Estate Planning Blog Articles

Estate & Business Planning Law Firm Serving the Providence & Cranston, RI Areas

Estate Planning Checklist to Keep You Focused

The estate tax exemption many taxpayers enjoy is scheduled to sunset at the end of 2025. According to a recent article from Kiplinger, “13 Smart Estate Planning Moves,” this large exemption had many people thinking they didn’t need to worry about estate taxes or other ways their legacies could be threatened.

Here are steps to discuss with your estate planning attorney:

Rethink your IRA investment strategy. With limited exceptions, inherited accounts must be emptied within ten years of the original owner’s death.

The age for RMDs (Required Minimum Distributions) rose to 73 in 2023 and will increase to 75 in 2033. You could take a voluntary distribution and convert it to a Roth IRA if you’re younger. Taxes are paid when you make a contribution, grow tax-free and there are no taxes on withdrawals. It’s a good deal, depending on your circumstances.

Use the annual gift tax exclusion to make gifts to as many people as you wish, up to $18,000 per person in 2024. A recent change to the 529 College Savings Account rules lets a gift giver fund five years of gifting into one account.

Pay medical or education expenses for someone else. Just remember to make checks out directly to the educational institution or care provider, not to the person.

Set up an irrevocable trust for a spouse, specifically a Spousal Lifetime Access Trust (SLAT), which lets you name a spouse as the beneficiary and children or grandchildren as remainder beneficiaries. Your spouse can tap it for health, education and living expenses.

Preserve assets with a bypass trust, funded at the first spouse’s death. The surviving spouse has access to the funds, with expenses for health, education, maintenance and support generally approved.

If you need to protect assets from creditors or litigation, a domestic asset protection trust allows you to keep funds out of your estate while you can be a beneficiary.

Use a revocable trust to manage assets. You won’t get any estate tax breaks. However, it’s easier for a successor trustee to take charge in case of incapacity.

Plan for Medicaid by transferring assets to a Medicaid Asset Protection Trust. MAPTs are state-specific, so consult with an experienced estate planning attorney.

Get your assets organized. If possible, consolidate accounts with one institution. This will keep your estate settlement less complicated and, therefore, less costly.

Reference: Kiplinger (May 9, 2024) “13 Smart Estate Planning Moves”

Can You Gift Money from a Retirement Account?

When preparing an estate plan, it’s easy to neglect charitable giving, especially if your main focus is to get the plan done most efficiently and move on to the next task on your list—like spring cleaning or gardening. However, a recent article from the Tri-Cities Area Journal of Business recommends a way to take care of charitable giving as part of your estate plan that won’t be overly burdensome: “Use retirement accounts to give to charity in your estate plan.”

An estate comprises different assets, which all have different characteristics. Some assets are distributed by a will, and others by the beneficiary designation on the account. Some are subject to income taxes for heirs, and others are not taxable. This info needs to be considered when preparing an estate plan.

If you choose to give pre-tax retirement accounts, those funds are typically subject to income tax when beneficiaries withdraw money from them. A pre-tax retirement account may be more expensive for heirs, especially if they are in a high-income tax bracket. The inheritance could also push them into a higher tax bracket.

Nonprofits are not subject to income tax and are grateful to receive pre-tax retirement assets.

Your estate plan consists of a last will and testament, powers of attorney and health care directives. Your estate includes different types of assets, and you’ll need to consider their value in light of their tax liabilities when creating an estate plan.

Beneficiary designations are usually used with life insurance policies and retirement accounts. They can be changed whenever you want, and you can name whoever you want to receive the accounts, except pensions governed by federal law. Those must go to your spouse and follow the rules of the pension custodian.

To understand this concept, let’s say a married couple has two children and a net worth of $one million, which includes a $500,000 house, $100,000 in the bank and $400,000 in their retirement accounts. If they want 10% of their estate to go to a charity and the rest to their children, they could do the following:

  • Write the amount or percent of the donation into their will and direct their executor to ensure funds are donated from their probate estate, or
  • They can use the beneficiary designation on their retirement account to give a certain percentage to their children and charity.

The charity will receive $100,000 from the pre-tax assets, thereby preserving more nontaxable assets for their children. As assets change over time, they may need to change the percentage of the assets given through the retirement accounts. Assuming high marginal tax rates, by giving from their retirement accounts, their heirs will net a higher amount than if other assets were used to make the gift to the charity.

If your estate plan hasn’t included charitable giving, and this is an important part of your legacy, consult with an estate planning attorney to learn how to structure your estate plan and beneficiary designations to work together to achieve your goals.

Reference: Tri-Cities Area Journal of Business (April 15, 2024) “Use retirement accounts to give to charity in your estate plan”

Is Mick Jagger Thinking about Estate Planning?

The “Satisfaction” singer, who is putting out a new album with the band, said that while the Rolling Stones have no plans right now to sell their post-1971 catalog — which includes Black and Blue and Tattoo You — but have some ideas of what to do with it eventually.

People’s recent article entitled, “Mick Jagger Hints Rolling Stones May Leave $500M Album Fortune to Charity to ‘Do Some Good in the World,’” reports that in a new interview with WSJ Magazine, the 80-year-old rock legend said they could give the approximately half a billion dollars they would get from selling it to their heirs, but “the children don’t need $500 million to live well. Come on.”

So he said that “maybe” the money could go to charity instead. “You maybe do some good in the world,” added Jagger.

Meanwhile, he and fellow bandmembers Keith Richards and Ronnie Wood are releasing another album. Their upcoming release, Hackney Diamonds, is the band’s first album of original music in 18 years.

Jagger noted to WSJ that there are a number of guests featured on the album, including Paul McCartney, who contributed bass, Elton John and Stevie Wonder on the piano, and Lady Gaga, who contributed vocals to their song “Sweet Sound of Heaven,” while working in the same studio as the band during one session.

Jagger revealed that he had put a deadline pressure on the group to keep the album on track, saying, “What I want to do is write some songs, go into the studio, and finish the record by Valentine’s Day. Which was just a day I picked out of the hat — but everyone can remember it. And then we’ll go on tour with it, the way we used to.”

When Richards, 79, pushed back, Jagger said he told him, “‘It may never happen, Keith, but that’s the aim. We’re going to have a f—ing deadline.’ ”

“Otherwise, we’re just going to go into the studio, for two weeks, and come out again, and then six weeks later, we’re going to go back in there. Like, no. Let’s make a deadline,” he added.

In the end, the deadline pressure worked. The band recorded basic tracks in four weeks, missing their Valentine’s Day target by just a few weeks.

In an emotional moment, the trio also touched on what it was like to record the album without their longtime drummer, Charlie Watts, who died in August 2021 at age 80.

“Ever since Charlie’s gone it’s different, he’s number four,” Richards said. “He’s missing, he’s up there. Of course he’s missed incredibly.”

Reference: People (Oct. 3, 2023) “Mick Jagger Hints Rolling Stones May Leave $500M Album Fortune to Charity to ‘Do Some Good in the World’”

What’s Is the Best Way to Give to Charity?

Charitable giving plays a valuable role in estate and tax planning. A well-planned donation can also provide a healthy income tax deduction, along with a reduction of estate taxes. Your generous donation could help to maintain financial security, exert control over assets during life and after death and provide for heirs, as explained in a recent article titled “Charitable giving good for heart, 1040” from the Valdosta Daily Times.

To accomplish any of these objectives, you’ll want to work with an experienced estate planning attorney who can help tailor an estate plan to your individual circumstances. Here are some strategies to consider.

Gifts of appreciated property might allow you to avoid capital gains tax owed when the asset is sold and, if planned properly, might allow you to receive an income tax deduction, usually worth the fair market value of the asset.

Removing any assets from your estate reduces the potential estate tax liability.

If you want to make a donation to a charity but you’d like to maintain some control over it, a Charitable Remainder Trust (CRT) might be a good fit. A CRT works best when funded by an appreciated asset, such as real estate or stock in a family owned business.

Once the property is transferred to the CRT, the CRT can sell the appreciated assets it holds without paying capital gains taxes. It then continues to provide income generated by the CRT to the beneficiaries for a period of time, as instructed by the CRT. At the end of this period, the remainder of the CRT is donated to the charity. You avoid capital gains on the assets you donated, an income stream and you also receive a tax deduction.

Another strategy is to use a Charitable Lead Trust or CLT. With a CLT, you give the charity the use of the asset and the right to any income generated for a predetermined time. When the time period ends, the asset reverts to you or is given to whoever you designate in the CLT. Appropriate assets for a CLT could be income-producing stocks and bonds, a valued collection or a painting transferred to a museum for a certain period of time.

You likely receive a current income tax deduction for the value to the charity. However, you receive no other direct benefit during the term. If a CLT is created upon your death, estate tax liability could be reduced.

Early tax planning can help make the most of any charitable giving opportunities and let you take full advantage of any additional benefits. Talk with an experienced estate planning attorney to receive guidance appropriate to your unique situation.

Reference: Valdosta Daily Times (Dec. 4, 2022)  “Charitable giving good for heart, 1040”

Why Do People Give to Charities at End of Year?

The landscape for charitable giving has undergone a lot of change in recent years. More changes are likely around the corner. This year, a more intentional approach to year-end giving may be needed, according to the article “How to Make the most of Year-End Charitable Giving” from Wealth Management.

From the continuing pandemic to natural and humanitarian disasters, the need for relief is pressing on many sides. Donors with experience in philanthropy understand charitable giving as part of a tax strategy, part of providing the essential support needed by non-profits to keep operating and respond to emergencies and, at the same time, ensure their charitable dollars are aligned with their family values and missions.

For the tax perspective, changes resulting from the Tax Cuts and Jobs Act of 2017 left many nonprofits harshly impacted by the doubling of the standard deduction, which gave fewer people a financial incentive to donate. The question now is, could the latest round of proposed changes spur greater giving?

Amid all of these changes, sound and stable giving strategies remain the wisest option.

The CARES Act encouraged individual giving during times of hardship, and tax breaks were extended in 2021. However, certain incentives are now closing, such as the ability to deduct up to 100% of adjusted gross income for cash gifts made directly to public charities.

The Build Back Better Agenda proposes increasing the long-term capital gains tax rate for individuals with more than $400,000 of taxable income, and married couples filing jointly with more than $450,000 of taxable income, to 25%, plus a 3% surcharge to income of more than $5 million. This would make charitable giving more attractive from an income tax perspective. However, this bill has yet to be passed.

Consider the following strategies:

Qualified charitable distributions. RMDs must be taken in 2021. For donors taking a standard deduction, a qualified charitable distribution is a possible option. If you are 70½ and over, you can donate up to $100,000 from an IRA. This satisfies the RMD, as long as the gift goes directly to a charity, not to a Donor Advised Fund.

Contributions of appreciated stock. To make charitable gifts in the most tax-efficient way possible, a donation of appreciated stock is a smart move. Donors receive a charitable income tax deduction (subject to AGI limitations) and avoid capital gains tax.

Charitable bequests. The uncertainty around income tax reform includes estate taxes, and pro-active individuals are now reviewing their estate plans with their estate planning attorneys.

Funding a Donor Advised Fund (DAF). A DAF allows donors to contribute assets to a tax-free investment account, from which they can direct gifts to the charities of their choice. The contribution to the fund provides the donor with a charitable income tax deduction in the year it’s made.

Reference: Wealth Management (Oct. 11, 2021) “How to Make the most of Year-End Charitable Giving”

What to Leave In, What to Leave Out with Retirement Assets

Depending on your intentions for retirement accounts, they may need to be managed and used in distinctly different ways to reach the dual goals of enjoying retirement and leaving a legacy. It’s all explained in a helpful article from Kiplinger, “Planning for Retirement Assets in Your Estate Plan”.

Start by identifying goals and dig into the details. Do you want to leave most assets to your children or grandchildren? Has philanthropy always been important for you, and do you plan to leave large contributions to organizations or causes?

This is not a one-and-done matter. If your intentions, beneficiaries, or tax rules change, you’ll need to review everything to make sure your plan still works.

How accounts are titled and how assets will be passed can create efficient tax results or create tax liabilities. This needs to be aligned with your estate plan. Check on beneficiary designations, asset titles and other documents to make sure they all work together.

Review investments and income. If you’ve retired, pensions, annuities, Social Security and other steady sources of income may be supplemented from your taxable investments. Required minimum distributions (RMDs) from tax deferred accounts are also part of the mix. Make sure you have enough income to cover regular and unanticipated medical, long term care or other expenses.

Once your core income has been determined, it may be wise to segregate any excess capital you intend to use for wealth transfer or charitable giving. Without being set apart from other accounts, these assets may not be managed as effectively for taxes and long-term goals.

Establish a plan for taxable assets. Children or individuals can be better off inheriting highly appreciable taxable investment accounts, rather than traditional IRAs. These types of accounts currently qualify for a step-up in cost basis. This step-up allows the beneficiary to sell the appreciated assets they receive as inheritance, without incurring capital gains.

Here’s an example: an heir receives 1,000 shares of a stock with a $20 per share cost basis valued at $120 per share at the time of the owner’s death. They will pay no capital gains taxes on the gain of $100 per share. However, if the same stock was sold while the retiree owner was living, the $100,000 gain in total would have been taxed. The post-death appreciation, if any, on such inherited assets, would be subject to capital gains taxes.

Retirees often try to preserve traditional IRAs and qualified accounts, while spending taxable accounts to take advantage of lower capital gains taxes as they take distributions. However, this sets heirs up for a big tax bill. Another strategy is to convert a portion of those assets to a Roth IRA and pay taxes now, allowing the assets to grow tax free for you and your heirs.

Segregate assets earmarked for charitable donations. If a charity is named as a beneficiary for a traditional IRA, the charity receives the assets tax free and the estate may be eligible for an estate deduction for federal and state estate taxes.

Your estate planning attorney can help you understand how to structure your assets to meet goals for retirement and to create a legacy. Saving your heirs from estate tax bills that could have been avoided with prior planning will add to their memories of you as someone who took care of the family.

Reference: Kiplinger (May 21, 2021) “Planning for Retirement Assets in Your Estate Plan”

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