Taxes Aren’t the Only Reason

Few people need to worry about estate taxes anymore.  For 2019, only estates in excess of $11.4 million are subject to federal tax, although lower amounts apply in a few states.  But people include charitable gifts in their estate plans for reasons other than tax savings.  There are ways to provide continuing support to favorite charities or achieve other estate planning goals with a thoughtful estate gift.

  • Steve has four nieces to whom he wants his estate to pass, but he doesn’t think he needs to leave them his entire $3 million estate.  He plans to divide his estate into five shares—one for each niece and one for the charities he has supported.

  • Martha wants her IRA to pass to her brother at her death, but because her brother is a poor money manager, she’s concerned he might withdraw and spend the funds, leaving nothing for his future needs.  Instead, she has the IRA pass to a charitable remainder trust that will make payments quarterly to her brother for life.  At her brother’s death, the remaining assets will pass to the charity.

  • Bob’s daughter has taken care of him for the past ten years, allowing him to remain in his home.  At his death, he plans to leave the house to a favorite charity, but give his daughter a life estate which will enable her to continue living there for her life.  If she decides to move out, she can rent the home and retain the income.

Planning for Your Digital Estate

Your estate planning should include supplying your executor or other trusted person with information about all your online storage and accounts, together with the necessary passwords and access codes. Stop to think of what’s included in your digital footprint: e-mail, cloud storage, electronic readers, mobile phones, financial accounts, desktop and laptop computers and social media accounts.  Each one probably has a different user name and password, and the passwords may change periodically.

Details of your digital estate should be included in the estate inventory prepared when making or revising a will or revocable living trust.  Because your digital estate inventory may contain sensitive financial information, you should take care to store it in a secure place, such as a safe deposit box.  Be sure to update the information whenever you change your passwords.

Selling Stock? Call Your Tax Advisor First

With the stock market on a roller coaster ride, many investors may be thinking it’s time to sell stock, to harvest gains or lock in losses to offset gains.  But before calling your broker, phone your tax advisor.  If you’re selling appreciated stock within a tax-sheltered account, such as an IRA, capital gains are not a concern.  But if the shares are in a taxable account, keep in mind the holding periods and capital gains rates when selling:

One year or less—The gain is short-term and is taxed at your ordinary income tax rate, up to 37%.

More than 12 months—The gain is long-term, taxed at 15% for most taxpayers (20% for those in the 37% income tax bracket or zero for those in the 10% and 12% tax brackets).

In addition to the capital gains tax, some taxpayers may be subject to an additional 3.8% tax on net-investment income (interest, dividends, capital gain, rents, royalties, nonqualified annuities, income from businesses that are passive activities and income from trading financial instruments or commodities) when modified adjusted gross income exceeds $200,000 (single taxpayers) or $250,000 (married couples).

Capital gains taxes can be avoided completely if shares held more than one year are given to charity.  In addition, there is an income tax charitable deduction available for the fair market value of the shares on the date of the gift.  The deduction for a gift of shares held one year or less is limited to the lesser of what you originally paid or the fair market value if the stock has declined.

Assets You Might Not Have Considered for Giving

Donors sometimes own assets that are no longer needed for financial security and could achieve greater significance as contributions.

Life insurance—Many people own life insurance policies purchased decades ago to protect young families.  A gift of a policy that is no longer needed can generate an income tax charitable deduction.  Another option is to retain ownership of the policy—and the right to borrow against the cash value or change the beneficiary—but name charity as the death beneficiary.  There is no income tax deduction for this type of gift, because it is a revocable gift.

U.S. savings bonds—Millions of dollars are tied up in savings bonds that are no longer earning interest.  Many bonds have simply been forgotten, meaning no one is depending on the bonds for income.  There is a way to repurpose those dollars—and possibly generate an income tax charitable deduction—by redeeming the bonds and contributing the proceeds.  It’s not possible under Treasury Department rules to contribute the bonds directly.  Bonds also make an excellent charitable gift in an estate.