Last week, I discussed a strategy for making charitable gifts by using the beneficiary designation under your retirement account instead of a specific bequest under your will and thereby potentially saving hundreds or thousands of dollars in taxes owed by your heirs. Today, I’ll review the various ways to give to charities before the end of the year.
Cash. Cash gifts must be post-marked by December 31st in order to receive a tax deduction for this year. Deductions are limited to 50% of Adjusted Gross Income (AGI) with any excess carried forward for up to five years.
Personal items. Giving clothing and other personal items is a great way to help people in need and do a little pre-spring cleaning at the same time. You’ll need a detailed list of the items along with the fair market value for tax purposes. Be sure to get a receipt of the gift from the charity.
Appreciated property. While the stock market is still approximately thirty percent below its 2007 high, we have seen a remarkable recovery of over sixty percent from this year’s March 9th low. This means that some of you own stocks that have substantial gains. By giving appreciated stock instead of cash, you effectively ‘give away’ the imbedded tax liability as well. If you want to continue to own the stock, use your cash to purchase an equal number of shares. The charity receives their money and you now own the stock with a new, higher cost basis. Gifting appreciated bonds, real estate or other personal assets can also be advantageous. The tax deduction for gifts of appreciated property held for more than one year is limited to 30% of AGI and the transaction must be completed before December 31st.
Retirement accounts. If you are age 70½ or older, you can transfer up to $100,000 of retirement plan assets directly from your retirement account to a qualified charity. While you do not receive a tax deduction for the gift because you already deducted your contributions to the plan, you avoid reporting any income. In the past, an additional advantage of this strategy was that the transfer counted towards your Required Minimum Distribution (RMD). However, for 2009, no RMD’s are required.
Donor Advised Fund. Sometimes people have the money available to make a gift and the desire to do it now in order to reap the tax benefits but have not decided which charities they want to benefit. An excellent solution is a Donor Advised Fund which allows you to give this year, receive a tax deduction this year, but designate the charities sometime in the future. Donor Advised Funds are often administered through the more than 650 Community Foundations across America. To get more information or to find a Community Foundation near you, go to www.cflocator.net. In Birmingham, contact The Community Foundation of Greater Birmingham at 205 327-3800.
At a time when official unemployment rate has eclipsed 10% and true unemployment exceeds 50 million Americans, it is more important than ever that those of us who do have jobs and excess funds, give to those charities that touch our hearts.
Showing posts with label Helping Charities. Show all posts
Showing posts with label Helping Charities. Show all posts
Saturday, November 21, 2009
“Helping Charities While Reducing Taxes- Part I” - November 8, 2009
I recently met with a client couple as part of an estate planning review. As is true with so many people, this couple expressed a strong desire to give to charities both during their life and at their death. This week, I’ll focus on a strategy for giving to charities at death.
Often people will make charitable gifts by designating a Specific Bequest in their will. The typical logic is that they want to make sure that all of their assets are available for their support during their lifetime. Then, at the last of them to die, they want to make a gift, typically of a certain dollar amount, to their church, college or other charity. While this is pretty straight-forward planning, there may be an even better way to accomplish the same goal while significantly reducing taxes that will have to be paid by heirs.
Think of your own situation or maybe a family member. Do you (or they) plan to make charitable gifts at death? Instead of making a specific bequest in your will, consider making the same gift by using your retirement account. You see, contributing to a retirement account is one of the best ways to accumulate wealth during your working years because you receive a tax deduction for your contributions and tax-deferred growth until the funds are taken out during retirement. During retirement, people often leave as much money as possible in their retirement account in order to avoid income taxation on their withdrawals. As a result, they often die with money still left in their retirement account. However, a retirement account is one of the worst assets for an heir to receive. This is because not only are retirement accounts potentially subject to estate taxes, the heirs must also pay income taxes as they make withdrawals. For the wealthy, this combination of estate taxes of possibly as high as 55% and income taxes of possibly as high as 39.5% could eat up nearly 70% of your retirement account!
Here’s a strategy for making smarter testamentary gifts. Let’s assume that you and your wife have decided to leave your alma mater $100,000 at the last of you to die. Instead of making a specific bequest under your will, you change the beneficiary designation under your IRA account to reflect your wife as the primary beneficiary and your alma mater as the second beneficiary for $100,000 with the balance going to your children. If your wife predeceases you, your alma mater receives $100,000 and the balance goes to your children. If you die before your wife, she receives your entire IRA account and can ‘roll-over’ the account into her own name. She’ll then need to name your alma mater the primary beneficiary for the first $100,000 of the retirement account while naming the children the primary beneficiary for the balance. As a result, at her death, the charity receives the same amount of money, $100,000, from the retirement account instead of from the personal estate. You have effectively ‘given away’ the tax problem. Another advantage is that if you decide to make changes regarding your charitable contributions, changing beneficiary designations is easy and free while changing specific bequests under your will would require you to engage an attorney.
Often people will make charitable gifts by designating a Specific Bequest in their will. The typical logic is that they want to make sure that all of their assets are available for their support during their lifetime. Then, at the last of them to die, they want to make a gift, typically of a certain dollar amount, to their church, college or other charity. While this is pretty straight-forward planning, there may be an even better way to accomplish the same goal while significantly reducing taxes that will have to be paid by heirs.
Think of your own situation or maybe a family member. Do you (or they) plan to make charitable gifts at death? Instead of making a specific bequest in your will, consider making the same gift by using your retirement account. You see, contributing to a retirement account is one of the best ways to accumulate wealth during your working years because you receive a tax deduction for your contributions and tax-deferred growth until the funds are taken out during retirement. During retirement, people often leave as much money as possible in their retirement account in order to avoid income taxation on their withdrawals. As a result, they often die with money still left in their retirement account. However, a retirement account is one of the worst assets for an heir to receive. This is because not only are retirement accounts potentially subject to estate taxes, the heirs must also pay income taxes as they make withdrawals. For the wealthy, this combination of estate taxes of possibly as high as 55% and income taxes of possibly as high as 39.5% could eat up nearly 70% of your retirement account!
Here’s a strategy for making smarter testamentary gifts. Let’s assume that you and your wife have decided to leave your alma mater $100,000 at the last of you to die. Instead of making a specific bequest under your will, you change the beneficiary designation under your IRA account to reflect your wife as the primary beneficiary and your alma mater as the second beneficiary for $100,000 with the balance going to your children. If your wife predeceases you, your alma mater receives $100,000 and the balance goes to your children. If you die before your wife, she receives your entire IRA account and can ‘roll-over’ the account into her own name. She’ll then need to name your alma mater the primary beneficiary for the first $100,000 of the retirement account while naming the children the primary beneficiary for the balance. As a result, at her death, the charity receives the same amount of money, $100,000, from the retirement account instead of from the personal estate. You have effectively ‘given away’ the tax problem. Another advantage is that if you decide to make changes regarding your charitable contributions, changing beneficiary designations is easy and free while changing specific bequests under your will would require you to engage an attorney.
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