Give 10 Moments
No-one Builds a House without a Plan.
It may seem pretty basic, but no-one starts a construction project without a plan. That plan will include estimates on materials, time-frame, and costs. The more complex and long a project is, the greater the number of variables are present. When variables increase, so does the risk for error. In the real-world we call these planning errors “cost over-runs.” Again; this is all very basic.
Thus, I am always surprised when I talk to retirement-age people who have given very little thought to how they will maintain their freedom and autonomy as they age.
Perhaps this is because we naturally recoil at the prospect that we will eventually lose our ability to make our own decisions and achieve our preferences.
We tend to think something like: “I am my own man, I make my own decisions and I always will.” But that is not reality.
The reality is that our bodies and our minds will not last forever. They will deteriorate over time. If we are honest, we see this all around us in both our extended families and our friends’ families.
Ok -you will not always be able to make your own decisions. So what should you consider in choosing a “substitute decision maker” that can step up when the time comes?
- Who will assist me when I can’t help myself?
- Who can I rely upon to make sure that all my bills are paid?
- Who can I rely upon to make sure my investments are managed?
- Who will help me with seasonal tasks around the house?
- Who can I rely upon to take me to doctor’s appointments and make medical decisions?
- Who will drive me when I can’t drive myself? (For that matter, who will make the decision that I can no longer drive? (May it never be!!!))
Each person will have a different answer for the “who.” This will depend heavily upon the person’s family relationships (close or strained), health condition (good or terminal) and financial position (wealthy or meager).
For some, their family relationships are such that they absolutely trust the decision-making capability of their children. For others, their family relationships require that rely primarily upon third parties to assist with decision making (e.g. trusted friends or professionals).
“Everybody has a plan until they get punched in the mouth.” – Mike Tyson
The point of all of this is to encourage you to honestly assess your plan. Do you have one? Has it been put into writing? Is that writing a legally enforceable Durable Power of Attorney? Do your future decision makers know what your preferences are? Will they be able to execute on your preferences when the time comes?
Although known more for boxing prowess than good judgment, Mike Tyson clearly understands that even the best-laid plans must survive the unexpected.
How will your plan handle a cancer diagnosis, early on-set dementia or decade long stint in a nursing home? There are myriad variables at play for every different person and the time horizon is very long (hopefully!).
The call to action is for you to soberly assess your plan. This is your life, your preferences, and your desires. It is much more important than any construction project.
Have you given your plan for future substitute-decision makers the consideration that it deserves? If not, then the time is now.
Tax Efficient Giving: IRAs and Qualified Charitable Distributions
If you are age 70½ or older, IRS rules require you to take required minimum distributions (RMDs) each year from your tax-deferred retirement accounts. This additional taxable income may push you into a higher tax bracket and may also reduce your eligibility for certain tax credits and deductions. To eliminate or reduce the impact of RMD income, charitably inclined investors may want to consider making a qualified charitable distribution (QCD).
A QCD is a direct transfer of funds from an IRA custodian, payable to a qualified charity, as described in the QCD provision in the Internal Revenue Code. Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to $100,000, and can also be excluded from your taxable income. This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution later.
If you take the RMD as income, instead of as a QCD, your RMD will count as taxable income. Having higher taxable income can directly impact your eligibility for certain deductions and credits. For example, your taxable income helps determine the amount of your Social Security benefits that are subject to taxes. Keeping your taxable income level lower may also help reduce your potential exposure to higher ordinary and capital gains income tax brackets, net investment income tax and Medicare surtax.
In my semi-annual tax and financial planning meetings with clients, I frequently hear that a priority is to decrease their annual tax burden. The reality is that their fixed sources of income from Social Security, pensions, investments and IRA distributions require them to recognize more income than they need to cover retirement living expenses. It’s great to be in this position, but tax inefficient and you lose control over where and how your assets are being used.
A question I ask a client under this scenario is “what are your annual giving goals and what is your required IRA distribution this year”? The question originates from the recent passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, the qualified charitable distribution (QCD) provision is now a permanent part of the Internal Revenue Code. With the 2018 tax law changes, there’s an additional question to consider: can you take advantage of the higher standard deduction at 70 ($13,850 for single filers, $27,000 if married and filing jointly) and receive a tax benefit for your charitable gifts? This means that if you claim the standard deduction, you won’t be allowed to itemize things like charitable donations. However, since QCDs are not deductible (because the distribution is not taxable), they can remain an option for your charitable giving, even if you claim the standard deduction in a given year.
Requirements in making a Qualified Charitable Distribution (QCD):
- Eligible IRAs for QCDs—Traditional, Rollover, Inherited, SEP and SIMPLE (inactive plans only).
- You must be 70½ or older to be eligible to make a QCD. New legislation may move the age to 72 for all RMDs.
- QCDs are limited to the amount that would otherwise be taxed as ordinary income. This excludes non-deductible contributions.
- The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. (If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.)
- For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, generally December 31.
- Any amount donated above your RMD does not count toward satisfying a future year’s RMD.
- Funds must be transferred directly from your IRA custodian to the qualified charity. This is accomplished by requesting your IRA custodian issue a check from your IRA payable to the charity.
- A QCD is reported by your IRA custodian as a normal distribution on IRS Form 1099-R for any non-Inherited IRAs.
- The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions.
- Some charities do not qualify for QCDs:
- Private foundations.
- Supporting organizations: i.e., charities carrying out exempt purposes by supporting other exempt organizations.
- Donor-advised funds, which public charities manage on behalf of organizations, families, or individuals.
- Some charities do not qualify for QCDs:
A general example of the QCD process each year is to determine how much of your IRA RMD you need for living expenses. Let’s say you have an RMD for 2019 of $20,000 and you need $10,000 for personal expenses. The other $10,000 can be distributed directly to the charities of your choice before year end. The $10,000 QCD will bypass the income portion on the front page of your tax return and won’t have to itemize if your standard deduction is higher. Depending on your tax bracket the tax savings will be an immediate 12-37% for most which means that your gift will have more impact versus giving the after-tax amount.
The process to establish QCD instructions through your IRA custodian isn’t difficult but due to the December 31st deadline you want to start the process before mid-November. The accumulation of work the yearend creates for advisors, custodians and charitable organizations makes it wise to start the process earlier. Each distribution to a qualified charity will need a separate signed distribution form. The form can be a one-time or annual recurring distribution designation.
If this is your first time giving using a QCD method I would advise meeting with your tax and financial advisor to discuss a giving plan for the next 3-5 years. Depending on your philanthropic goals and types of organizations you want to support your trusted advisors can recommend how to efficiently transfer assets to minimize tax and increase cashflow to the recipient.
Lifting Up Your Community through Estate Planning
As an elder law attorney, I often see clients who are struggling to decide whom to give their assets to when they pass away. Close family members are natural beneficiaries, but some clients have very few or even no family or close relatives that they can name in their Will. Even for those with family, I often get asked, “Is there anyone or anywhere you would recommend?”
Well, that’s when I sit back and ask them – have you considered a charitable gift? And then I let them think about that possibility for a few minutes. Usually, their next question is, “What do you mean by a charitable gift?” I tell them I mean that leaving even a small portion of their estate to charity. I ask them to seriously consider leaving up to 10%, which won’t usually take away much from the gifts they intend for their family members. And that 10% will mean a lot to charitable organizations and those they serve right here in the Wenatchee Valley.
We all know about the developmental tasks of toddlers and children, learning to tie their shoes, color within the lines and begin to assert their independence from their parents. But what about the developmental tasks of adulthood and older adulthood? One of the most important tasks of these ages is to identify ways in which you can leave a legacy. Perhaps it’s teaching your grandchildren to fish or your family’s favorite apple pie recipe, but what if part of your legacy was a gift that kept on giving to your entire community for generations to come?
You can leave that sort of powerful legacy when you participate in the Community Foundation of North Central Washington’s Give 10 program. Leaving 10% of your estate to CFNCW to steward for you, means that your legacy benefits not only your children and grandchildren, but everyone’s children and grandchildren both now and in the future. Imagine your gift of $10,000 going to help establish or support a college scholarship so that our community’s young people can avoid the crushing debt of student loans while they become more educated, so they can succeed and then give back to our community. Let’s leave them more than money – leave your children and grandchildren a legacy and a fine example of good work by participating in the Give 10 program. Contact your estate planning attorney or the Community Foundation today to leave your legacy.
Updating Your Will: Everyone’s talking about it!
Last month, we saw people from all corners of our region’s communities coming together to talk about – of all exciting topics – their wills!
Maybe there is something about the start of the New Year that has people ready to think about a topic that is oh-so-easy to put off, or maybe we are just lucky to live in a region where people care deeply about supporting their community.
Here’s a recap:
- On January 15, over 60 people gathered at TwispWorks in the Methow Valley to hear from Rolf Borgerson, a local attorney, about the basics of setting up a will and how to take care of important causes in the Methow Valley.
- On January 18, attorneys and Professional Advisors gathered to hear from Scott Claeys, a founding board member of the Leave 10 initiative in the Seattle area, to learn about values-based planning, a method for ensuring that their clients’ values – not just tax incentives – are reflected in their estate plans.
- On January 22, Pybus University broke its highest attendance record with almost 100 people showing up for a session about will-planning and leaving a legacy led by local attorney Colleen Frei of Jeffers, Danielson, Sonn & Aylward, and CFNCW’s Executive Director, Beth Stipe.
In each of these instances, we have been heartened by people across the region who are not only thinking of how they can best care for their families after they are gone, but also making sure that they leave something for causes they care about – their church, their favorite charities, their beloved alma mater, for example.
Our phones have been ringing here at CFNCW with calls from attorneys working with clients on charitable bequests and also from people like you, wondering how CFNCW can make their values persist beyond their lifetime.
Whatever is in the air – It’s GOOD and it’s GENEROUS.
If you’re looking for ways you can leave a legacy in your community and beyond, take a look at some of our Planned Giving resources.
If you’re looking for an attorney or financial advisor, we have a list of Professional Advisors who value community philanthropy and can help guide you in the right direction.
We are honored to be part of such a generous region and to help you give back to the place you love.
Leaving a Legacy Gift Without Updating Your Will
November’s “Give 10 Moment” comes to you from one of our local Financial Advisors, Ben McNair of Draggoo Financial Group. Ben presents some great strategies for leaving a legacy without the hassle of updating your will.
Looking for a method of leaving a legacy gift without spending the time and energy of updating your will or estate plan? Look no further than your qualified retirement plan (IRAs, 401(k)s, 403(b)s, etc.) or permanent life insurance policies.
These assets both allow the owner to designate a beneficiary (or multiple beneficiaries) that bypasses the probate process and takes precedent over wills or other estate planning documents, and updating a beneficiary is as easy as requesting a beneficiary change form from your financial or insurance advisor.
For many of my clients their IRA is one of their largest liquid assets. They’ve spent years contributing to them and enjoying the tax benefits they provide.
Many of my clients also find that, once they’ve reached retirement, they are not as dependent on the income the IRA can provide than they thought they would be, and simply withdraw the minimums required each year after reaching age 70 ½.
In many cases this means there will be money left over in the IRA once the owner passes away. These assets can be passed on to the next generation, but at a cost, as IRA assets are taxable to a beneficiary and may face additional estate taxes depending on the size of the owner’s overall estate.
By making a qualified charity the beneficiary of an IRA, the owner can deduct the amount from their overall estate, and the balance will pass to the charity free of taxation. This allows the IRA owner to not only make an impact on their community, but also gives them the flexibility to pass on other, more tax efficient assets to their heirs. This same strategy can also be applied to qualified and non-qualified deferred annuity contracts.
Permanent life insurance policies are another asset that can easily be updated to create a legacy gift. Life insurance is put into place as a form of protection. Policies are purchased to protect our families from a premature death where the death benefit is intended to provide income replacement and the liquidity to pay off debts.
If you have had the good fortune to live a long life and find you no longer need the insurance policies for their original intent, updating the beneficiary to your charity of choice will provide a legacy gift at your passing. Life insurance death benefits are generally paid tax-free, and this would certainly be true if a charitable organization were the beneficiary of the policy.
It is important to note that the owner of a qualified retirement plan, deferred annuity contract, or life insurance policy may name more than one beneficiary. If the owner would still like some money to be passed on to their heirs, they can name both the heirs and a charity.
While these beneficiary updates are as simple as completing a form or two, an owner should still consider any estate planning that may already be in place and ensure the changes would still coordinate with that existing planning.
Remember that your named beneficiary can be as broad or as specific as you choose. CFNCW manages hundreds of charitable funds that benefit specific nonprofits or scholarships, general “fields of interest,” and of course endowed funds that will give back forever.
A Shout Out to Nonprofits!
Today we want to give a quick “shout out” to our friends at the Numerica Performing Arts Center, Upper Valley MEND, and the Wenatchee River Institute for updating their planned giving material to include the Give 10 campaign! Check out samples of their work:
|NUMERICA PERFORMING ARTS CENTER|
|UPPER VALLEY MEND|
|WENATCHEE RIVER INSTITUTE|
Including information about Give 10 in your materials will help your donors understand how their legacy fits into a larger effort to take care of this region for the generations to come.
It also gives them peace of mind, knowing that they can choose to have their legacy gift managed by an organization whose primary mission is the stewardship of charitable assets.
Please lean on our expertise and resources as you engage your donors in these important conversations. Click here for a Planned Giving Toolkit.
CRUTs: A Practical Path to a Lasting Legacy
Today we’d like to introduce you to the Charitable Remainder Unitrust, also known as the CRUT. CRUTs can be a donor’s best friend, providing them an income stream for life and allowing them to establish a legacy once they pass.
Consider this story from local attorney, Russ Speidel:
In 1995, an investment advisor called me for help. He had an elderly retiree-client, a single man who owned about $1 million of appreciated Alcoa stock. The advisor was looking for a way to sell the stock, to avoid paying capital gains tax, AND increase his client’s monthly income. This was a tall order, but when I inquired and learned that the retiree might have a charitable intent, there was an easy solution: form a Charitable Remainder Unitrust with the Community Foundation. It worked marvelously. The retiree transferred his Alcoa stock to the Community Foundation, which could sell it tax free. Then, during the remainder of the retiree’s lifetime, the CRUT paid to the retiree all of its net income, a sum much greater than the Alcoa dividends. The retiree, Roy Hill, established a lasting legacy through a Scholarship Fund and a Designated Fund. To this day, those funds support students and provide income to his favorite charity every year. In the 20 years since he passed in 1998, approximately $1.1 million has been awarded in grants and scholarships and the funds have grown in value with a balance today of over $1.4 million – allowing his legacy to continue on, forever.
By establishing a CRUT, Mr. Hill secured a larger income for himself during the remainder of his life, and he left an astonishing gift to the community by creating the Roy W. Hill Music Scholarship and a designated fund to benefit the symphony.
CRUTs work particularly well when people have an appreciated asset and want to avoid capital gains tax. People who own rental properties – and are tired of being landlords – can gift their rental properties to CFNCW to establish a CRUT. Often the interest income from the CRUT provides as much if not more income than they would have received from tenants, without all the hassle of maintaining the property.
CRUTs provide tax advantages and provide a charitable deduction for the donor. And the best part: They will have established a charitable legacy in the process.
Working with Professional Advisors to Achieve your Charitable Goals
North Central Washington is full of well-trained Professional Advisors who can help you realize your charitable goals and make tax-smart financial decisions. We are fortunate at the Community Foundation of NCW to work with many of these advisors who see the value that charitable giving provides their clients as well as the community.
When is it time to see a Professional Advisor?
- If you are thinking about creating or updating your will
- If you are interested in the tax-benefits of charitable giving
- If you are planning retirement and want to learn more about creating income streams through a charitable trust
To help you find a professional advisor, we have created a list on our website which includes attorneys, accountants and financial planners.
We talked to some of the different types of professionals on our list about the services they offer and why charitable giving is an important part of their conversations with clients. Here’s what they have to say:
Attorney: Christina Davitt, Ogden Murphy Wallace
“My role as an attorney is to help people reach their life goals through their estate planning by providing for their family, friends and community. To paraphrase, we eat fruit from trees we did not plant. When you include a charitable gift in your estate plan, no matter how large or how small, you are not only leaving a legacy, but also setting an example for others to follow.”
Visit your attorney if you need to write or update your will, consider creating a trust, or find out how to create income streams during life while also leaving a legacy.
Accountant: Jeff Neher, Cordell, Neher & Co.
“The desire to leave a lasting legacy is a deeply personal issue, which is so much more than just deciding to leave money to an organization or individual. Supporting our favorite charitable organizations and causes well past our lifetimes through the Foundation could be one way to create this legacy. Using a CPA and financial advisor who cares about doing and getting it right, improves the success of your wishes and goals. Leaving a legacy is about transferring your values and beliefs to generations to come.”
Visit your accountant to explore ways to meet your charitable goals while also making tax-smart decisions.
Financial Planner: Chris Avey, Financial Alternatives
“I’ve been doing this for 20 years and worked with multiple Community Foundations. Community Foundation of North Central Washington has been wonderful to work with. I’ve had some clients I wanted to sit down with and discuss their giving goals with an idea in mind. Each time, we’ve been able to improve the client’s situation through a new idea and they’ve felt wonderful about the gift they’ve given each time and it has been a fantastic experience for all involved.”
Visit your Financial Planner to figure out how best to achieve your giving goals within your overall financial picture.
Remember, choosing a Professional Advisor is an important decision. Take time to find the right fit and make sure to do your research and ask the right questions. Some resources to help you with this decision are found below.