Legacy Planner July 2011
Choosing Your Estate Planning Team
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roper estate planning often needs to be a team effort. It’s certainly not a do-it-yourself project. Who are some of the experts that you may need on your estate planning team? Attorney – An attorney will draft all the documents you need – a will, living trust, powers of attorney, health care directives, deeds – making sure they comply with state law and achieve your desired goals. If federal or state estate taxes are a concern, your attorney can discuss tax reduction strategies. (Through 2012, only estates in excess of $5 million are subject to federal estate tax; state estate and inheritance taxes vary.) Accountant – Many people rely on their accountants to file income tax returns and keep corporate financial records. But your accountant also is an excellent source for business valuations and for compiling your net worth. Reducing income taxes is an important part of your estate planning and an area where your accountant’s financial skills are needed. Your accountant and attorney may work in conjunction to craft an estate plan that fits your needs.
Insurance agent – Life insurance is important for providing financial security in the event of untimely death. Life insurance can help pay off a mortgage, fund a business buy-out plan, provide liquid assets to pay estate expenses and taxes or to cover other contingencies such as disability or long-term nursing care. UMHB Gift Planner – Your estate plan can include continued support of our mission. Our office would be happy to provide you with ideas for ways to include the University of Mary Hardin-Baylor in your will or living trust. We also have ideas for leaving a thoughtful bequest without changing your existing estate planning documents. We can explain how you can make a gift today while reserving income for your life or the life of someone else. As a part of your estate planning team, we would work with your attorney, accountant, insurance agent or other financial advisers and provide calculations on the tax savings available for your gift. The goal is to develop the most satisfying gift possible in keeping with your other estate plans. There is no cost for our services and you are under no obligation.
The Bank of Grandma and Grandpa
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randparents spend lots on their grandchildren. A 2009 study by Grandparents.com estimated that the nation’s roughly 70 million grandparents would spend approximately $52 billion on goods and services for grandchildren that year. Another study that same year by Met Life showed that 63% of grandparents had provided financial help or cash gifts to their grandchildren in the prior five years. The average contribution: $8,661. Most grandparents don’t think about taxes when giving to their grandchildren, but some gifts may be subject to tax. In 2011, individuals can make gifts up to $13,000 per recipient free from tax, and for gifts in excess, the gift tax credit shelters lifetime transfers up to $5 million per transferor. (Gift tax returns are required for gifts over $13,000.) Few grandparents have to worry about exceeding the $5 million level, but there are ways to make giving more tax-wise for both the grandparent and the grandchild.
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If the grandchild is under age 19 (or age 24 for full-time students), consider giving assets that defer income, such as U.S. savings bonds, to avoid the “kiddie tax.” Unearned income (interest, dividends, capital gains) in excess of $1,900 is taxed at the parents’ highest income tax rate, not the child’s lower rate.
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Give assets that are likely to grow in value. Stock or mutual fund shares may be worth significantly more than $13,000 in the years ahead when a grandchild sells them to help pay for college or for the down payment on a home.
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Don’t sell appreciated stock in order to give a child cash. Instead, transfer the shares directly. The child may completely avoid capital gains on the sale of the shares, compared to the 15% rate you would pay.
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In addition to the $13,000 annual exclusion, you can make gifts of any amount for medical or educational expenses without owing gift tax. The payments must be made directly to the health care provider or school, rather than to the child.
Consult your financial adviser about the tax consequences before making any substantial gifts to family members. Another Finding The Grandparents. com study (titled The Grandparent Economy) found that grandparents are also generous to charities, making 45% of the country’s cash contributions. U.S. charitable contributions totaled $290.9 billion in 2010.
How to Benefit Now From a Gift You Retain for Life
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re you planning to leave your house or farm to UMHB? Thinking about it? Many individuals do. However, most forfeit a valuable tax deduction that can benefit them significantly in retirement. Through sensible gift planning, more and more individuals are seeing the benefit of a Retained Life Estate.
endowed scholarship to benefit students in elementary education. Mary learns that she can gift UMHB her house by simply deeding it to the university; and combined with a Retained Life Estate agreement, she will continue to enjoy living in her house for the rest of her life. Mary agrees to continue the upkeep of the house and pay the property taxes, just as she had planned. The only difference is . . . she now enjoys a charitable income tax deduction of $112,831!
You see, if you leave your house or farm to charity by way of will or living trust, there are only estate tax deductions that benefit your heirs. Certainly a beneficial plan, but you miss out on the income tax benefits!
Mary is on a fixed income of $62,850 in retirement, so how will she be able to use all of the $112,831 charitable income tax deduction? No worry, Mary can use this deduction against 30% of her adjusted gross income every year for up to 6 years!
With a Retained Life Estate, an individual can make a gift of their house or farm now, and receive a current income tax deduction that would otherwise be lost. The beauty of this type of gift is that you retain the right to live in your house for the rest of your life, or for a certain number of years that you decide.
Because Mary established a Retained Life Estate with a gift of her house, Mary decides she can now afford to buy a new car!
Here is an example of how it works: Mary, age 71, owns a house with a current market value of $220,000. Mary decides that she would like to leave her house to the University of Mary HardinBaylor which will ultimately be sold to fund an
Positive Impact of Retained Life Estate on Income $
Year 1 62,850
$
Year 2 62,850
$
Year 3 62,850
$
Year 4 62,850
$
Year 5 62,850
$
Year 6 62,850
$ $
3,700 5,800
$ $
3,700 5,800
$ $
3,700 5,800
$ $
3,700 5,800
$ $
3,700 5,800
$ $
3,700 5,800
Adjusted Gross Income: Deductions: Exemptions: Standard Deduction: Retained Life Estate Deduction:
$ 18,855
$ 18,855
$ 18,855
$ 18,855
$ 18,855
$ 18,556
Taxable Income: Income Tax:
$ $
$ $
$ $
$ $
$ $
$ $
Net Income:
$ 58,101
$ 58,101
$ 58,101
$ 58,101
$ 58,101
$ 58,027
Retained Life Estate Difference:
$
$
$
$
$
$
34,495 4,749
4,713
34,495 4,749
4,713
34,495 4,749
4,713
34,495 4,749
4,713
Total Retained Life Estate Income Tax Benefit: $ 28,205
34,495 4,749
4,713
34,794 4,824
4,639
No Retained Life Estate Years 1-6 $ 62,850 $ $
3,700 5,800
$ $
53,350 9,463
$ 53,388
$0
Choices, Choices, Choices
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ou’ve dutifully contributed to your employer’s 401(k) plan over the years. But now that it’s time to retire, what should you do with the funds you’ve accumulated? There are several options:
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If the plan permits, you can leave your account in the company plan and have it paid out as needed. Required minimum distributions don’t start until after age 70½. If you continue working past age 70½, you may be able to postpone required minimum distributions from your 401(k), although distributions are required from your IRA.
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The funds can be rolled over to an IRA. Simply direct the 401(k) custodian to do a trustee-to-trustee transfer. If you instead receive a check, you have 60 days to reinvest the distribution in an IRA, and the custodian will be required to withhold 20% of your account. If you don’t reinvest 100% of the 401(k) balance — including the amount withheld — you’ll be deemed to have taken a distribution and will owe income tax. Funds in an IRA can be used to make a gift to the University of Mary Hardin-Baylor if you’re over age 70½. Although no charitable deduction is allowed, you can save income taxes anyway if the distribution takes the place of required
Dr. Gene Kimes, Director of Gift Planning 254-295-4608 gkimes@umhb.edu
minimum distributions. Qualified charitable distributions cannot be made directly from a 401(k) plan.
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If your company’s profit sharing plan includes contributions of your employer’s publicly traded stock, you can have the shares transferred to a separate taxable account. You’ll owe income tax on the basis of the employer stock (the value of the shares when the employer contributed them to the account), which may be significantly less than the current value of the stock. If you then hold the shares for more than one year, any gain on a subsequent sale will be taxed at capital gains rates (maximum 15%). (If the shares are instead rolled over to an IRA, future distributions will be taxed at ordinary income rates — currently up to 35%.) If you hold the shares until death, there will be a step-up in basis to the dateof-death value, allowing family members to completely avoid the capital gains tax. It’s also possible to use the appreciated stock as a gift to the University of Mary Hardin-Baylor. You can even retain income for life from your gift, for you or others, and still receive an income tax deduction. We’d be happy to answer questions you or your advisers have about gifts from IRAs or gifts of employer stock. Just call our office.
Brent Davison, Vice President for Development 254-295-5044 bdavison@umhb.edu