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Estate Planning with Cryptocurrency

Estates & Estate Planning, Taxes & Finance, Wills, Trusts & Estates

A cutting edge issue in traditional estate planning is cryptocurrency. “Cryptocurrency” (as defined by Investopedia) is “a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.”

The most common, and for now the unofficial standard for cryptocurrency (AKA altcoin) is Bitcoin. But the market is getting increasingly more crowded with others including Ripple, Dash, Litecoin, and Zcash to name just a few. (For the purposes of this article, we’ll focus on Bitcoin, but these points could be applied to cryptocurrencies in general.)

Many posts could be written about cryptocurrency, its benefits, and its challenges, but this post is focused on how to account for Bitcoin in your estate plan, as opposed to a standard currency, like the U.S. Dollar.

Acknowledge the IRS’ Perspective

The IRS has determined, at least for the time being, virtual currency is treated as personal property for federal tax purposes. So, virtual currency transactions are most definitely not the same as, say, online banking through your local community credit union. Instead, for general tax purposes, Bitcoin is treated like tangible property you own, like a painting or a car.

Establish the Existence of Bitcoin

Unlike a checking or saving account. there are no beneficiary designations on Bitcoin accounts. In fact, quite the opposite — Bitcoin is anonymous. Therefore, if you were to die without communicating that you have Bitcoin, it will die with you.

For security reasons, of course, you won’t want everyone to know about your ownership of Bitcoin. But you do need to develop a method for passing along the important details to a trusted representative such as your named trustee or executor. This is somewhat similar to accounting for digital assets in your estate plan and many of the same steps/tips apply.

Bitcoin falls into somewhat of a “grey” area outside the realm of a pure digital asset, but it also isn’t a pure financial asset. It might make sense to entrust the existence of Bitcoin to the person you assign to take care of your digital assets, especially if they have a better knowledge base of the what/why/how of cryptocurrency.

Make sure the Bitcoin is Accessible

Unlike a traditional bank account, your executor/trustee can’t just simply contact Bitcoin (as they would your community credit union or bank) after your death. Your agent must have your private key (or username/password depending on the wallet host) in order to access and then distribute the coin as you’ve determined in your estate plan. Again, if you’re the only person who has access to your “wallet,” the Bitcoin will be forever lost in the network. If you’re comfortable with it, you could include your Bitcoin private key on a secure digital archive site like Everplans or, more traditionally, you could keep the key in a safety deposit box.

Estate Planning: On Valentine’s Day Skip the Heart Box & Go for Secure Storage

Plan for the Prudent Investor Act

Many states, including Iowa, have a version of the Prudent Investor Act. (The text of Iowa’s law can be found under the Iowa Uniform Prudent Investor Act.) Under the Act, if you die with a large reserve of Bitcoin, it could be considered an “investment” which the trusted agent could be required to sell and/or diversify. In the face of uncertainty, it’s always better to account for contingencies in your estate plan before your loved ones are faced with a bad scenario. If one of the goals of your estate plan is to grant your executor/trustee the ability to hold your Bitcoin long-term, then it’s wise to include specific language in your will or trust absolving the executor/trustee from liability if they “fail” to diversity your Bitcoin.

Top 10 Estate Planning Goals

Think About Taxes

If your executor/trustee retains your Bitcoin it would not be considered income (at least at the time of this post’s writing). However, if Bitcoin is converted to cash following your passing, it must be declared as income on an estate tax return. Additionally, if your executor were to retain Bitcoin, see it appreciate in value, and then sell it, there is the issue of the capital gains tax. (“The IRS requires American resident taxpayers to report Bitcoin trading income and losses worldwide on U.S. resident tax returns.”) Consider this in your directive of how you would like your Bitcoin to be managed in event of your death.

Fair Market Value: Step Up or Down

The fact that Bitcoin is currently considered personal property means evaluating for either a step-up or step-down in basis given the fair market value on the date of death. (I write more on this in regards to four different types of assets here.)

Let’s consider the hypothetical where Betty inherits 100 Bitcoins (BTC) from Amy. At the time of Amy’s death 1 BTC is worth $50 and when Betty goes to spend 1 BTC, it’s worth $60. That means Betty’s taxable gain on the use of the Bitcoin is $10. How much Amy initially paid for the 100 BTC is irrelevant. Again, the only relevant factor is the fair market value on the date of Amy’s death. It’s wise, as part of your estate planning, to consider your Bitcoin’s depreciation or appreciation to determine how this may affect your heirs. It’s even wiser to discuss your individual situation with professional tax and financial advisors, as well as your estate planning attorney.

Estate Planning is a Must, not an Option

It’s likely we’re going to only see more unique situations, such as that which cryptocurrency presents, in the future. While the future value of Bitcoin may be uncertain, for certain you need an estate plan, and you shouldn’t let your investment die with you. If you already have an estate plan, it’s probably a good time to revisit it to ensure it accounts for assets like Bitcoin. Email me or give me a call (515-371-6077) with questions or to discuss your digital estate planning needs.

June 11, 2019/by Gordon Fischer

Volunteering time NOT tax deductible, but out-of-pocket expenses ARE

Charitable Giving, Taxes & Finance

Did you know that April is National Volunteer Month? Celebrate and make an impact at the same time by donating your time, energy, and skills to the causes you care most about.

However, unlike the charitable contribution deduction on federal income tax for cash and non-cash assets, the IRS does not count volunteering time as a part of that deduction. However, out-of-pocket expenses relating to volunteering are deductible.

Out-of-pocket expenses are deductible if the expenses are:

unreimbursed;
directly connected with the services;
expenses you had only because of the services you gave; and
not personal, living, or family expenses.

Out-of-pocket charitable expenses which might be deductible include the cost of transportation (including parking fees); travel expenses while you are away from home performing services for a charitable organization; unreimbursed uniforms or other related clothing worn as part of your charitable service; and supplies used in the performance of your services.

As with other donations, keep good records…documentation is key!

If you have any questions I would love to be of assistance. (After all, the mission at Gordon Fischer Law Firm is to maximize charitable giving, which certainly includes volunteer time!) Reach out to me at any time via email or by phone (515-371-6077)

April 23, 2019/by Gordon Fischer

Love, Death, & Taxes: Estate Planning Considerations for Same-Sex Spouses

Estates & Estate Planning, Taxes & Finance, Wills, Trusts & Estates

Everyone needs an estate plan! This goes for if you’re a young professional or have minor children or are retired. And, it goes for all married couples!

This year marks a decade since Iowa Supreme Court decision of Varnum v. Brien, which legalized same-sex marriage in the state. This case was a precursor and set a standard echoed subsequently in other states and eventually at the national level. The Supreme Court’s opinion in Obergefell v. Hodges, which legalized same-sex marriage was a major win for both LGBTQ and human rights.

The 10-year marker of the Varnum decision reminded me that Obergefell had an enormous impact on estate planning. With same-sex marriage now recognized across the country, it opened a multitude of previously unattainable tools and tax-savings that come along with a legal and recognized marriage. Yet, same-sex couples still may have situations that require extra or special planning. You may be surprised to learn that It can’t be it covered by a single article, so I’ll hit the high points. Here are five considerations for same-sex spouses engaged in estate planning.

Unlimited Marital Deduction

The unlimited marital deduction is a money-saving must for all married couples. The unlimited marital deduction is an essential estate preservation tool because it means an unrestricted amount of assets can be transferred (at any time, including at death) from one spouse to the other spouse, free from taxes (including the estate tax and gift tax). Prior to Obergefell, same-sex couples had to depend on their individual applicable exclusion in order to provide for a surviving partner.

(Note that the marital deduction is available only to surviving spouses who are U.S. citizens. If your spouse is not a U.S. citizen, look at other tools, such as a qualified domestic trust (QDOT), which may act to minimize or eliminate taxes.)

Guardianship of Minor Children

A will is so critically important for several reasons, including the fact a parent can make a designation of guardianship for minor children should something happen to the parent while the child is still under age 18. Without a will, no guardianship can be established, and Iowa Courts must choose guardians. Unfortunately, with no clear evidence as to what the former caregivers would have preferred, the Court must make its “best guess” as to who the parents would have preferred and what would be in the best interest of the child. The Court may, or may not, choose who the caregivers would have named.

Establishing guardianship is SO important for all parents, but especially so for same-sex parents. The legal relationship between a minor child and a parent in a same-sex marriage should specifically be identified in the estate plan. Additionally, if only one spouse is currently the natural or adoptive parent of a minor child, the spouse of the said parent should consider adopting the child to legalize the relationship. Without this officially established relationship, the death of the adoptive/natural parent could open the door for a custody battle with the deceased’s family or the child’s birth parents. To avoid litigation (and avoiding litigation in estate planning is always a good idea), co-parent adoptions protect each parent’s rights regarding guardianship.

If adoption isn’t on the table, it’s smart to create a trust with specific provisions for the relationship between the non-legal parent and the minor child if someone else were to become the guardian.

(Expert advice: The adoption tax credit is not available for a spouse adopting a spouse’s child. If adoption is in the plans it may be financially advantageous for the adoption to take place prior to marriage.)

Give Your Assets to your Child(ren)

Adoption also plays an important role not just in guardianship but in the passage of assets. Typically, when parents die their assets are passed on to their child(ren). If this is indeed an estate planning goal for a same-sex couple, adoption should definitely be considered since it’s more common in same-sex marriages for only one parent to be biologically related to the child.

The term for adoption by a spouse (without the “first parent” losing any parental rights) varies from state-to-state and can be called second-parent adoption, co-parent adoption, stepparent adoption, or confirmation adoption.

Once an adoption is final, an adoptive parent has all the permanent legal rights and responsibilities of a parent-child relationship, exactly the same as that of a birth parent.

Without the legal determination and an estate plan the child(ren) may not get anything as the couple’s assets could flow instead to other family members.

Professional Planner

For all the aforementioned considerations and more, it’s smart for all couples, but especially same-sex couples, to avoid the DIY online estate plan templates. Most of these services don’t include the specific provisions and important estate plan needs of LGBT couples. Seek out a lawyer with ample experience in estate planning who understands the potential legal challenges your estate could face so they can adequately protect your assets from potential peril. For instance, if you think the situation could arise where family members who disprove of the marriage or decisions regarding the estate could create future conflict, your lawyer should be able to advise on how a “no contest” clause to be incorporated into the estate plan.

9 Reasons You Need a Lawyer to Write your Estate Plan

Comprehensive Review

As stated before, given the tax-saving tools that marriage provides, it’s nothing but beneficial to review any and all existing estate plan documents of each spouse. (Married couples often seek joint representation in estate planning, but individual representation can help couples avoid conflicts of interest.)

In your estate plan review confirm that definitions accurately reflect relationships with verbiage such as “spouse,” “children,” “husband,” “wife,” and the like, so there’s no ambiguity when it comes to execution of the plan.

Following marriage, it’s also a good idea to take a look at re-titling property (such as a home) from sole ownership to joint tenancy. This means that if one spouse were to pass, the other would get the property without it passing through probate. (Depending on your situation, you could also consider “tenancy in common” as another option for holding property titles under multiple names.)

Additionally, don’t forget to check your beneficiary designations on accounts such as savings/checking, insurance, 401k, and retirement benefits, as these designations actually trump your will.

Ask your professional advisors—lawyer, financial advisor, insurance agent—to help you maximize your money-saving benefits when it comes to gift, income, and federal/state estate taxes.

Get Started

You’ve worked hard for the assets you’ve built and the property you’ve acquired. Almost assuredly you want these assets to pass to the ones you love—the ones you’ve built a life with and around. Don’t let legal loopholes, family members that will never fully understand that love is love, or guardianship issues get in the way you crafting your legacy. It’s never too early to get started on your estate plan (with my free, no-obligation) estate plan questionnaire. I’m always happy to discuss the topic over the phone (515) 371-6077 or via email.

April 17, 2019/by Gordon Fischer

(Legal) Word* of the Day: ILIT

Estates & Estate Planning, Legal Word of the Day, Taxes & Finance, Trusts

Mark Twain famously said, “A classic is something everybody wants to have read, but no one wants to read.” Life insurance is a little like that. Everyone needs it, but we don’t like to talk about it much.

Life Insurance as Key Estate Planning Tool

Life insurance is an amazing estate planning tool. I cannot stress enough the importance of life insurance. I, of course, don’t sell it, so I have no economic stake here. It’s just that life insurance is generally reasonably and affordably priced, yet still so helpful with so many financial goals. Replacing a breadwinner’s earnings is one of the most commons ways it is utilized. But, it can also provide liquid assets for a small business when a key partner dies. Life insurance can also cover costs that you might forget about, like funeral costs or unpaid taxes. While there are many advantages to life insurance, and you most definitely need it, life insurance can also create estate planning issues.

Expert Interview: Life Insurance & Your Estate Plan

Three Estate Planning Issues Life Insurance May Create

The major issue created by life insurance is that of the “sudden windfall” to your beneficiary. Do you really want, say, your 19-year-old to inherit several hundred thousand dollars at once? Even oldsters with experience managing finances may find a huge influx of cash to be overwhelming.

Another issue to consider: does your beneficiary receive government benefits? If so, proceeds from your life insurance policy might make your beneficiary ineligible for further benefits. By the way, don’t think that those receiving government aid are all elderly. Quite the opposite! A vast majority of Medicaid recipients are under age 44. Regardless of age, any beneficiary on Medicaid, or similar government aid program, is at risk of losing benefits without careful estate planning.

Finally, for high-net-worth (HNW) individuals and families, there is the issue of the federal estate tax. Everything owned in your name at death is included in your estate for estate tax purposes. Yes, that includes the death benefit proceeds of your life insurance policy. Considering that many policies carry quite hefty death benefits (several hundred thousand dollars, or more, not being unusual), this is definitely something for those with HNW to carefully consider.

Back to School: Economics of Charitable Gifts of Life Insurance

In Trusts we Trust

I’ve explained trusts generally before. A quick primer: in simplest terms, a trust is a legal agreement between three parties: grantor, trustee, and beneficiary. This allows a third party (the trustee) to hold assets for a beneficiary (or beneficiaries).

There are a nearly infinite variety of trusts. One type of trust is an irrevocable life insurance trust or ILIT.

So, what IS an Irrevocable Life Insurance Trust?

Think of an ILIT as an “imaginary container,” which owns your life insurance policy for you. This provides several benefits. An ILIT removes the life insurance from your estate, i.e., lowers estate tax liability. Like other trusts, an ILIT allows you to decide how, when, and even why your named beneficiary receives life insurance proceeds.

Latest Iowa Lawyer Issue: Read GFLF’s Article on Irrevocable Life Insurance Trusts

Wait, what was that about the three parties?

The grantor is you, the purchaser of life insurance.

The trustee can be anyone you, as grantor, chooses — an individual(s) or a qualified corporate trustee (like the trust department at your bank). But, note a major difference between an ILIT and other kinds of trusts – with a large number of other trusts, you can name yourself as trustee. With an ILIT, you wouldn’t want to do so, because the IRS may then determine that life insurance really hasn’t left your estate.

Who can be a beneficiary of an ILIT?

Most often, spouses, children, and/or grandchildren are the named beneficiaries of an ILIT. But really, it can be any individual(s) you, as grantor, choose.

Your beneficiary and your life insurance proceeds

The conditions under which a beneficiary receives distributions from an ILIT is up to you. You can, for example, specify that your beneficiary receives monthly or annual distributions. You can decide the amounts. You may even dictate that your beneficiary receives distributions when s/he reaches milestones which you choose. For example, you can provide for a large(r) distribution when a beneficiary reaches a certain age, graduates from college or post-graduate program, buys a first home, marries, or has a child. Or, really, just about any other condition or event that you decide is appropriate.

You also have the option to build in flexibility, so that your trustee has the discretion to provide distributions when your beneficiary needs it for a special purpose, like pursuing higher education, starting a business, making an investment, and so on.

And, of course, if your beneficiary is receiving government benefits, an ILIT can account for that, as well.

Good gosh, is there anything an ILIT CAN’T DO?

Once again, an ILIT is irrevocable. While an ILIT provides a great deal of flexibility, there’s one action for certain you can’t take — you cannot transfer a policy owned by an ILIT into your own name. So, if you think that someday you may need to access the policy’s cash value for your own purposes, you probably shouldn’t set up an ILIT.

Options for “ending” an ILIT

Now, I suppose, there’s nothing requiring you to continue making insurance payments into your ILIT. Depending on the kind of policy you have, your policy may lapse as soon as you miss your premium payment. Or, if your policy has cash value, these funds may be used to pay premiums until all the accumulated cash is exhausted. So, that’s an option for “ending” an ILIT.

101 Assets You Could Place in a Trust

I bet you have some questions. Let’s talk!

An ILIT can provide you, your loved ones, and your estate with significant benefits. To learn more, contact me at my email, gordon@gordonfischerlawfirm.com, for a free consultation, without obligation. You can also give me a call at 515-371-6077.

*Yes, you’re right – ILIT is really not a word, but an acronym. You caught me. It’s just that Legal Word of the Day sounds more exciting than Legal Acronym of the Day. Also, congratulations to you for being the kind of person who reads footnotes.

**In 2019 an individual must have an estate of more than about $11.18 million, and a married couple an estate of more than $22.8 million, before they need to worry about federal estate taxes.

April 8, 2019/by Gordon Fischer

Final Four: 4 AMAZING Tax Breaks for Iowans on Charitable Gifts

Charitable Giving, Taxes & Finance

Minneapolis, Minnesota may have the Final Four, but Iowa has such generous tax benefits for charitable gifts. In fact, in Iowa, donors can receive four amazing tax benefits for charitable gifts. Your March Madness bracket may be busted already, but these benefits are ones you can bank on.

Appreciated, long-term property

For donors and potential donors, the ideal asset for charitable donations will depend on a whole range of factors. But, when donating to charity, one type of asset to seriously consider is appreciated, long-term property. Common examples of such property would include publicly traded stock, real estate, and farmland. First, a couple of terms to be clear on:

Appreciated: simply means increased in value.
Long-term: property held for more than one year (e.g., 366 days).

Give now, rather than later

The four tax benefits I’ll outline are only available when the charitable gifts are made during a lifetime. It’s been said, “You should be giving while you are living, so you’re knowing where it’s going.” Many Iowans have philanthropic intentions to donate to their favorite causes eventually, usually at death through their estate plan, will, and testamentary trust. Why not give now? You can have more say about your charitable gifts while you are still alive, and also feel the joy that comes with helping the causes you care about most. Again, there are also lots of good tax reasons for giving now rather than later.

Benefits of gifting appreciated, long-term property

While not celebrated as much as the Final Four, there are four genuinely exciting tax benefits for charitable gifts of appreciated, long-term property.

Double Federal Tax Benefit

When you gift appreciated, long-term property (ALTP) to a charity during lifetime, you may receive a double federal tax benefit. First, you can receive an immediate charitable deduction on your federal income tax, which is equal to the fair market value of the property. Second, assuming, of course, you have owned the property for more than one year, when you donate the property, you avoid the long-term capital gain taxes you would have owed if you sold the property.

Let’s look at a concrete example to make this clearer. Pat owns appreciated, long-term property (such as stocks, real estate, or farmland) with a fair market value of $100,000. Pat wants to use the property to help favorite causes in the local community. Which would be better for Pat–to sell the property and donate the cash, or give the property directly to favorite charities? Assume that the property was originally purchased at $20,000 (basis), Pat’s income tax rate is 35%, and the capital gains tax rate is 20%.

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise your personal situation on these matters.

Again, a gift of appreciated, long-term property, made during your lifetime, is doubly beneficial. You receive a federal income tax charitable deduction equal to the fair market value of the property. You also avoid the capital gains tax. In Iowa, there is even a greater potential benefit. You may receive a 25% state tax credit for such charitable gifts, lowering the after-tax cost of your gift even further.

25% Endow Iowa Tax Credit

Under the Endow Iowa Tax Credit program, gifts during lifetime can be eligible for a 25% tax credit. There are three requirements to qualify.

The gift must be given to, or receipted by, a qualified Iowa community foundation.
The gift must be made to an Iowa charity.
The gift must be endowed—that is, a permanent gift. Under Endow Iowa, no more than 5% of the gift can be granted each year. The rest is held by and invested by a local community foundation.

Let’s look again at the case of Pat, who is donating appreciated, long-term property per the table above. If Pat makes an Endow Iowa qualifying gift, the tax savings are very dramatic:

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise your personal situation on these matters.

Pat gave a significant and generous gift to a charity of $100,000. But using the Endow Iowa Tax Credit, coupled with the federal income tax charitable deduction and capital gains savings, the after-tax cost of the gift of $100,000 is less than $20,000. Plus, because the gift was endowed, it will be invested by Pat’s local community foundation and will presumably grow through its investment. Thus, it will continue benefiting the charities Pat cares about most!

Note again Pat’s huge tax savings. In this scenario, by giving appreciated, long-term property during lifetime, Pat receives $35,000 as a federal charitable deduction, avoids $16,000 of capital gains taxes, and gains a $25,000 state tax credit, for a whopping total tax savings of $76,000.

25 Days of Giving: Basics of the Endow Iowa Tax Credit Program

Gift Tax Considerations

Yet another benefit: charitable gifts are exempt from federal gift tax. In fact, charitable contributions made to qualifying charities are not the only deductible on itemized tax returns, but you may also deduct the value of your charitable donations from any amount of gift taxes you owe.

Areas of Caution

Going back to our example, this is a great deal for Pat and a great deal for Pat’s favorite causes. But, could anything go wrong with this scenario? There are a few areas of caution.

Latest Iowa Lawyer Mag Article: Charitable Giving Strategies Under the Revised Tax law

Charitable Deduction Capped

The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of an appreciated, long-term property is limited to 50% of your adjusted gross income (AGI) to public charities and 30% of AGI to private foundations. You may, however, carry forward any unused deduction amount for an additional five years.

Tax Talk: Federal & State Differences on the Charitable Deduction Limitation

Endow Iowa Capped

Endow Iowa Tax Credits are also capped both statewide and per individual. Iowa sets aside a pool of money for Endow Iowa Tax Credits and it is first come, first served. In 2018, approximately $6 million in tax credits were available annually through Endow Iowa. This means it’s not only is it important to make your gift but to fill out and return your Endow Iowa application as quickly as possible. Donors who do not receive tax credits in the year the gift is made will be first in line for the new supply of the next tax year’s credits. (Here’s the 2019 Endow Iowa Tax Credit Application.)

There is also a cap on Endow Iowa tax credit per individual. Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million (if both are Iowa taxpayers). (Since the inception of the Endow Iowa Tax Credit Program, Iowa Community Foundations have leveraged more than $215 million in permanent endowment fund gifts!)

IRS Requirements for Non-Cash Gifts

Additionally, to receive a charitable deduction for non-cash gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. You need to engage the right professionals to be sure all requirements are met. A notable exception to the appraisal requirement is appreciated long-term, publicly traded stock.

Gifting Publicly Traded Stock to Charity? Here’s how to Assess Value

Advice Needs to be Individualized

Finally, all individuals, families, businesses, and farms are unique and have unique tax issues. This article is presented for informational purposes only, not as tax advice or legal advice. Make a fast break to consult a legal professional for personal advice.

All of this can be a bit confusing as you’re working out your planned giving strategy. Do not hesitate to contact me and we can work together to maximize your tax-wise giving.

April 6, 2019/by Gordon Fischer

Sweet Sixteen: 16 Reasons Charitable Gift Annuities Are Great Tools for Philanthropic Giving

Charitable Giving, Taxes & Finance

The #SweetSixteen is a time of celebration for teams which made the elite group. Similarly, with charitable gift annuities (CGAs), donors can experience the joy of giving to their favorite causes. But, unlike making the Sweet Sixteen, CGAs aren’t hard, they are relatively easy to understand and execute. Also unlike the Sweet Sixteen, CGA donors don’t have to be part of an elite group; all donors, regardless of income, or class, or status, can enjoy the many benefits CGAs offer.

ABCs of CGAs

A CGA is easy to understand, about as easy as a fast break lay-up. A CGA, put simply, is a contract. Specifically, a CGA is a contract in which a charity agrees to pay a fixed amount of money to one or two individuals for their lifetime(s), in return for a transfer of assets (such as, say, cash, stocks, or farmland).

A person who receives payments is called an “annuitant” or “beneficiary.” After the annuitant(s) die(s), or the term of the contract ends, the charity keeps the remainder of the gift.

ABCs of CGAs: Basics of Charitable Gift Annuities

Sixteen Sweet Benefits of a CGA

Before we go deep into CGAs, I’ve listed 16 key advantages of CGAs.

CGAs are simple to execute.
CGAs are (relatively) easy to understand and explain.
CGAs avoid management responsibilities.
CGAs may be executed during lifetime (called an inter vivos transfer), or by operation of a will (called a testamentary transfer).
CGAs allow a donor to provide a consistent stream of income for others.
CGAs pay lifetime income to one or two individuals, part of which is (most often) a return of principal and free from income tax.
CGAs provide an immediate income tax charitable deduction for the donor for the gift portion.
When appreciated property (such as stock or real estate) is provided to fund a CGA, and the donor is an annuitant, some of the capital gain is spread over the donor’s life expectancy, and the rest is never recognized because it is attributed to the gift portion.
Depending on all the circumstances, CGAs can possibly save a donor taxes on Social Security benefits.
The income payout from CGAs can begin immediately or can be deferred.
The income payout from CGAs is guaranteed.
The income payout from CGAs is fixed (e.g., same amount is paid each payment period).
The charity’s obligation to make the income payout is backed by the general assets of the charity.
For some donors, especially in today’s low-interest environment, CGAs may present an attractive alternative to CDs.
In certain situations, CGAs can supplement retirement income.
CGAs provide the joy of giving to your favorite causes.

Three More Points on the Scoreboard—Three Types of CGA Agreements

1. Immediate Gift Annuity

Under an immediate gift annuity, the annuitant(s) start(s) receiving payments at the start/end of the payment period immediately following the contribution. Payments can be made monthly, quarterly, semi-annually, or annually.

2. Deferred Gift Annuity

Under a deferred payment gift annuity, the annuitant(s) start(s) receiving payments at a future time, the date chosen by the donor, which must be more than one year after the date of the contribution. As with immediate gift annuities, payments can be made monthly, quarterly, semi-annually, or annually.

3. Flexible Annuity

Under a Flexible Gift Annuity (also known as a Deferred Payment Gift Annuity), the donor need not choose the payment starting date at the time of her contribution. The annuitant (who, remember, may or may not be the donor) can choose the payment starting date based on their retirement date or other considerations.

Jump Ball—Choosing Start Date of Deferred CGA

Under an immediate gift annuity, annuity payments begin no later than one year after the initial contribution.

A deferred gift annuity allows the donor to delay the start date of annuity payments. This delay will increase the annuity amount when payments begin and result in a larger income tax charitable deduction which is available in the year of the contribution (subject, as are all charitable donations, to Adjusted Gross Income (AGI) limits).

A deferred gift annuity can produce current tax savings during high-earning years while creating a supplemental retirement income. Generally, the donor sets a date for the deferred gift annuity to begin. However, the IRS approved a deferred gift annuity which did not specify a fixed starting date for the annuity payments [IRS Ltr. Rul. 9743054].

March Madness Inspired: 64 Charitable Gifts of Non-Cash Assets

Don’t Foul Out—Charities Issuing CGAs Must Follow Certain Rules

CGAs are an exception to the general rule that charities cannot issue commercial insurance contracts. As such, charities which issue CGAs must comply with several rules. The basics of the rules may be simplified as follows:

The present value of the annuity must be less than 90 percent of the total value of the property transferred in exchange for the annuity. In other words, the charitable interest must be at least 10 percent.
The annuity cannot be payable over more than two lives, and the individual(s) must be alive at the time the gift annuity is set up.
The gift annuity agreement cannot specify a guaranteed minimum, nor a maximum, number of annuity payments.
The actual income produced by the property transferred in exchange for the gift annuity cannot affect the amount of the annuity payments.

Four Point Play—Tax Advantages

In basketball, a four-point play is a rare occasion when a player makes a three-point shot while being fouled. Similarly, it is rare for a charitable gift to offer four potential tax advantages to donors, as the CGA does. The CGA can have a positive effect on the donor’s charitable deductions, income taxes, capital gains taxes, and gift taxes.

Federal Income Tax Charitable Deduction

A CGA is considered part gift and part sale, as the donor contributes property in exchange for annuity payments from the charity. The donor who itemizes deductions on her taxes may take an income tax charitable deduction for the gift portion (i.e., the value of the transferred property minus the present value of the annuity).

This income tax charitable deduction is subject to the same limits as an outright gift of cash or property. For example, if cash is transferred for the CGA, the limitation of the deduction is 50 percent of the donor’s AGI. Or, if long-term capital gain property is transferred the limitation is 30 percent of AGI. Any deduction in excess of the applicable percentage limitation may be carried forward for five years.

What recordkeeping is required for charitable deduction?

Taxation of Payouts

The annuity payments by the charity under a CGA are treated for income tax purposes as follows:

Tax-free return of principal
Long-term capital gain
Ordinary income

Let’s break each of these categories down.

Tax-Free Return of Principal

A portion of each payment received by the donor, or another annuitant, is a tax-free return of principal until the cost of the annuity is fully recovered when the annuitant reaches life expectancy. Put another way, a portion of the payments is considered to be a partial tax-free return of the donor’s gift, which are spread in equal payments over the life expectancy of the annuitant(s).

The assumed cost of the annuity does not include the gift portion of the transaction. The donor’s cost basis must be allocated between the gift and sale portions in accordance with the respective proportions of the value of the property transferred.

Long-Term Capital Gain

When a taxpayer sells long-term, appreciated property, such as stocks or real estate, she generally pays capital gains on the appreciation. If long-term, appreciated property funds a CGA, a portion of each payment will be taxed as long-term capital gain. This will reduce the income tax-free return of the principal portion of the annuity payments.

Under general tax rules, long-term capital gain is recognized in the year the property is sold. Capital gain is recognized only on the sale portion of the transaction and with the basis allocation previously described. However, with a CGA, the donor may spread the gain over life expectancy, assuming either a sole annuitant or the donor has another individual named as a survivor annuitant. It’s obviously beneficial for a donor to be able to defer capital gains taxes.

Case Study for St. Patrick’s Day: Save Some Green on Gifts of Long-Term Capital Assets

Ordinary Income

After the capital gain and tax-free portions of the annuity payment have been determined, the balance of the payment will be taxed as ordinary income.

Gift and Estate Taxation

If the donor is the sole annuitant, there are no gift or estate tax issues because both the annuity is her own and the annuity terminates at death. If the donor names anyone other than herself as an annuitant, gift and estate tax issues may arise.

Regarding the gift tax, if the donor names another person as an annuitant, the gift is the value of the annuity. An exception exists for a spouse under the gift tax marital deduction. Another alternative to avoid gift tax: the donor could retain the right to revoke when the named annuitant has a survivor interest.

Regarding the estate tax, if the donor names another person as an annuitant, the remaining value in the annuity is considered part of the donor’s estate. An exception exists for a joint annuity using only the donor’s life as the measuring life. Of course, there is also an estate tax marital deduction available if surviving annuitant is a spouse.

Low-Interest Rates = Higher Tax-Free Income

The Applicable Federal Rate (AFR) selection decision is more nuanced for gift annuities than for other planned gift tools. A donor who wants to maximize their deduction will select the highest rate available, but this reduces the overall value of the annuity and increases the amount of the charitable gift. Conversely, a donor who wants to maximize the income tax-free portion of the annuity payments will select the lowest available rate.

When the Clock Runs Out—Testamentary CGAs

If carefully planned, it is possible to arrange a CGA through a will. The IRS approved a testamentary gift annuity in Ltr. Rul. 8506089. It is crucial that both the bequest amount and annuity payout are made clear by the terms of the will.

A donor should engage an expert estate planning expert to handle the careful drafting needed for a testamentary CGA. A donor, together with his estate plan professional, should address two issues:

What if the designated annuitant(s) predecease(s) the testator? (The testator is the person who makes the will).

The donor may want to specify a contingent annuitant or provide for an outright bequest to the charity.

2. What about the payout rate?

The donor could (or should) leave the charity some flexibility in the payout rate, to assure the 10 percent minimum charitable interest requirement can be met in the future.

March Madness: A Charitable Giving Take on the Bracket

Winning Point

Donors and nonprofits can both score big with CGAs and this charitable tool can be a slam dunk for all parties!

The mission of Gordon Fischer Law Firm, P.C. is to promote and maximize charitable giving in Iowa. I offer training on complex gifts, like CGAs, for nonprofit boards, staff, and stakeholders. Contact me for a free one-hour consultation; I can always be reached at Gordon@gordonfischerlawfirm.com or at 515-371-6077.

March 28, 2019/by Gordon Fischer

March Madness Inspired: 64 Charitable Gifts of Non-Cash Assets

Charitable Giving, Taxes & Finance

Want to help make your favorite charity a winner? Encourage the charity to discuss the potential of charitable gifts of non-cash assets with donors. Donee charities can gain access to what has been called prospective donors’ “treasure chest” of non-cash assets. After all, the vast majority of a potential donor’s net worth will not be in cash, but in non-cash assets such as a home, retirement benefit plan, life insurance, etc.

Inspired by the start of NCAA March Madness, and the number of bracketed teams, here are 64 non-cash assets that could be used for charitable gifting.

Please note the alphabetized listing, I’m not recommending one gift over another, since so much depends on the individual circumstances of the donor.

Airplanes
Antique Automobiles
Antiques
Artwork
Assets held by C Corporation
Assets held by S Corporation
Autograph Books
Barn Doors
Beach House
Beanie Babies
Boats
Bonds
Books
C Corporation Stock
Coin collections
Comic books collection
Commercial and residential real estate
Condominiums
Credit Card Rebates
Depression-era Glass
Dolls
Enamelware
Equestrian Ribbons
Farmland
Gold Bullion
Grain
Guitars
Hedge Fund Carried Interest
Historic Papers
Installment Notes
Intellectual Property
Life Insurance
Limited Liability Partnerships
Livestock
Marbles
Mineral Rights
MLB Team
Mutual Funds
Oil and Gas Interests
Operating Partnership Units
Paint-by-number Landscapes
Painted Planks
Paintings
Patents
Photographs
Pooled Income Funds
Racehorses
Real estate
Restricted Stock (144 and 145)
Retained Life Estate
Retirement benefits
Royalties
S Corporation Stock
Sculpture
Sculpture Garden
Seat on New York Mercantile Stock Exchange
Seats at Events
Stamp Collection
Stocks
Tangible Personal Property
Taxidermy
Timber Deeds
Vacation Home
Vehicles

Pretty exhaustive list right? Like stamps and dolls, there are so many assets that you likely never even considered could be a charitable gift. And, that’s where I come in and can assist! If you’re a donor or donee nonprofit do not ever hesitate to contact me. I can always be reached at gordon@gordonfischerlawfirm.com and 515-371-6077.

March 15, 2019/by Gordon Fischer

Young People Should Be the Most Concerned with Estate Planning

Estates & Estate Planning, Powers of Attorney, Taxes & Finance, Trusts, Wills, Wills, Trusts & Estates

So, WHO needs an estate plan, anyway?

Who needs to be most concerned with estate planning? What age group? Ask Iowans this question, and I’ll bet most would conjure up the image of a retiree who just spent 50+ years working hard to acquire significant assets. Of course, it’s important for this demographic to have a quality estate plan, that’s fairly obvious.

But, imagine a young, married couple. They both have good jobs, live in a fine starter home, and have a baby.

This young couple tries to put away a little bit of money for savings, in a 529 college fund, and for retirement. Why should they worry about estate planning?

The truth is, this young couple should be just as concerned–arguably, even more concerned–with estate planning as the retiree.

Here are four reasons why:

Choosing guardians for minor children. In an estate plan, you can choose the guardians of minor children (e.g., children under age 18). If you should become incapacitated, or even die without any estate plan, an Iowa court would have no choice but to appoint a guardian for your children – but it may not be who you wanted or would have chosen. Better to have plenty of time to consider and make a careful, well-reasoned choice.

Show Your Kids You Love ‘Em with a Testamentary Trust

Save on fees, court costs, and taxes. A good estate plan can save you and your estate money on fees, court costs, and taxes. These savings can be even more critically important for a smaller estate (more likely when you’re younger), than for larger estate (more likely as you grow older). Often, young folks actually have the greatest need to save money to pass along the greatest amount they possibly can to family and loved ones.

Help favorite charities. Having an estate plan means that you can put into place immensely helpful donations for your favorite charities. Without an estate plan there’s no opportunity for you to help your favorite charities

Let’s Head Back to School! First Lesson is on Planned Giving

Life is uncertain. It may be awkward to talk about, but life isn’t guaranteed for any of us, young or old. There’s an old saying in estate planning circles that goes, “People don’t always die when they are supposed to.” Wives usually outlive their husbands, parents usually outlive their children, and so on, but not always. It is best to be prepared for anything and everything.

Who should be most concerned with estate planning? I actually think young people should be!

Whatever your age, if you are interested in estate planning (as everyone should want to check it off their list), a good place to start is my free Estate Planning Questionnaire. Questions? Want to discuss you personal situation? Contact me for a free consult!

November 28, 2018/by Gordon Fischer

What’s the Difference Between Public Charity & Private Foundation

Charitable Giving, Nonprofits, Taxes & Finance

Since 1968, every Section 501(c)(3) organization is classified by the IRS as either a private foundation or a public charity. This classification is crucial for at least two reasons to anyone considering forming a nonprofit or anyone considering making a significant donation to a nonprofit.

First, private foundations are subject to much stricter regulations than public charities. Second, public charities receive more favorable tax treatment than private foundations. Let’s explore each classification a little deeper.

Public Charities

Public charities must attract broad donor support. Some organizations—churches, schools, and hospitals for instance—are by their very nature considered “publicly supported.” Other organizations must pass mathematical public support tests to qualify as a public charity. These tests require charities to obtain funding from numerous sources, rather than one singular source, or a small group of related funders.

When a charity passes one of the public support tests, it is demonstrating to the IRS that the general public (non-insiders) evaluated the charity’s performance and found it worthy of financial support. As a result, such charities are treated as having a sort of stamp of approval of the general public, lessening the need for the stricter IRS scrutiny applied to private foundations.

Private Foundations

Private foundations are funded by an individual, a family, a company, or a small group. Two prominent examples would include the Ford Foundation and Bill & Melinda Gates Foundation.

Private foundations are subject to a more strict regulatory scheme than public charities. There are penalties for self-dealing transactions, failure to distribute sufficient income for charitable purposes, holding concentrated interests in business enterprises, and making risky investments. The IRS recognizes two types of private foundations: private non-operating foundations and private operating foundations. The main difference between the two? How each distributes its income:

Private nonoperating foundations grant money to other charitable organizations.
Private operating foundations distribute funds to their own programs that exist for charitable purposes.

In general, private foundations can accept donations, but many do not and instead have endowments, as well as invest their principle funding. The income from the investments is then distributed for charitable activities/operations.

Deduction limits

Contributions made to public charities and private foundations may be deducted from the donor’s federal income tax. The amount of the deduction is subject to certain limits under federal tax law.

Gifts to public charities receive more favorable tax treatment than gifts to private foundations—this includes donor limits. For example, a charitable cash donation to a public charity would be deductible at up to 50 percent of the taxpayer’s adjusted gross income (AGI), but the same gift to a private foundation is deductible at a rate of only 30 percent of AGI.

A word on the word “foundation”

Don’t assume that an organization with “foundation” in its title/name is indeed a private foundation and not a public charity. Of course, it could be, but many types of nonprofit organizations have adopted “foundation” as part of their name to help project a mission and/or identity. (Examples include Friends of Animal Center Foundation and the Iowa City Public Library Friends Foundation.) If you’re entirely unsure if a nonprofit you’re considering donating to is a private foundation or public charity, simply ask one of the nonprofit’s executives or appropriate contact.

If you’re wanting to make a complex gift or include nonprofits as beneficiaries in your estate plan it’s wise to work with an attorney experienced in those areas. Of course, I would be happy to help.

Have any questions? Want to discuss your charitable donation or formation of your dream nonprofit? Contact me by email or phone (515-371-6077) .

October 27, 2018/by Gordon Fischer

Tax Talk: Iowa’s Inheritance Tax

Estates & Estate Planning, Taxes & Finance, Wills, Trusts & Estates

We talk about taxes and fees a lot in estate planning because if you don’t have a quality plan in place your estate will likely be hit with taxes and fees to a varying degree. Actual figures depend on the gross value of your estate, what state you lived in, and what strategies you employed (such as a living revocable trust) that help to reduce or even eliminate taxes and fees.

Recently I wrote about one specific tax that only applies to states—the state estate tax. If you don’t have time to read the full post and live in Iowa, the bottom line is that generally you won’t need to worry about it. Unlike places like Minnesota and Illinois, Iowa does not have a state estate tax. However, Iowa DOES have a special “death tax” that only six states in the U.S. have.

Tax Talk: If You Die in Iowa is There a State Estate Tax?

What is an Inheritance Tax and how is Different than an Estate Tax?

At first glance the inheritance tax seems mighty similar to the estate tax (both state and federal). Indeed, both are collected after someone’s death. However, an estate tax is assessed by the overall gross value of a person’s estate. This figure totals up all assets passed to all beneficiaries, regardless of their relationship to to the decedent (the person who passed away).

Any estate taxes owed are paid out of the estate assets before beneficiaries receive their distributions. And, the estate executor is responsible for making certain any state or federal estate taxes owed are fulfilled.

The inheritance tax, instead, is a tax levied on assets and property certain beneficiaries have inherited from someone who has died. I say “certain” because in most states the relationship of the beneficiary to the person who died determines if inheritance tax is owed or not. Amount of tax owed is calculated on each eligible beneficiary’s share of the estate and the beneficiary’s relationship to the decedent.

The beneficiary subject to estate taxes is personally responsible for filing the tax. In Iowa this means filling out Form 706 and filing before the due date on the last day of ninth month after death.

What the New Tax Law Means for Your Estate Plan

Iowa’s Inheritance Tax

The good news in light of all this tax talk is that Iowa’s inheritance tax only applies in certain situations. Not every Iowan who passes away will render their heirs subject to more taxes. For instance, Iowa’s inheritance tax does not apply if the estate is valued at $25,000 or less.

The following, among others, are exempt from Iowa’s inheritance tax:

Spouses
Beneficiaries who are descendants including children (biological and legally adopted), stepchildren, grandchildren, and great-grand-children.
Beneficiaries who are lineal ascendants such as parents, grandparents, and great-grandparents.
Life insurance
Annuities purchased under a retirement or employee pension plan
Assets left to U.S. charitable, religious, and educational organizations

As you can see, most people won’t ever have to deal with Iowa’s inheritance tax. So, who isn’t exempt as a beneficiary? Domestic partners, friends, and non-lineal relatives such as nieces, nephews, siblings, aunts, uncles, and cousins are all subject to the inheritance tax on the assets they inherit. Assets bequest to corporations or social/fraternal organizations don’t fit the qualifications as “educational, religious, or charitable” and are therefore not exempt.

Iowa’s max inheritance tax rate is 15%. (Which is better than our neighboring state of Nebraska, which has the highest top inheritance tax rate of 18%.)

In case you were wondering, there is no federal inheritance tax to worry about.

How do I Know if my Estate or Beneficiaries will owe Taxes?

Consult with an experienced estate planner and other professional advisors so that may they thoroughly evaluate if your estate will be subject to estate or inheritance taxes. Regardless, it’s a good idea to start looking into strategies and estate planning tools to reduce the burden of (all) taxes on your beneficiaries.

One way to do that during your lifetime is to gift (cash or non-cash) assets during your lifetime. The gift tax rate is currently at $15,000. Meaning the IRS will allow you to give away up to that amount, per donee (person receiving the gift), every year, without facing a gift tax.

I also highly recommend consulting an estate planner and other related trusted professional advisors to review your estate planning goals, financial situation, and assets. There are all sorts of unique considerations people face in that demand a thorough review and thoughtful solutions.

Have any questions or owe inheritance taxes yourself? Don’t hesitate to contact me at gordon@gordonfischerlawfirm.com or by phone at 515-371-6077.

August 21, 2018/by Gordon Fischer