Are there good assets and bad assets in your estate? – Henry & Associates

Are You Trapped with Retirement Plan Assets?

 

“Give my stuff to charity!  What kind of crazy estate plan is that?”  That’s a typical response when clients ask about ways to eliminate unnecessary estate taxes and are told to make gifts.  It’s an understandable reaction.  It’s also not intuitively obvious how giving away something the client needs can be a good thing, especially if the potential donor was raised during the Depression.  The epiphany comes when clients look at the choices they have for assets not consumed to support their lifestyle; those remaining assets can only go to children, charity or Congress.  Once the options are explored, many people make an informed decision to pass property to heirs and other assets to charities that either had or will have some impact on their family’s life.  How can they be smarter making that decision?

 

Good assets and bad assets.

Actually, most people don’t see much difference between the two, as any inherited asset ought to be a good asset, right?  Well, some inherited assets come with an accompanying income tax bill, even in estates too small for an estate tax.  Who’s at risk?  Many professionals and retirees have worked a lifetime and have accumulated a significant 401(k), 403(b) or an IRA and don’t realize that their heirs will not receive the full value of that account.

 

Option #1.  As it turns out, giving heirs all the assets that can be legally excluded from tax and leaving the rest of the estate to charity works if (and it’s a big if) tax avoidance and philanthropy are the only goals.  It’s a simple, easy to understand process with no need for expensive tax planning or specialized legal advice.  While this technique might shortchange family heirs, it is an ideal solution for charitably motivated families.  However, even if the family has an altruistic desire to make a charitable gift, there’s no reason it can’t be done in a tax efficient manner.  How so?  Make those charitable bequests with assets that otherwise would be taxed twice.  For example, in 2002 and 2003 anything in excess of $1,000,000 is subject to a federal estate tax.  A simple estate plan would sweep anything above that level to charity.  A better plan would be to give away those assets on which an added income tax is owed.  What qualifies?  Use those “income in respect of a decedent” (IRD) assets.  Start with an IRA, a retirement plan account, a deferred annuity, savings bonds and don’t forget earned, but uncollected professional fees; these are all unattractive and taxable assets for your heirs.  Instead, a bequest made from that donated IRA means a charity receiving $100,000 collects the whole value without paying any tax.  In the traditional estate plan, children might be penalized 75 or 80 percent if they inherited those IRD and tax-deferred dollars.  Better to let family heirs inherit assets that “step up” in basis, so if they’re sold later, there won’t be much of an income tax due.  This proactive approach is more tax efficient, as the charity receives more, the heirs get to keep more and the IRS gets zilch.

 

Option #2.  With the latest rules on required minimum distributions, many financial planners propose “stretch IRA” programs and make a good case for their use.  Unfortunately, for all the planning that goes into them, few heirs leave the plans alone long enough for the stretch to do any good.  For owners of significant retirement plans, naming a charitable remainder trust as beneficiary might make better financial sense.  While there’s usually no charitable income tax deduction, there’s often a significant estate tax deduction and this charitable roll-over still ensures a steady income stream for a surviving spouse that’s not going to be subject to required distributions that erode the value of the asset.  For older heirs, a CRT funded with IRD assets might be an ideal solution to eventually convert an ordinary income pump to an income stream taxed at capital gains rates.

 

The problem is that without changes in beneficiary designations or specific language in the Will, the estate can’t make charitable gifts of income.  Bequests are normally made from principal unless there has been a proactive decision to give away tax liabilities.  Seek guidance from competent professional advisors to make sure these gifts are properly implemented, and do it now.

 

 

A good plan deals with concerns beyond tax efficiency; it must also meet the needs of the family.  For instance, will the plan provide for proper management by underage or unprepared heirs?  Has it been decided if there’s an upper limit on what heirs could or should receive?  What does the concept of money mean to the client?  How much is too much?  Could an inheritance provide a disincentive to work and succeed?  Does the plan try to pass assets to all heirs equally, or have past gifts and interactions been considered in an effort to be equitable?  Since there’s more to a legacy than just money, the estate plan should include passing down a family’s value system and influence.  How have the family’s core values been addressed in the master plan?    The problem is that few professional advisors like to deal with such intimate and personal questions.  Most tax and estate planners spend years honing their analytical skills only to find that clients don’t create and implement estate plans for purely logical reasons.  Instead, there’s an overriding emotional motivation that’s often unsolicited in discussions with client.  The problem is that even an elegant estate plan that does everything it’s supposed to accomplish won’t be well received if the family doesn’t understand and agree with its goals.  As a result, there’s paralysis by analysis, and nothing gets accomplished until both the logical and emotional needs for family continuity planning occur.  Rather than try to plan an estate on an asset-by-asset basis, take a big picture view of the family’s goals and values and see how the planning can be made to meet those needs.	Subscribe to Henry & Associate   Gift and Estate Planning Discussions Want to be kept up to date   on CRT planning issues? Join our mailing list!     Check our Trust and Planning Archive Hosted by Henry & Associates	Subscribe to Henry & Associate   Gift and Estate Planning Discussions Want to be kept up to date   on CRT planning issues? Join our mailing list!			Check our Trust and Planning Archive	Hosted by Henry & Associates
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