Spring Cleaning for Estate Plans

Estate planning deserves everyone’s attention at least once a year.  Here are some ideas to consider:

  • Dust off your will.  When was the last time you reviewed your will?  Changes in your life may affect your estate plans.  Some events that should alert you that your will needs updating include:  Marriage, death of a spouse or beneficiary, increase in your assets, relocation to a new state, birth of a child or grandchild.

  • Straighten up your life insurance.  Just as your income, assets and family situation change over the years, so do your life insurance needs.  If your children are grown, your home paid off and savings ample to provide for loved ones, you might consider making charity the beneficiary or owner of an old life insurance policy.

  • Take inventory of your financial worth.  Estate taxes are no longer a concern for most Americans (only those with estates in excess of $11.4 million in 2019), but you may live in or own property in a state that imposes an estate or inheritance tax at a much lower level.  Knowing the value of your assets also helps plan for eventual retirement or for budgeting during retirement.

  • Plant some seeds to benefit future generations by adding a charitable gift in your estate plans.  You can continue the gifts you’ve made during your lifetime by including a gift to charity in your will, living trust or by beneficiary designations on an IRA, life insurance policy or financial account.  There are even ways to provide payments for life to loved ones, with benefits eventually passing to charity.

Nervous About the Market’s Direction?

No one knows where the stock market is headed, but some investors may be looking to cash in on any appreciation without losing as much as 23.8% to capital gains tax.  There are ways to retain payments for life from your charitable gift of appreciated stock.

Charitable remainder unitrusts—A unitrust pays a fixed percentage of the annual value of the trust’s assets for life or a term of up to 20 years.  The trust must pay a minimum of 5% and a maximum of 50%.  If the value of the trust’s assets increases, so too do the payments.

Charitable remainder annuity trusts—Like a unitrust, annuity trusts make payments for the life of one or more individuals or for a term of up to 20 years.  Unlike a unitrust, the annuity trust makes fixed payments for the term of the trust.  The amount is a minimum of 5% or a maximum of 50% of the value of assets originally placed in the trust.

With both a charitable remainder unitrust and a charitable remainder annuity trust, there is no capital gains tax when appreciated assets are contributed to the trust or when the trustee sells the stock to diversify the trust’s portfolio.  When the trust term ends, all remaining assets pass to charity.  Donors are entitled to an income tax charitable deduction when the trust is created for a portion of the value of the gift transferred.

Charitable gift annuities—A gift annuity is simply a contract in which charity agrees to make fixed payments to one or two people for life in exchange for a donor’s gift.  The exact amount of the annuity depends on the age or ages of the beneficiaries.  Gift annuities can be funded with cash, but funding a gift annuity with appreciated stock allows a donor to avoid some capital gains tax while spreading the remaining gains over his or her life expectancy.  An income tax charitable deduction is available for a portion of the value of the stock or cash transferred for the gift annuity.

Top Three Assets for Lifetime Charitable Giving

Many donors typically just write checks when contributing to charities.  Checks are simple and are deductible up to 60% of adjusted gross income for taxpayers who itemize.  But gifts of assets may provide greater benefit to donors and the charities they assist.  Here are three good choices:

Appreciated securities—Donors receive a double tax benefit when they contribute stock, bonds or mutual fund shares that have grown in value and been owned more than one year.  Donors can deduct the full value of the assets—not just what they originally paid—and save again by avoiding all capital gains taxes on any paper profit.  Capital gains rates are 15% for most taxpayers, but can go as high as 20%.  Sellers may also be liable for the 3.8% net investment income tax.  All of these taxes are avoided with charitable contributions.

Surplus life insurance policies—Life insurance originally purchased to pay off a mortgage or pay college expenses for children in the event of a premature death may no longer be needed as owners approach retirement age.  Others who purchased insurance to cover federal estate taxes may find it is no longer an issue with estates up to $11.4 million sheltered from tax in 2019.  Now may be a good time to use that old policy for a charitable gift.

Qualified charitable distributions from IRAs—Those age 70½ and older can direct IRA custodians to make direct gifts to qualified charities up to $100,000.  Although no income tax deduction is available, donors avoid the income tax that would otherwise be owed on withdrawals from IRAs.  Gifts to charity can take the place of minimum distributions that IRA owners are required to take each year.

Three Things About Wills That Aren’t True

I can’t afford a will—lawyers are too expensive. Drafting a simple will is one of the least expensive of all legal services, and the cost of not having an attorney plan the disposition of assets accumulated over a lifetime can be significant.

I don’t need a will. My spouse and I own everything in joint names and it will all pass automatically to the survivor. What would happen if both you and your spouse died within a short time of each other and neither had made a will?  Each joint owner should have a will that avoids having assets distributed according to state laws.

I don’t need a will. I have a revocable living trust. You need a will to provide that assets not transferred during life can “pour over” into your living trust at death.  A will also lets you name an executor and guardian for minor family members or for those with special needs.