitarian. Oprah also regularly uses her platform of fame to encourage her fans/viewers to support charities they care about.

Sara Blakely

Youngest self-made female billionaire and founder of Spanx, Blakely was an early signer of the Giving Pledge, a call to action by founders Bill Gates and Warren Buffett encouraging billionaires to donate at least half of their wealth to charity. Additionally, her company’s foundation supports programs designed to empower underserved women and girls through education, entrepreneurship, and the arts.

Dr. Marilyn Simmons

Simons is president of the Simons Foundation. With a Ph.D. in economics, Simmons was uniquely poised to grow the 1994-established private foundation into a leading funder for math and scientific research.

Dr. Priscilla Chan

As a pediatrician, Chan has incorporated her medical training into the charitable and 501(c)(4) arms of the Chan Zuckerberg Initiative, which operates with ambitious goals such as “to cure, prevent or manage all disease in the next generation’s lifetime.” Also, in 2016, Chan founded The Primary School, a private, nonprofit school in East Palo Alto, California that offers both a high-quality education and healthcare services.


Inspired yet to make your mark and leave a lasting legacy? Of course, this is just a short list. This blog post could go on for days if we let it, as so many women are power players when it comes to charitable collaboration and effective resource management.

Believe me, you don’t need to be wealthy to make a difference and maximize what you can/want to give to your favorite causes and nonprofit organizations. Contact me to discuss strategies that are unique/work for you.