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25 Days of Giving: Help a Charity With Your Retirement Assets

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blue and tan present

Thanks for reading the 25 Days of Giving series! Plan on coming back to the blog every day from now through Christmas Day.

In December there is gift giving with wrapping paper abound, but when it comes to charitable giving the important assets (like your retirement assets) don’t need ribbons or bows. Let’s first focus on a major retirement asset giving tool, the IRA charitable rollover.

IRA Charitable Rollover

This federal law allows donors age 70½ and older to make direct distributions of up to $100,000 from his/her IRA each year to any qualified charity. The donation is not treated as taxable income and, moreover, counts toward the donor’s required minimum distribution for that year.

At the end of 2015, Congress made the IRA charitable rollover a permanent giving tool, unlike the year-to-year renewal basis they had operated on since the introduction of the IRA charitable rollover in 2006 (as part of the Pension Protection Act).  The result? Tax savvy IRA account holders can now plan charitable giving in a more reliable way.

The IRA Charitable Rollover, Explained

Other Options

There are two other accessible ways to direct retirement benefit plan assets to your favorite charity:

  • Gifts at death via beneficiary designations.
  • Withdrawals over age 59½ followed by outright deductible gifts that can effectively result in tax-free retirement plan gifts.

Keep in mind, too, that the IRA charitable rollover applies only to IRAs. These two options — gifts at death via beneficiary designations and withdrawals by those older than 59½ — will work with virtually all qualified retirement plans, including 401(k)s and 403(b)s. baubles on a green tree

Naming your favorite charity as beneficiary

Donors considering charitable bequests may not realize that they can make a meaningful gift simply by naming their favorite charity as the beneficiary of an IRA, 401(k), 403(b), or other retirement plan. Giving retirement assets in this way is easy, and does not require drafting or amending a will or trust. A donor simply has to contact his/her financial institution holding the retirement benefit plan and request a change of beneficiary form.

Note, however, that if the account holder is married, the spouse should be informed and may have to consent to the gift. The plan assets may also be left to a charitable or marital trust[s]. In the latter case, professional advisors should be consulted. (Hint: call me!).

9 Reasons You Need a Lawyer to Write your Estate Plan

Give now!

Donors could also choose to make current gifts using funds withdrawn from their qualified retirement plans. Individuals over age 59½ may generally withdraw funds from retirement plans without penalty, make a gift with these funds, and then claim an offsetting charitable deduction. In most cases, a gift made in this manner will be a “wash” for tax purposes.

Let’s take a quick example. Rebecca (age 64) wants to make a very generous donation of $10,000 to her favorite charity. She can withdraw $10,000 from her IRA or 401(k) account, and make that donation. Assuming she itemizes her tax deductions, the $10,000 donation should leave her “even Steven” with regard to taxes – the $10,000 in income is offset by the $10,000 charitable deduction, resulting in zero net income taxes.

Benefits of Smart Estate Planning: Avoiding Taxes and Fees

Advice is Priceless

The decision to want to give to you favorite causes this season is easy. Knowing exactly where to start with smart giving can be a little more complex. If you have questions about the IRA charitable rollover or any other giving strategy, don’t hesitate to reach out via email or by phone (515-371-6077). My firm’s mission is to maximize charitable giving in the state of Iowa and I want to help YOU maximize your personal charitable giving (in a way that is also tax efficient).

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National Estate Planning Awareness Week & a Brief History Lesson

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this week calendar

Believe it or not, National Estate Planning Awareness Week is a very real thing and we’re celebrating October 21-27! Let’s kick it off with a brief history on the Week and estate planning in general.

Background on National Estate Planning Awareness Week

National Estate Planning Awareness Week was an effort spearheaded by the National Association of Estate Planners & Councils (NAEPC) and Rep. Mike Thompson (D-CA) (with 49 other Representatives on board).  In September 2008, Congress passed H. Res. 1499 which designated the third week in October as a week for assisting the public in understanding the importance and benefits of estate planning, as well as how to assemble a qualified team of experts to assist in the process.

In general, it’s in the best interest of society when the transfer of wealth and property is as seamless and as close to the decedent’s intent as possible. That’s where estate planning comes in and why it’s so essential.

Sure, you won’t see decorations for sale for National Estate Planning Awareness Week…but you can still celebrate by discussing your estate planning needs and goals with a qualified, experienced estate planning attorney. This goes for your first (much needed) estate plan, but also revisions on existing estate plans. (Remember, estate plans never expire!)

5 Scenarios for Estate Planning Revisions

Time Warp: A Brief History of Estate Planning

For as long as people have had property, that property has been distributed or passed along in some manner or another. In early cultures property was considered to be owned collectively by a family or tribe and when a leader of the group perished the assets were divided in accordance with family/tribal customs.

Estate planning was apparent in ancient Rome under the Code of Justinian which recognized oral and written wills that were approved by a public official. In the Anglo-Saxon period of England, royalty had to approve land transfers. That changed in the 12th century when property would automatically pass to the eldest son. Under English law, the Statute of Wills was established in the 16th century which allowed a landowner to pass along their land as they wished, whether that was to the eldest or not.

Current state intestacy laws are a modern iteration of British common law in which property inheritance passed to the spouse and children in pre-defined percentages.

Unfortunately, women were often excluded entirely from estate planning; assets were only distributed amongst male heirs at law and women were disinherited. At certain points throughout history, women (such as a wife or daughter) could be provided for through a trust upon the death of the husband/father, but often that trust was dissolved if/when the woman married/remarried. Thankfully policy and society progressed, and now women and men have an equal right to inheritance and ability to convey assets.

(Legal) Word of the Day: Trust

To that point, the individual American citizen of today has the freedom to plan for the distribution of property as wished without approval needed or mandate defining who can and cannot be a beneficiary.

Estate Planning in the United States

Statue of Liberty

In U.S. history, estate planning has been intricately linked with estate taxes because estate planning techniques are tools to reduce or even eliminate the Federal estate tax. To understand that in full you could go all the way back to the Stamp Act of 1797, where a tax was passed to fund the Navy in an “undeclared war with France.” The estate tax was subsequently abolished and then reinstated with corresponding wars including the Civil War and Spanish American War.

The estate tax, more or less as we think of it today, was instituted in association with World War I in 1916. To bypass this, people would gift parts of their estates to their families to which the lawmakers responded to by passing a gift tax in 1924. It was briefly repealed and then re-enacted in 1932 and remained that way until 1976 when the gift and estate tax were consolidated.

In modern political history, the estate tax has seen a few major changes; it was entirely revoked in the 2010 calendar year after 2001 legislation phased out the tax. However, that didn’t last long. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 meant a return of the estate tax but raised the exclusion to $5 million for 2011 and 2012. Then came the American Taxpayer Relief Act of 2012 which kept the $5 million inflation-adjusted exclusion figure, but increased the maximum rate of the tax to 40 percent from 35 percent. In 2018, the exclusion rate sits at $11.18 million per individual. This means an individual can leave $11.18 million to heirs and pay no federal estate or gift tax. Married couples get an exclusion for each spouse, so a couple can leave up to $22.36 to their heirs and IRS won’t collect estate tax on it.

What the New Tax Law Means for Your Estate Plan

Final Footnote

All of this history is to say that estate planning, in some form or another, has been an important aspect of societies in the world for a long time. Regardless of the size of your estate, and just like the ancient Romans or Americans of the early 1900s, you want to pass along your assets to the people you care about and want to provide for. Claim your right to distribute your property in accordance with your wishes by ensuring you have an up-to-date, quality estate plan. The best way to get started is with my free (and no obligation) Estate Plan Questionnaire. It’s a great tool for organizing all the important information you and your estate planner need to know when creating your custom estate plan.

Think Estate Planning is Just for the Wealthy? Think Again!

This is the first of a week’s worth of articles all dedicated to the topic of estate planning as a part of National Estate Planning Awareness Week. Want to discuss your estate plan or talk about the history of the estate tax? Don’t hesitate to contact me.

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

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hands in huddle

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!

love your neighbor hat

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)

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

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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.

  1. CGAs are simple to execute.
  2. CGAs are (relatively) easy to understand and explain.
  3. CGAs avoid management responsibilities.
  4. CGAs may be executed during lifetime (called an inter vivos transfer), or by operation of a will (called a testamentary transfer).
  5. CGAs allow a donor to provide a consistent stream of income for others.
  6. CGAs pay lifetime income to one or two individuals, part of which is (most often) a return of principal and free from income tax.
  7. CGAs provide an immediate income tax charitable deduction for the donor for the gift portion.
  8. 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.
  9. Depending on all the circumstances, CGAs can possibly save a donor taxes on Social Security benefits.
  10. The income payout from CGAs can begin immediately or can be deferred.
  11. The income payout from CGAs is guaranteed.
  12. The income payout from CGAs is fixed (e.g., same amount is paid each payment period).
  13. The charity’s obligation to make the income payout is backed by the general assets of the charity.
  14. For some donors, especially in today’s low-interest environment, CGAs may present an attractive alternative to CDs.
  15. In certain situations, CGAs can supplement retirement income.
  16. CGAs provide the joy of giving to your favorite causes.

basketball court with ball in hoop

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.

slam dunk with a basketballFederal 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:

  1. Tax-free return of principal
  2. Long-term capital gain
  3. 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:

  1. 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.

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

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Rows of 100 dollar bills

There’s that pragmatic, and slightly depressing saying that the only sure things in life are death and taxes. But what about taxes on death? Just like you can’t escape taxes in life, they government can tax your estate at death. Indeed, it’s often referred to as the “death tax.”  And, just like taxpayers file both federal and state income taxes, there are both federal and state estate taxes.

People having a meeting at a desk with papers

What is an Estate Tax?

When a U.S. resident dies, an estate tax may be levied against the gross estate, which includes the fair market value (FMV) of all owned property, as well as any assets the deceased had interest in (e.g. assets like life insurance). Think of it like the gross income figure you calculate for income tax returns.

Federal Estate Tax

Let’s start with federal estate taxes. Because this is a federal tax, this applies regardless of what state you die in.

Not too long ago, I reviewed the Tax Cuts and Jobs Act’s (TCJA) impact on estate planning. (Why? Because smart estate planning accounts for taxes and employs strategies that minimize said taxes.) One of the most significant changes from the “new tax law” was with the estate tax exemption. This is the figure subtracted from an estate’s gross value in order to calculate federal taxes.

What the New Tax Law Means for Your Estate Plan

For tax years 2018 through 2025, the exemption from estate, gift, and generation-skipping taxes was raised from $5.49 million per individual to an approximated $11.2 million. (Why do I say approximated? Because the exemption base is indexed, so the base for the 2017 tax year was $5 million; for the 2018 tax year, the base is now $10 million and indexed for inflation.) In plain terms, this means each individual should be able to pass over $11 million to their heirs before any estate, gift, and generation-skipping taxes apply.

If you’re married, this means your estate exemption now equals $22.4 million. (Or, you could think of it like each couple now has an additional $11.2 million in assets available to gift or make a testamentary transfer with thoughtful estate planning.)

The bottom line: if your estate is worth less than the federal exemption rates, it will be free from the estate taxes after you die. If you have an estate valued at more than the exemption threshold (and smart estate planning strategies are not appropriately implemented to shield assets from being counted in your estate’s gross value), your taxable estate will met with a tax rate of up to 40 percent.

State Estate Taxes

The caveat (and good news for residents of the majority of states) is that not all states have a state estate tax…including Iowa! Currently, 12 states and D.C. also impose an estate tax on residents. It’s important to note that the exemption rates for these state estate taxes are much lower than the federal exemption rate. For instance, our neighbors to the east in Illinois have an exemption rate of $4 million and a graduated marginal tax rate of of o.8 to 16 percent.

Here’s an incredibly helpful map from Tax Foundation that illustrates this.

estate tax map

Note: figures may have changed since time of publication of this map.

Is there any reason an Iowan would need to account for state estate taxes in their estate planning? Only if they own real estate in another state. Let’s consider a hypothetical example to explain this better.

Alice with her Minnesota Lake House

Alice is an Iowa resident. She died in March 2018 owning a vacation home on her favorite lake in Minnesota. Alice’s gross estate totals $2.8 million. What estate taxes will Alice’s estate be responsible for?

Iowa’s Inheritance Tax

While Iowans largely escape the state estate tax, there is a state inheritance tax. The inheritance tax is different than the estate tax (although they they are often incorrectly used interchangeably). The estate tax is based purely on gross value and regardless of who inherits what; the inheritance tax is only charged against the share of inheritance of certain estate beneficiaries.

There’s a lot to note about Iowa’s inheritance tax, so I’ll do a deep dive into that here on the GoFisch blog later this week!

Questions about how taxes (and other fees) may affect your estate plan? Need to revise your current plan after changes to the tax code? Don’t hesitate to contact me via email at gordon@gordonfischerlawfirm.com or by phone (515-371-6077).

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What the New Tax Law Means for Your Estate Plan

US capitol building against a blue sky with flag

Changes to the tax code can and often do impact estate planning because one of the major goals for most is to reduce or eliminate the taxable amount of the estate. Passed at the tail end of 2017, the Tax Cuts and Jobs Act (otherwise referenced as the new tax law), is no different and there were some major changes that will no doubt impact estate plans moving forward. What did the Act change, what didn’t it affect, and what should you do to maximize your benefits?

Estate Exemption

congress building

One of the most significant changes under the new tax law are the estate-related exemption amounts. The estate tax exemption—or estate tax exclusion as it’s sometimes referred to—is the figure subtracted from an estate’s gross value for the purpose of calculating federal taxes.

This change is one that all estate planning individuals, especially those classified as middle- to high-net worth, need to be aware of. For tax years 2018 through 2025, the exemption from estate, gift, and generation-skipping taxes was raised from $5.49 million per individuals to an approximated $11.2 million. (The exemption base is indexed, so the base for the 2017 tax year was $5 million; for the 2018 tax year, the base is now $10 million and still indexed for inflation.) This means each individual should be able to shelter over $11 million before any estate, gift, and generation-skipping taxes apply.

If you’re married, this means your estate exemption for tax year 2018 now equals $22.4 million. (Or, you could think of it like each couple now has an additional $11.2 million in assets available to gift or make a testamentary transfer with.)

Important Considerations

Other estate planning related taxes

glasses on paper with laptop

None of the estate, gift, or generation-skipping taxes were repealed by the new tax law, and the tax rates for these remains at 40 percent. Just for review: the federal estate tax is applied to the transfer of property at death; the gift tax applies to transfers made while living; and, the generation-skipping transfer tax is applied to transfers of property that skip a generation.

However, these transfer taxes (sometimes referred to as excise taxes) will apply to fewer estates given the major increase to the exemption figures. (The Joint Committee on Taxation estimates the number of taxable estates will drop to 1,800 in 2018, compared with 5,000 estates under the previous tax law.)

Gift tax annual exclusion

Discussing gift tax can be confusing when you consider there is an annual exclusion amount and a lifetime gift tax exemption. Let’s clarify some important points, so you can feel great about gifting to your loved ones!

In the 2018 tax year, the annual gift tax exclusion will be $15,000. This is up from the $14,000 it’s been stuck at for the past half-decade. This annual gift tax exemption is inflation-based, but only raises in increments of $1,000, which is why it took the rate five years to increase.

This means you could gift up to $15,000 to an individual without cutting into the lifetime gift tax exemption. You can give gifts up to that value to multiple individuals. Meaning if you have three adult children and want to gift each of them $15,000 in the 2018 tax year, you could do so and it would be completely exempt from the gift tax. If you’re married (and your spouse consents) you can give a joint gift (otherwise referred to as a split gift) of up to $30,000 per individual in the 2018 tax year.

Let’s say you, as an individual, want to gift a grandchild $20,000. That $20,000 is $5,000 greater than the annual gift tax exclusions and that $5,000 would then be counted toward the lifetime exemption rate (the $11.2 million previously discussed).

Timing

black and white timer

Because the new exemption rates are only instated (as of right now) through the 2025 tax year, on January 1, 2026 the exemption basis will revert back to where it was for the 2017 tax year—$5 million exemption per individual. (Of course, the actual figure will be larger because it will still be indexed for inflation.) Congress could choose to extend this exemption rate past 2025, but they could also choose not to. There could also be further changes to the tax law after future congressional and the presidential elections.

Basis adjustment

There was no change made to the step-up in basis rules. Meaning, when you pass, assets left to beneficiaries are reset to the fair market value at the date of your death. This is a benefit when it comes to taxes for both the whomever inherits the property and helps simplify taxes because there’s no guesswork as to what the property was worth when the testator (the person who made the estate plan) acquired it.

Actions to Take Today

If/when the exemption amounts are reduced, there will be no “clawback,” allowed, meaning that gifts and transfers made up until 2025 will not be later subjected to taxes. That means if the increased exemption rate could have an impact on your estate and allows you to make gifts increased in quantity or value, time is of the essence. Where to start?

woman looking up

Research & consult on your options

There are a few different approaches to gift-giving that could be particularly fitting with the tax changes. Look into establishing and funding a new irrevocable trust or gifting to an existing one. Contemplate how gifts could be applied toward life insurance funding or present sales to trusts. For the charitable-minded individual, the higher exemption amount represents an opportunity for increased philanthropy—consider a tool like a charitable lead trust.

Discuss your options with the appropriate professionals such as your estate planning attorney, financial advisor, and accountant. They’ll be able to advise on tools and strategies you’ve researched, but also provide clear information and counsel of options you didn’t even know about. It’s your professional advisors’ jobs to present you with all the info (benefits and potential detriments) you need to know to make an informed executive decision regarding your estate.

Review estate plan

You should review your estate plan annually regardless of any legislative changes, but with the new tax law you’ll certainly want to review your will, any trust documents, estate planning goals, and overall tax strategies. Again, discuss your options with a qualified estate planner!

Update Your Estate Plan: How, When, & Why

Contact me for a free consult

Let’s talk about what the new tax laws mean for you, your family, and your legacy. How can you leverage the increased exemption rate to make a difference in your community? How can you better prepare your heirs when you’re not around to support them and offer guidance? Contact me for a free consultation via email or by phone (515-371-6077).

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Benefits of Smart Estate Planning: Avoiding Taxes and Fees

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Blue journal on desk

Estate planning can be a huge relief for you and your loved ones. A quality estate plan means a sense of security that your family and other important people in your life will be provided for at the time of your death.

You’ve worked hard for what you have, but the saying is all too true: you cannot take it with you when you die. So, you may as well pass along your assets through an airtight estate plan to people you care about, as opposed to the government.

To that point, there are important, not-so-obvious benefits of an estate plan, such as avoidance of specific taxes and fees.

 

Person holding phone at table

Here are several ways to get the best benefits out of your estate planning:

Federal estate tax 

The federal estate tax applies to high net worth individuals; for 2018 the estate tax exemption is $11.2 million/individual (up from $5.49 million in 2017 due to the new tax law). What does that mean exactly? It means that any one individual could leave up to that amount to heirs and pay no federal estate tax. For married couples, the limit is $22.4 million. These are important rates to know because estate taxes can be as high as 40 percent. (Which is pretty harsh!) The good news is that smart estate planning strategies exist to legally avoid the federal estate tax.

Customized estate planning

Without a customized estate plan, you and your estate may end up paying more in the long run in professional fees, court costs, and taxes. A customized estate plan is essentially a thorough plan that takes these potential future charges into consideration. It includes elements such as a managed distributions, which can help alleviate much of the tax burden on your beneficiaries.

A customized, smart, up-to-date estate plan can mean your estate avoids court costs almost entirely. Optimally you want to avoid the worst case scenario (aka litigation) with certain estate planning provisions.

 

Professional fees can include costs for services provided by accountants and lawyers. Using a flat rate with an attorney will be much more straightforward and to your long-term economic advantage. Why? Paying someone on the front end means less work and hassle down the road when your family is coping with your passing.

Allocating charitable contributions 

This is my favorite strategy for avoiding a large brunt of taxes and fees. Mutually beneficial for both nonprofit organizations and estate beneficiaries, charitable contributions are a way to secure a lasting legacy, make a tangible community difference on the way out, and secure helpful tax deductions.

There is no one-size-fits-all approach to estate planning, and a legal professional can help you identify financial advantages and benefits. (Yet another reason why you need a reputable attorney to craft your estate plan.)

Have questions? Need more information?

Click here to download my free, no-obligation Estate Plan Questionnaire or feel free to reach out any time. You can contact me by email at Gordon@gordonfischerlawfirm.com or give me a call at 515-371-6077.

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Gifts of Long-Term vs. Short-Term Capital Gain Property

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Capital assets include stocks, bonds, real estate, art, and antiques. The amount a donor can claim as an income tax charitable deduction depends on whether the property is considered short-term or long-term capital gain property. The long-term holding period is a 12 months plus a day. Short term property is that which is held for 12 months or less.

new york stock exchange

Long-Term Capital Gain Property

For gifts of long-term capital gain property, the donor can generally claim a federal income tax charitable deduction for the fair market value of the property. To take a simple example, assume Jill Donor has held publicly traded stock for more than one year. The stock is valued at $10,000, which Donor bought for $1,000, i.e., the stock has a cost basis of $1,000. If Donor makes a gift of this stock to a qualified charitable organization, she can claim a deduction for the full fair market value of the stock, $10,000.

Short-Term Capital Gain Property

For short-term capital gain property, the value of the federal income tax charitable deduction is limited to the cost basis. Another example: assume Jill Donor held publicly traded stock for 364 days. The stock is valued at $10,000, which has a cost basis of $1,000. If Donor makes a gift of this stock to a qualified charitable organization, she can claim a deduction for only the cost basis of the stock, $1,000.

As you can see, it’s generally advisable to delay a gift of appreciated property until the long-term holding period can be met.

Ask More Questions.

This is a solid overview, but you may have more questions! Don’t hesitate to reach Gordon by phone at 515-371-6077 or email at gordon@gordonfischerlawfirm.com.

To stay in the know with the latest Gordon Fischer Law Firm news and blog posts, subscribe to the monthly newsletter, GoFisch!

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April 2017 Edition of The Iowa Lawyer

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The Iowa Lawyer

The April 2017 issue of The Iowa Lawyer is out and I’m proud to say my article, “How can you give more to your favorite charity? Consider gifts of stock!” is included. Scroll to page 11 for info that’s helpful on taxes, just in time for Tax Day.

Tax tips just in time for Tax Day

The Iowa Lawyer magazine is The Iowa State Bar Association’s official publication. The magazine features information on legal developments, legislative news, bar history, views from the bench, profiles of legal community leaders, and ISBA events.

Any questions after reading? Feel free to contact me any time to discuss how to maximize the potential of appreciated, long-term, publicly-traded stock. I offer a one-hour free consultation, without any obligation. I can be reached any time at my email, gordon@gordonfischerlawfirm.com, or by phone at 515-371-6077.

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What The Bachelor should do: Iowa farmer Chris Soules has an easy choice tonight

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combine harvester

Will the story of Prince Farming have a fairytale ending?

ABC’s The Bachelor, Season 19, is coming to a close. On tonight’s finale, Chris Soules, the dreamy farmer from beautiful Arlington, Iowa, will choose between Whitney and Becca. Who will get the final rose? Whitney says she loves Chris, but does she really want to give up the big city and successful nursing career for life on the farm? And does Becca have enough real-life experience to take the next step with Chris? The chiropractic assistant revealed she’s never been in love.

Please don’t judge.

Sure, I have better things to do with my time than watch reality TV. But, I’m a sucker for watching Iowans on the national stage. And, setting aside the predictable formula and questionable premise of finding true love through competition, there’s no denying the show revealed Des Moines to be a happening urban center and rural northeast Iowa a pastoral wonder, which has been fun to see. So this year, I admit I’ve not only watched The Bachelor regularly, I’ve even followed its drama online and embarrassed myself asking friends if they are “Team Whitney” or “Team Becca.” And I can say for certain what Prince Farming should do.

The path for Chris Soules is clear

Chris and whoever he chooses to share his life on the farm can deepen their love by embracing charitable giving. As a farmland owner, Chris is a great real-life example of someone who should pursue some tax-savvy charitable giving opportunities.

Specifically, he should give farmland to his favorite causes, and he should give now instead of later for maximum benefit. He should (1) use the federal charitable tax deduction, (2), avoid long-term capital gains taxes, and (3) take advantage of the Endow Iowa Tax Credit. In fact, he should combine all three to achieve tax savings and increase the value of his gifts dramatically..What great role models Chris and his new fiancée (?) could be.

Give More & Pay Less in Taxes: 5 Pro Tips for Iowans

The Bachelor could be The Benefactor

ABC, here’s a new show idea: a guy who deeply cares about his community and state explores tax-savvy opportunities for charitable giving. There would be fewer tears and less kissing, but plenty of thrills and true love. Call me.

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