Generation X and Planned Giving

The Case for the Generation-X’ers

 “Planned giving is not an option for young accumulators.” Have you heard that? Don’t believe that all young people are mostly concerned with acquiring the newest and latest gadgets to the exclusion of something they strongly believe in and are willing to financially support. Case in point, Jennifer (30) and Jason (30) Williams are a proactive couple with a new child. Married less than 5 years, both are professionally employed with well-paying jobs providing competitive benefits packages. Besides their home and vehicles, they have already topped out in their retirement plan contributions and own a small parcel of investment property for which they paid just $7,500 a few years ago. Now they find that their suburban community is encroaching on their undeveloped land, and the fair market value has risen accordingly. Even with the reduction in federal capital gains rates, they are unwilling to sell the land and lose control of a significant part of the sale proceeds. These losses include federal, state and city income taxes, and so they researched the use of an IRC §664 Trust to shelter the capital gains inherent in the sale of their property. Already supporting their local church, Jennifer feels like they are charitably inclined, although they both profess to be averse to unnecessary taxes and are concerned about future income security.

Jennifer was initially supportive of assets eventually going to their church, but was reluctant to contribute 100% of their real estate to an irrevocable trust, citing college funding concerns for their daughter, Jamie. Jason, on the other hand, argued that the tax savings would offset costs, and they could afford additional savings for future college expenses. Their financial advisor suggested a CRUT be set up as a “spigot trust” or NIMCRUT allowing them some latitude in distributing income when they need it for college and retirement expenses down the road. It was also suggested to compromise and only contribute 6 of the 71/2 acres to the CRT, retaining a portion outside the trust to be sold in a recombined unit to the new buyer. In this way, the Williams get their “seed money” back to reinvest in other property, and the tax deduction generated by the contribution of the remaining acreage to their CRT would offset this taxable sale.

The only stumbling block to this scenario was the recently enacted TRA 1997 – Section 1089 which now mandates a 10% remainder interest inside a CRT. Prior to July 28, 1997, a 5% CRUT for Jennifer and Jason’s joint lives would have been easily done. Now, they are prevented from using such planning tools because of their age and the inability to take a low enough income payout to qualify their charitable trust under the new law. Although they could have opted for a qualifying term of years trust, the maximum allowed is only 20 years and that did not meet their needs for an income stream as they approached retirement. What eventually worked was a one-life NIMCRUT based on just Jennifer’s life expectancy. The rationale was that as the slightly younger and female spouse, she would probably outlive Jason and the income stream would be effectively available for both their lives. To protect Jason’s future income interest in his wife’s trust, which would terminate with her premature death, he chose to insure her life to at least make sure that he wouldn’t give up all potential income from the jointly contributed property. Since they needed insurance on Jennifer’s life anyway to address survivor income for their child, they felt like this compromise solved the problems as well as could be expected under the new law and still provided for their security In the final analysis, they were able to increase spendable income, reduce unnecessary taxes and pass more total assets to heirs in ways that met their financial planning needs for both security and control. Have a similar case? Call us.

End of the Year Estate Planning – Vaughn Henry & Associates

End of Year Planning Options

Vaughn W. Henry

 Even with the stock market’s hiccups, many people have seen their investment portfolios, land values and business interests steadily increase in value. Why is this a problem? More and more of the middle class are coming under the scrutiny of the IRS estate tax auditors, and families may be forced to pay taxes at rates in excess of 80% because of poor planning.

Inflation is a subtle process. Don’t think so? Well, remember your first house? Did it cost less than your last car? For most of you, it did, and this is one cause of the problem. So what are some of the available solutions? Besides sophisticated tax planning, there are some simple tools to squeeze, freeze and pass an estate to heirs, if you move forward now. Why now? The problems generally get worse by waiting and options more limited, so almost everyone with an estate, and for sure those in excess of $900,000 should look at potential tools and be familiar enough with them to react if the estate gets near the $1 million federal threshhold. Also, there is a planning window that may close if a fickle Congress feels that too much revenue is slipping through the cracks. So complete your plan while the rules are favorable.

Gifts to Charities

A simple planning process is to just sweep everything in excess of the estate tax exclusions to charity. If done properly, you can even give charities your income tax problems at death by naming them to receive retirement plan proceeds, since your heirs would have a significant income tax if they received them instead. Highly appreciated assets are often given to charities as a way to be more tax efficient since the capital gains are never realized and the charities can convert the gift to cash without paying tax. If a donor sells the asset and gives the cash, then there is an unnecessary tax paid to be charitable. Transfer old insurance policies directly to charity if there’s no estate liquidity needs. Charitable remainder and lead trusts, gift annuities and life estates are legal and ethical tools to meet financial security needs and benefit charity while still providing estate tax relief. With tax efficient wealth replacement vehicles, the family will not be short-changed if giving away wealth is a concern. Some of these tools require expert guidance, and few advisors understand them well, so it makes sense to use a team approach to solve planning problems.

Gifts to Heirs

Your estate can limit growth by making gifts to heirs now. Gifts to heirs are still limited to $11,000 per donor per recipient, and married couples can agree to join to make a tax-free gift of $22,000 of value. Where a lot of family members go off the approved IRS track is that they believe there is an exception to this rule when providing gifts at Christmas, Hanukkah, weddings, graduations and birthdays. There isn’t. Also, if you write a check to your child for college tuition and expenses, you may have given your child a taxable gift. For most families, expensive gifts are not likely to produce estate and gift tax problems because they are counted against what used to be called the “Unified Credit”, now called the Applicable Exclusion Amount. From 1987 – 1997 the value was limited to $600,000 and the amount free of tax crept up to a heady $1,000,000 in 2002. So it is unlikely that many American families will be exposed to the estate tax since they won’t transfer more than that total amount of exempt wealth either while alive as outright gifts or at death as an inheritance. However, middle class families with increasing portfolio values in family businesses, farms, expected inheritances and large insurance or retirement plans will more frequently slide into a tax trap once reserved for the ultra wealthy. If they only know what most families of wealth knew, namely that estate taxes are paid only if you fail to plan. The estate and gift tax is a straight-forward tax that is easy to avoid if you start early and make good choices about your planning options.

As the end of the year rolls closer, take a look and see if this introductory checklist of estate planning actions makes sense, and set up a time to review them with your professional advisors:

1. Review your current will and trusts. With recent tax law changes, almost all tax planning wills and trusts are now out of date. If estate tax planning isn’t a factor, make sure your trustee and successor trustee designations are accurate.
2. Is your Durable Power of Attorney current? Is there an updated living will on file with family members and health care providers? Have funeral arrangements and decisions on anatomical gifts been discussed with family?
3. Inventory and make a written record of contents of any safe deposit box with a trusted family member, remove will and codicils, trust instruments, insurance policies on your life, burial instructions, cemetery plot deeds and any property which does not belong to you. File them elsewhere.
4. Review and update your life insurance policy and retirement plan beneficiary and contingent (back-up) designations and settlement provisions. If you have a taxable estate, have you considered shifting ownership of your life insurance to a trust or to your heirs?
5. Have you gone down to your bank and named designated heirs to receive account proceeds at your death? Generally, naming them as “joint owners” is too risky and it doesn’t solve tax problems; instead, consider using a “Payable on Death” (POD) designation to redirect the account without unnecessary probate problems. This still doesn’t solve tax problems, but at least it’s uncomplicated and a functional way to see that the account isn’t tied up needlessly.
6. Review, and if necessary, revise existing business buy-sell agreements; prepare agreements if there are none; re-value purchase price under those agreements that require periodic review. Buy-sell agreements are critical to preserve the value of a family business and provide liquidity at a time when family members are often too distracted to make sound business judgments. Do you have the necessary liquidity, and if not, are you insurable?
7. Should annual exclusion gifts be made to your heirs? Remember, gifts of appreciated assets pass at your tax basis, so there may be an income tax due if the asset is eventually sold by your heirs. However, the $11,000 annual exclusion gifts are one of the few meaningful tools to reduce the value of an appreciating estate and it’s a shame so few families use it correctly. If you write checks to heirs, make sure they’re issued far enough ahead of time so they will be cashed before the end of the year.
8. If there are family medical or educational expenses to be paid, make any checks payable directly to the institution, not to the individual. This action allows you to also make their $11,000 gifts without creating an unnecessary tax.

Not all year end tax planning is estate oriented, sometimes there are good reasons to act and save on income taxes too.

• Maximize your IRA, or if you have a pension then defer additional salary as many employers make a matching contribution to their plans; those extra deferrals may also increase your employer’s contribution.
• Make charitable contributions before December 31. Remember, the deduction is usually recognized on the date the charity receives the gift, not the date on the check.
• Defer income, if you have the option of recognizing it next year.
• Prepay deductible expenses, make an added mortgage payment or prepay your property tax. Bunch up your medical expenses (maybe it makes sense to get elective procedures, eyeglasses or dental work done now) to itemize every other year. Consider taking the standard exemption one year and then push two year’s charitable and any medical deductions into the alternate year.
• Offset your capital gains with losses, as volatile as the market is many portfolios will have both. You may be able to offset other passive income up to $3,000 and those gains will be tax-free when you match up losses as the portfolio is rebalanced.

Tax planning is a complex process, and you should seek qualified advice to make the best choices about the control of your estate. Craft a plan, review it annually and exercise your own options. For more information, check our Internet web-sites for free articles and software, starting at –gift-estate.com

Henry & Associates

CONTACT US FOR A FREE PRELIMINARY CASE STUDY FOR YOUR OWN CRT SCENARIO

A Wash CRT

A “Wash CRT”

Some donors want to maximize their donations so there can be a nearly equal charitable tax deduction to offset the capital gains in a taxable sale. The following is an example of the math needed to create such a Charitable Remainder Trust(CRT).

For math wizards who will check the algebra and need some confirmation, a $617,491.40 contribution to a two life 5% CRUT generates a 36.532% deduction of $225,581.96. At the donor’s 39% tax bracket, that saves the donor $87,976.96 in tax payments. With a 23% capital gains tax rate, a $382,508.60 taxable sale requires $87,976.98 to offset that tax liability. The difference between the two numbers is due to rounding errors, but it provides a framework in the design process.

Take Charge – Avoid Planning Pitfalls – Vaughn Henry & Associates

Take Charge – Avoid Planning Pitfalls

Vaughn W. Henry © 1999

“Over and over again, the courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor, and all do right for nobody owes any duty to pay more tax than the law demands. Taxes are enforced exactions, not voluntary contributions.” — Judge Learned Hand, 1934

f you adopt this philosophy-and most reasonable people do, consider this. With income tax, you get a chance every year to make sure you’re arranging your affairs the way you want them. But you only get one chance with estate taxes-and that chance is your estate plan.

veryone should have a plan that conserves and distributes assets, provides income for survivors, and prevents unnecessary payment of excessive tax or transfer costs. A carefully crafted estate plan even offers you an opportunity to pass down something along with your property; that is, your system of values.

ot only should you have this kind of plan-you can. This isn’t just an abstract, unachievable goal; it’s a real possibility. But it doesn’t always happen that way. When we examine why, we find the reasons fall into two general categories. Both professional advisors and their clients bear some of the responsibility when estate plans fail to achieve their ideal objectives.

What? Me? A Client?

he alarming fact is many clients don’t even realize they need estate-planning help. They fail to recognize that their assets have appreciated to the point where estate taxes are a concern. They don’t realize that the combined value of appreciated real estate, a retirement plan, insurance proceeds, ownership interest in a family business, and other assets pushes their net worth beyond the limits of the current $650,000 estate tax exemption-if they even realize such an exemption exists. So they never become clients-or become clients too late in the game to take advantage of all available options.

“Estate taxes are the government’s way of making up for all the cheating you did on income taxes.”— Will Rogers

onsider the classic example of the midwestern farmer. Over the years he has heeded his advisors’ advice. He has deferred income-and consequently, income tax–by not selling product, prepaying for supplies, trading in equipment and upgrading without selling. He has lived poor-but he’s going to die rich. And as his assets balloon in value, so does the potential for estate tax liabilities. Still other clients recognize they have estate tax liabilities-but allow a “paralysis by analysis” mentality to set in, which prevents them from making the decisions they need to make to set a plan in motion. Even the best plan is bound to fail without if no one follows it through.

Advice for Advisors

rofessional advisors have an obligation to educate clients-to offer them estate-planning options they may not know are available to them. But too often, these advisors make invalid assumptions. Some-like an attorney I met recently who advises farmers in an area where farm land routinely sells for $3,000 to $4,000 an acre–assume their clients aren’t wealthy enough to have estate tax liabilities. Guess again.

ome advisors even assume their clients don’t mind paying estate taxes so long as heirs receive significant assets and all taxes and fees are paid.

ome take a reactive rather than a proactive position with their clients. Adopting the attitude that “the customer is always right,” they give their clients precisely what they ask for. The result is that clients are limited in their options by their own knowledge.

nd some are simply ill equipped to advise their clients effectively. As general practitioners, they haven’t the time or inclination to keep up with subtle changes in estate tax law. They lack the technical expertise to craft anything but a “cookie cutter” plan.

Now for the good news.

here are several tools available to minimize or even eliminate estate and gift taxes entirely. You won’t learn about them in any government pamphlet. But qualified advisors can show you how to legally and ethically disinherit the IRS, while addressing common concerns like providing for disabled dependents, managing assets for minor children, and charitable giving.

ncreasingly popular are plans that decide in advance, what percentage of the estate will pass to children, charity, and the government. Anyone with appreciated assets might be well advised to look into a §664 Charitable Remainder Trust (CRT) plan. The Charitable Remainder Trust offers many advantages, including life-time income security, reduced income and estate taxes, plus the opportunity to direct family wealth according to their own values.

haritable Remainder Trust planning is a highly specialized field that encompasses both estate and wealth preservation planning. These trusts are complex in design-certainly not a do-it-yourself project. And they’re not the best strategy for everyone.

n fact, there’s no such thing as a one-size-fits-all estate plan. The most successful plans are drafted by a team of qualified advisors-a team that takes the “big picture” into consideration and offers you a range of flexible strategies. With forethought and early planning, your estate plan can help you achieve your financial, familial and philanthropic objectives.

For more articles and case studies, go to https://gift-estate.com

Planned Gifts Don’t Have to be Deferred – Vaughn W. Henry & Associates

Planned Doesn’t Always Mean Deferred

One of the biggest stumbling blocks planned giving officers have with their supervisors and other development staff is the long-term nature of a “planned gift”.  By definition, a planned gift is often tied to a donor’s estate or financial plan and implies a long wait.  As a result, many nonprofit organizations don’t solicit for charitable trusts and bequests because of design complexity and the length of time needed before the deferred gift “matures”.  For fundraisers used to working one on one with a donor’s annual gifts in support of charitable programs, most remain wary about jumping into a complex and hard to understand planned giving effort.  Besides needing to understand business succession, income and estate tax concepts, a more sophisticated gift forces planned giving officers to deal with the donor and all of the for-profit advisors who have to sign off on their client’s convoluted plan.

To counter the impression that a planned gift only helps a charity at the end of a long wait, look at the case study of George and Ruby Johnson.  It is illustrative of the flexibility in a well-designed gift, as it helps both the donor and the nonprofit organization.  George has accumulated some stock and real estate in his portfolio and uses the dividends from $500,000 worth of stock in his electronics company to pay the $25,000 annual fees for his vacation home.  However, since his son has taken over the reins of the business, the dividends from his stock have been reduced as revenue has been reinvested in upgrading the company’s technology.  Seeking a reliable source of funding for his golfing excursions, George approached the planned giving officer at his alma mater about “one of those CRT things” they had previously discussed.  George proposed a simple 5% CRAT funded with his stock that would generate the cash flow needed, but the planned giving officer offered a different plan.  While the traditional 5% CRAT was prized, it wasn’t as appealing to the college’s foundation, already in the middle of a large capital campaign, as a current gift.  The experienced development officer knew that George just needed something that generated $25,000 a year, so he suggested the plan be modified to pay 6.25% from a $400,000 CRAT.  That produced a $25,000 annual distribution and the remaining $100,000 could then be used to fund an immediate capital campaign gift.  The $288,360 charitable income tax deductions generated by both approaches are equal; the difference is that the foundation receives a portion of the planned gift now, rather than waiting for the CRAT to mature when George and Ruby pass away.

A new development officer needs to recognize planning opportunities, e.g., when the donor sells appreciated assets, has a need to diversify; or receives an inheritance, significant retirement assets or stock options.  Knowing when a tool is useful makes it more likely it be used when really needed, and the proper tool that solves a donor’s problem is less likely to be derailed by the donor’s financial and tax advisors.  Cultivate this ability to help the donors, and more tax efficient gifts will follow.

CONTACT US FOR A FREE PRELIMINARY CASE STUDY FOR YOUR OWN CRT SCENARIO

Successful Transitions in Family Corporations

Keith Roth (74) has a closely-held corporation which has been involved in processing snack foods and distributing soft drinks for the last 42 years. Now he’s trying to figure out how to retire and leave his two sons, Jerry (41) and Robert (46) in positions of ownership. Like most family owned businesses, Keith has reinvested most of the income his growing business has generated in capital improvements and development. Unfortunately, he didn’t start any sort of a retirement plan until just a few years ago and counted on the business to continue producing income. Now that he has two heirs in line to take over the business, he wants to travel and enjoy the fruits of his labors with his wife of 45 years while they’re both healthy. Like many start-up corporations, he deferred taking salary until the corporation became profitable. Once the business got off the ground, Keith took significant salary and bonuses, but the IRS soon came along and threatened penalties for excessive compensation. Naturally, the IRS wanted those dollars distributed out as taxable dividends instead of compensation, so Keith deferred additional salary and reinvested back in his business. A few years later, the IRS came back and wanted to know about retained earnings and tried to assess penalties for not distributing the doubly taxed dividends again. Because of planned plant expansion, Keith was able to avoid the 50% penalty, but the family corporation is cash heavy now that major building plans are completed. With two of his sons in the business, Keith already transferred additional shares to them to reward the boys for their “sweat equity” in building the profitable business. But, how to pass majority ownership to the boys without incurring tax? In the process of meeting with the family’s financial advisors, it was suggested that an IRC §664 Trust might offer the family a tool to accomplish their estate planning and business continuity goals. The advantages of using this technique were:

• Jerry and Robert were able to gain control of the family corporation as their minority ownership changed to a majority interest, while the nonparticipating heirs were assured of equitable treatment and value by their parents
• excess accumulations inside the corporation were swept out by the redemption of Keith’s stock from his CRT, thus avoiding tax and penalties
• Keith and his wife were able to fund their retirement in ways that eliminated the capital gains liability on his stock and reinvest 100% of their capital to produce more income
• “social capital” dollars that otherwise would have gone to the IRS to pay unnecessary taxes were re-directed back to nonprofit causes of special interest to the Roth family, but only after Keith and his wife passed away

Henry & Associates designed the Roth scenario* and compared the options. Option (A) sell stock and pay the capital gains tax on the appreciation and reinvest the balance at 7% or Option (B) gifting the property to an IRC §664 Trust and reinvesting all of the sale proceeds in a 7% diversified income portfolio.

Hypothetical evaluations are provided as a professional courtesy to members of the estate planning community. Call for suggestions or schedules on upcoming workshops for professional advisors, nonprofit development officers and charitable boards..

Henry & Associates

Gift & Estate Planning Services © 1998

CONTACT US FOR A FREE PRELIMINARY CASE STUDY FOR YOUR OWN CRT SCENARIO

Tools for Tax Relief

Taxed to Death?

Powerful Tools and New Tax Laws

 Taxes, taxes, taxes — on what you make, what you save, what you buy, what you own and what you leave your kids. Are there solutions? You bet. Some of the country’s most progressive families have learned that many taxes are voluntary and only poor planning forces the unwary into paying more taxes than necessary. What’s the catch? You need to learn about and use the tools legally available to all, including those rarely discussed or understood.

Many people allow the “tax tail to wag the dog”, postponing decisions that would benefit their security and solve financial problems. For example, interested in selling your appreciated assets? If you have land, stocks, a farm, business or vacation property that has gone up in value and you dislike paying out tax on your paper profits, then there are alternatives to paying that hidden penalty. This tax on capital gain is kind of a sneaky way to generate revenue, since people object to the penalty of selling property, they wind up sitting on it until death. Then the estate tax, at rates up to 55%, has a chance to further nibble away at family assets.

After the Taxpayer Relief Act of 1997 was signed into law, there was a lot of talk about how helpful it was going to be. The early feeling was that the reduction in capital gains taxes would allow the sale of property without losing so much of the value to the IRS. Congress loudly touted this as a major development in their “tax relief” package. Now that the dust has settled; what a surprise, it seems people still object to paying the 20% tax to the IRS and the income tax at the state level (in Illinois, it’s 3%, other states are as high as 10%). What to do? Financial and estate planning specialists suggest using a special tax-exempt trust that benefits both family and community. These trusts bypass the payment of capital gains taxes on the sale of appreciated property and redirect dollars that otherwise would go to the IRS back to community or family charities.

What’s the advantage? If you want to:

• Increase your income
• Decrease your taxes
• Pass more assets to heirs
• Control the destination of your dollars
• Reinvest 100% of sale proceeds
• Favor family over the IRS
• Benefit charity instead of government

then one technique to consider is the Charitable Remainder Trust (CRT). This special financial planning tool has been available in its current format since 1969 as a §664 Trust. While often mentioned in passing as a powerful planning tool, it is rarely implemented. Why? It’s complicated and requires trained advisors to give the family the full benefit of all the available advantages. There are many nonprofit organizations that promote its use, but too often professional advisors and development officers lack the background to fully counsel their client-donors on the best way to make use of the CRT. Family business operations can also make use of these trusts as a device to ease the second and third generation’s transition into ownership and control while saving taxes. If a family expects heirs to eventually sell the business, then there are many more advantages to this technique.

If you want additional information on ways to avoid unnecessary tax and expense, call or write. If your professional advisors need to learn more about these techniques, have them check into the website at http://members.aol.com/CRTrust/CRT.html or contact one of our planning offices for a customized evaluation.