While death is a certainty, some taxes aren’t when IRAs are used to make charitable bequests, explains a thought-provoking article titled “Win an Income-Tax Trifecta With Charitable Donations” from The Wall Street Journal. For those who are philanthropically minded and tax-savvy, this is an idea worth considering.

There are few better ways to leave funds to a charity than through traditional IRAs. The strategy is especially noteworthy now, given the growth in traditional IRA values over the last decade, even with the recent selloffs in bond and stock markets. At the end of 2022’s first quarter, traditional IRAs held about $11 trillion, more than double the $5 trillion in IRAs at the end of 2012.

With the demise of defined benefit pensions, traditional IRAs are now the largest financial account many people own, especially boomers. Therefore, it’s wise to know about applicable tax strategies.

The first advantage is tax efficiency. Donors of IRA assets at death win a three-way tax prize: no tax on the contributions going to the charity, no tax on annual growth and no tax on assets at death.

Compare this to donations of cash or investments, such as a stock held in a taxable account. For example, let’s say Jules wants to leave a total of $20,000 to several charities upon her death. She expects to have more than $20,000 in each of three accounts at this time. One account is cash, the other is a traditional IRA, holding stocks and funds, and the third is a taxable investment account holding stocks purchased decades ago.

A charitable bequest of assets from any of these three accounts will bring a federal estate-tax deduction. However, Jules’ estate will be smaller than the current estate tax exemption of about $12 million, so there are no federal estate taxes to consider.

Jules should focus on minimizing heirs’ income taxes on any assets she’s leaving them and donating traditional IRA assets is the way to go. If she leaves the IRA assets to heirs, they will have to empty the IRA within ten years and withdrawals will be taxable.

Giving IRA assets gets pretax dollars directly to the charities, which don’t pay taxes on the donation. A cash donation would be after tax dollars.

Donating the IRA assets to charity is also typically better than giving stock held in a taxable account. Because of the step-up provision, there is no capital gains on such investment assets held at death. If Jules bought the now $20,000 stock for $5,000, the step-up could save heirs capital gains tax on $15,000 when they sell the shares. If she donates the stock, heirs won’t get this valuable benefit.

Next, IRA donations allow for great flexibility. Circumstances in life change, so a will that is drawn up years before death could be changed over time, to give a bequest of a different size or to a different charity. It’s easier to make these changes with an IRA. One way is to set up a dedicated IRA naming one or more charities as beneficiaries and then moving assets from other IRAs into it via direct (and tax-free) transfers. Beneficiaries and the percentages can be easily changed, and the IRA owner can raise or lower the donation by transferring assets between IRAs.

If the IRA owner is 72 or older and has to take required minimum distributions, the owner can take out donations from different IRAs. Note the funds must go directly to the charity when making the donation.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Can I Use an IRA to Reduce Estate Taxes?” read also these additional articles: Do I Need a Prenup? and Can a 529 Plan Help with Estate Planning? and Can You Prevent Family Fights over Inheritance? and Top Five Estate Planning Mistakes

Reference: The Wall Street Journal (Sep. 2, 2022) “Win an Income-Tax Trifecta With Charitable Donations”

Collecting art or other valuable items can be a passion for many people. Often such a pastime is more about enjoying the art or the medium itself than about ensuring financial gain. However, once you have accumulated a sizable collection, what do you want to happen to it after you pass away?

It is important that your estate plan address your art separately from your other assets.

The first step in estate planning for your collection is to document it. You should not only have the collection appraised, but also take photographs of each item and assemble any paperwork relating to the authenticity and origin of the pieces in your collection, including artist notes, bills of sale, or insurance policies.

According to an article by Bank of America entitled “Your Art Collection and Legacy Planning”, they give you three main options when considering what to do with your art collection:

• Sell the collection. If your family is not interested in maintaining your collection after you are gone, then you may want to sell it.

If you sell the collection while you are alive, you will have to pay capital gains taxes on the collection’s increase in value since you purchased it. The capital gains tax rate on artwork is 28 percent, compared with the top rate of 20 percent for other assets.

If the collection is sold after you die, however, it will be included in your estate, possibly increasing the value of your estate for estate tax purposes, but it will be “stepped up” in value. In other words, the increased value for income tax purposes likely will not subject to artwork to income taxes.  This means that if your heirs sell the collection, they will have to pay capital gains tax only on the amount by which the pieces have increased in value from the date of your death to the date of sale.

• Leave the collection to your heirs. You can give your artwork to individual family members, but a better approach may be to put the artwork in a trust or a Limited Liability Company (LLC).  The trustee of the trust or manager of the LLC whom you appoint will be responsible for sustaining the collection, including maintaining insurance on the artwork, arranging storage, and making decisions about selling and buying pieces. You can leave instructions for care and handling of the collection. Any profits from the sale of items would be split among the beneficiaries of the trust or members of the LLC.
• Donate the collection. You can donate your artwork while you are still alive and receive an income tax deduction based on the value of the items. This can be a good way to pass on your collection while avoiding capital gains taxes, and in addition, generating a charitable deduction for income tax purposes during your life.  Should you choose to donate through your estate after your death, your estate will receive an estate tax deduction based on the collection’s value, but there likely will be little income tax benefits (due to the step up in basis of the artwork).

Deciding which option to take will depend on your circumstances, your current and future income tax and estate tax position, as well as your family’s interest in the collection. Talk to your attorney to figure out the best option for you.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Three Estate Planning Options for Your Art Collection” read also these additional articles: What Common Mistakes are Made with Living Trusts? and How Do I Maximize My IRA? and Can My Pet Help Me in Old Age? and Can New Program Help Dementia Patients?

Simply put, a charitable trust holds assets and distributes assets to charitable organizations. The person who creates the trust, the grantor, decides how the trust will manage and invest assets, as well as how and when donations are made, as described in the article “How a Charitable Trust Works” from yahoo! finance. An experienced estate planning attorney can help you create a charitable trust to achieve your estate planning goals and create tax-savings opportunities.

Any trust is a legal entity, legally separate from you, even if you are the grantor and a trustee. The trust owns its assets, pays taxes and requires management. The charitable trust is created with the specific goal of charitable giving, during and after your lifetime. Many people use charitable trusts to create ongoing gifts, since this type of trust grows and continues to make donations over extended periods of time.

Sometimes charitable trusts are used to manage real estate or other types of property. Let’s say you have a home you’d like to see used as a community resource after you die. A charitable trust would be set up and the home placed in it. Upon your death, the home would transfer to the charitable organization you’ve named in the trust. The terms of the trust will direct how the home is to be used. Bear in mind while this is possible, most charities prefer to receive cash or stock assets, rather than real estate.

The IRS defines a charitable trust as a non-exempt trust, where all of the unexpired interests are dedicated to one or more charitable purposes, and for which a charitable contribution deduction is allowed under a specific section of the Internal Revenue Code. The charitable trust is treated like a private foundation, unless it meets the requirements for one of the exclusions making it a public charity.

To answer the question, “Do charitable trusts help with estate planning?”, consider that there are two main kinds of charitable trusts. One is a Charitable Remainder Trust, used mostly to make distributions to the grantor or other beneficiaries. After distributions are made, any remaining funds are donated to charity. The CRT may distribute its principal, income, or both. You could also set up a CRT to invest and manage money and distribute only earnings from the investments. A CRT can also be set up to distribute all holdings over time, eventually emptying all accounts. The CRT is typically used to distribute proceeds of investments to named beneficiaries, then distribute its principal to charity after a certain number of years.

The Charitable Lead Trust (CLT) distributes assets to charity for a defined amount of time, and at the end of the term, any remaining assets are distributed to beneficiaries. The grantor may be included as one of the trust’s beneficiaries, known as a “Reversionary Trust.”

All Charitable Trusts are irrevocable, so assets may not be taken back by the grantor. To qualify, the trust may only donate to charities recognized by the IRS.

Donations to charity during life typically have a more favorable impact for tax purposes, because you could be allowed a income tax deduction on your income tax return for the year of the gift.  Plus, the donation removes the property from your taxable estate.  This is a two-fer for tax planning purposes.  If you have a taxable estate, a gift made in a will at death can be deducted on your estate tax return only.

An estate planning attorney will know how to structure the charitable trust to maximize its tax-savings potential. Depending upon how it is structured, a CT can also impact capital gains taxes.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “Do Charitable Trusts Help with Estate Planning?” read these additional articles: What Power Does an Executor Have? and Can a Nasal Spray Prevent Dementia? and Should I Use a Corporate Trustee? and What a Will Can and Cannot Do and Does Louisiana Have an Inheritance Tax?

Reference: yahoo! finance (Dec. 16, 2021) “How a Charitable Trust Works”

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 to charities remains 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 if you are a person that wants to engage in charitable giving:

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 during life is a smart move. Donors receive a charitable income tax deduction (subject to AGI limitations) and avoid capital gains tax.  Also, for those persons who may have a future taxable estate, charitable giving during life effectively removes these assets from your taxable estate without a reduction in your lifetime exemption.

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 make a charitable contribution of 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.

If you enjoyed this article, “Why Do People Give to Charities at End of Year?”, you can learn more about how people can make charitable giving a component of their estate plans by reading these articles: Charitable Contributions to Reduce Taxes and Charitable Planning and What’s a QTIP Trust ? and Will a QTIP Trust Work for a Blended Family? and How to Keep the Vacation Home in the Family

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about how taxes may impact your estate planning

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