Preserving By Giving
Estate Planning Essentials and Ideas
Authored by Kyle A. Sadler, AIF®
For most people, discussing the inevitable is difficult. However, the reality is that everyone will eventually die. Many couples work extremely hard, save diligently and live within their means to sadly, leave this Earth and have their estate ravaged by federal and/or state taxation, frivolous spent by heirs or even squabbles that tear apart a families. All of which were avoidable with some planning of their assets.
When gathering information for this article an alarming discovery was made that multiple studies have shown that well over 50% of Americans do not have a will. To compound on that information, over 70% of Americans fail to do any estate planning. Lack of planning accounts for more than 50% shrinkage in estates due to taxes. However, a good attorney coupled with a competent Financial Planner and a few thousand dollars can preserve a significant part of a lifetime of work.
Although a full analysis is always recommended when reviewing one’s estate, this article will address a few simple steps that may assist in preventing a reduction in a lifetime of savings while leaving a smile on the face. A lot of people think that charitable giving is only left for the wealthy; however, money spends the same whether from a wealthy suit and tie guy or a hard-working, grease-stained blue collar man. Grant it, the people leaving millions of dollars to charities get to have their names in the newspapers but also the crazy people who leave their estates to their cats. Asset size is irrelevant when donating to a charity.
When donating money to charities, there are 4 ways to discuss passing assets to charities. The first method is the most obvious method, and well known. This is just a simple donation of cash or items. Most people are familiar with the tax benefits of this type of donation; therefore, there is no need to discuss this one in length.
The next three methods are lesser known but can be the most advantageous to the person donating and the organization. “Why would this be the most advantageous?” This is where most organizations can benefit from substantial monetarily benefits subsequent a person death.
For those who have not amassed a large fortune, a simple idea would be to bequest assist to an organization. For those not familiar, a bequest is just a fancy word for saying “put in a will.” An idea may be that an individual would like a portion of their assets, example-10%, to go to an charitable organization that provides scholarships to underprivileged children who wish to go to college. By adding a bequest to their will, these assets will pass to the organization and on the donator’s final tax return, will receive a tax deduction.
Also, a bequest may also state directions for the organization. Using the same example, the donator would like each year that 5% of the donated amount to be given in a scholarship in the donators name and to a student that wishes to attend the donator’s college of choice. With this bequest, the organization will now have what is called endowed scholarship. A competent attorney would be able to establish this when executing a will.
Tax Benefit: For most individuals that leave a bequest over 10%, the tax liability in most cases is $0. Most people will scratch their head on this one but it’s simple, the donation is based on 10%(using this example) of the asset size but taxation is only based on income received that year. However, always remember that every person’s tax situation is different and a tax advisor can analyze each individual situation.
TIP: A little tid-bit of advice, make sure in writing and it is highly recommended that non-benefactor witnesses sign the will.
Retirement plans, such as IRA’s and 401k’s, and Life Insurance Beneficiary(ies) are the easiest and most often overlooked form of charitable giving. For most individuals, their concerns are that they want to insure that they have adequate savings to last them throughout retirement. However, when retirement has ended, via death, the concern is no longer there. By naming a non-profit as the benefactor of a retirement plan and/or life insurance, the opportunity to assist is established without a potential burden on the retirement nest-egg.
Most life insurance policies and retirement plans generally allow percentages for beneficiaries. Therefore, a person could allow for a majority portion to go to heir while allowing the remainder to pass to the non-profit.
Tax Benefit: The assets that are inside of IRA’s, 401k’s, 403b’s, etc. are generally 100% taxable. Therefore, the charitable organization will be taxed at their tax rate when the assets are distributed. However, NQDA’s generally are not 100% taxed and taxation is based on value minus principal. Furthermore, the donator’s estate or heirs would not be taxed on these assets. Last, remember, the majority of all Life Insurance Policies are non-taxable.
TIP: When utilizing a retirement plan and/or life insurance to leave a charitable gift, probate is not involved. The assets are distributed based on the submission of a death certificate and generally a letter of instruction.
There are many ways charitable trust can be formed and utilized. A common type of trust is a Charitable Remainder Trust. This type of trust allows a person to donate a predetermined amount to the trust. After which time, the trust will make distributions to the beneficiary(ies) for a period of time stated within the trust. After this time period has expired, the remainder of the trust is then granted to the charity designated in the original trust document.
Even though the federal estate tax exclusion is currently(2013) set at $5,250,000, when estates exceed the 2 million dollar mark, it is recommend to start examining trust in estate planning. It would always be recommended that estates whose total assets(investments and real estate) exceed the federal estate tax exclusion to establish various types of trust.
Tax Benefit: Because of the uses of various trust, examples of estates that have paid little to no taxes and prospered are too numerous to mention. There are many tax benefits that a qualified tax professional could discuss in detail for pursuing this route.
TIP: Not all attorneys are well versed in tax law and estate planning. Determination of ability can easily be discovered by asking questions.
When mentioning this idea to people it is often heard, “Oh, my donation would be too insignificant and not worth the foundation’s time.” I have personally called to take individuals that have donated $25 to the Aldine Education Foundation because we recognize that every dollar counts when it regarding our children’s education and future. When 10, 100, or even a 1000 people donate only $25 what people feel might be insignificant just became very significant. I implore you not to think that your donation would ever be insignificant, and if the organization makes you feel as if it was, please make your check payable to the Aldine Education Foundation (we also accept PayPal!).
There are many avenues to pursue to preserve an estate and pass on legacies. Whether it’s through a charitable trust or a legacy granting the peace of mind will be that the giver is in control of the assets even beyond the grave. And yes, as part of your estate plan you can certainly benefit the Aldine Education Foundation if you are so inclined! For more information about giving to the Aldine Education Foundation, please visit www.aldineeducationfoundation.com For questions concerning estate planning, charitable giving and the information provided in this article please contact Kyle A. Sadler at (281) 973-9290.
The author, Kyle A. Sadler, AIF®, has worked in the financial industry for close to 20 years. In addition to being the president of Precept Wealth Management, he also serves as an executive board member of the Aldine Education Foundation along with being a volunteer with other non-profit organizations and his home church. Kyle has established a team of deliverables that can assist any non-profit in developing solutions to organizational and financial needs. If you should have any questions regarding the content of this article or other additional questions, please feel free to contact him at (281) 973-9290.
This report is not to be viewed or utilized as a recommendation or advice. Rules and regulations are subject to change and the reader should contact a qualified financial or tax professional for advise prior to implementation of the ideas in this report or any others. Associates of Precept Wealth Management only provide recommendations or advice to individuals subsequent meeting and gathering information regarding suitability.
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Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Precept Wealth Management are not affiliated.