This month's Tip of the Month is a continuation of our case for John and Mary we shared last month. As you'll recall, John and Mary Jones enjoyed a good life. They bought an initial starter home, but as their children grew older they sold that residence, rolled over the gain and acquired a second home. Their current residence is the third home they've purchased. It is now worth approximately $1,800,000 with a cost basis of $200,000. John and Mary have decided they no longer need the big home and would be quite happy with a smaller retirement condominium. However, they do not want to sell the big home and pay a large capital gains tax. To read about one solution for John and Mary, read on... Should you and/or your professional advisor wish to speak to the Development Office, regarding this or other giving options, please do so by calling us at 800-645-3582 or by e-mail at development@graceland.edu.
There is indeed a plan that would enable John and Mary to have cash in the bank, acquire the new condominium, receive a very significant increase in income and accomplish all of this with no taxation. The plan involves transferring half the value of the home into a charitable remainder unitrust and then a joint sale by the trustee of the trust and John and Mary.
First, John and Mary move out of the home. Second, they deed one half of the home to a charitable remainder unitrust. Third, they and the trustee of the unitrust list the home for sale and sell the property. Fourth, at closing, the proceeds are divided between the unitrust and John and Mary Jones.
How are John and Mary able to do this with Zero Taxes? First, the one half of the property that is transferred to a remainder trust will bypass capital gain under Sec. 664, so long as there has been no arrangement or discussion with a possible buyer. The basics of avoiding pre-arranged sale are that the trustee must have lawful capability to select the purchaser and the price. One half of the basis is allocated to one half of the value in the trust, leaving the other half of the value, approximately $900,000, and the remaining $100,000 of basis.
When the property is sold, it is possible to protect $500,000 of the sale price with the exclusion and, with the $100,000 of allocated basis, the gain is now $300,000. The $500,000 exclusion is available if John or Mary Jones have lived in their principal residence for two of the last five years.
Fortunately, there is a charitable income tax deduction of approximately $300,000 from the charitable trust that John and Mary established that offsets the long term capital gain. However, in the Internal Revenue Code, "The large print giveth and the small print taketh away." This gain will be recognized in the current year and the deduction will be subject to the 30% of adjusted gross income limit. In some cases, the result is a payment of a modest amount of tax in year one and tax refunds in future years due to charitable deduction carry forwards. However, the net result is still zero taxes when viewed from a multi-year perspective.
Return to TopIt's time to pass along yet another Estate Planning Tip of the Month. Perhaps you didn't know that the middle of the year is a good time to check up on your contributions to tax-deferred retirement plans. Make sure you are getting the maximum tax deferral from a 401K or other employer-sponsored plan.
If you have excess discretionary income you'd like to apply towards your retirement, but you've maximized the limits of your other plans, there's another option. Why not learn about a plan that gives you an immediate charitable income tax deduction and provides you control and flexibility in stipulating when income payments begin?
For your FREE no obligation illustration, e-mail development@graceland.edu or call the Development Office at 1-800-645-3582.
Return to TopUnder current tax law, the recipient generally must report distributions from qualified retirement plans, such as IRAs, Keoghs, qualified pension or profit-sharing plans, tax-deferred annuities, and some TIAA-CREF plans, as taxable income.
In addition, distributions from these retirement plans at the death of the account-holder can be subject to estate taxes. In a large estate, these income and estate taxes can leave less than 30 cents on the dollar of the plan's balance for your heirs (excluding your spouse).
By naming Graceland University as the beneficiary of the remainder of your retirement plan after the death of you or your spouse, 100 percent of the plan's balance would be available for Graceland's use, since the distribution would avoid both income and estate taxes.
To make this gift, you can simply notify your plan's administrator of your wish to change the beneficiary. A "change of beneficiary" form will be required. Should you designate that your qualified retirement plan come directly to Graceland at your death, your spouse will need to sign consent to the designation. The consent of your spouse is not necessary for an IRA unless you reside in a community property state.
If your spouse and children are currently the beneficiaries of your retirement plan, you can continue to keep them as beneficiaries, and also include Graceland as the beneficiary of a portion of the plan. Upon your death, the plan administrator can "cash out" Graceland's share of the account without affecting your family's portion of the account, so that Graceland, and your heirs, benefit from your retirement savings.
Retirement Plan: Sample beneficiary designation language for a spouse and Graceland:
The beneficiary is my spouse as long as he/she survives me. The beneficiary of any amount(s) remaining in the plan after the death of my spouse, or of the entire amount in the plan upon my death if my spouse does not survive me, or of any portion thereof which my spouse may disclaim, is Graceland University, 1 University Place, Lamoni, IA 50140.
By: Steven W. Tarta, Esq.
Estate planning is not only about planning for when we're not here; it is a lifelong process. The impact of estate planning extends beyond the span of an individual life, it impacts the surviving spouse as well as future generations. Estate planning is a very personal matter; that is why you must feel comfortable with your planner; proper planning represents the review of the "estate" you have created, the children you have raised and your intentions as well as capability in preserving the assets for your beneficiaries.
Estate planning represents the "charted" distribution plan that covers not only who you leave your estate to, but also in what manner you wish to implement your intentions. With very rare exception, there is a strong sense of relief when you have completed your estate plan. Also, the planners you are involved with must be capable of keeping your plan "current", you must be constantly updated regarding the ever changing status of the tax laws as well as tax related rulings.
The average person marrying today for the first time will spend more time caring for parents than raising their own children. In today's world, the average person, in one lifetime, will have more spouses than children. This movement in personal lifestyles as well as financial priorities challenges you as well as your adviser's ability to protect your legacies. The value of a competent estate planning team cannot be overstated. It takes a good quotient of patience and effort to coordinate the right team of professionals for your planning needs; but this is the only way to truly allow your intentions to become reality. Several professionals are required to implement your objectives - the estate planning attorney, the certified public accountant, and the financial planner. These professionals must coordinate your objectives and honor your desires in creating the appropriate financial plan as well as the efficient estate tax plan to result in the right program for you. This is a critical ongoing process; your team must have the ability to work together, to identify your needs, to ask the necessary questions and to zero in on the issues in order to create solutions - or it just won't work!
Effective estate planning requires talking about issues you do not want to address - death and taxation. The alternatives are simply brutal; perhaps a spouse without the benefit of any planning, which makes the government your ultimate beneficiary, or not providing for your children as you wished, or not addressing your grandchildren as you spoke of so frequently. The saddest event to witness is the individual who continues to think about the estate planning process, the "the shopping client", that is the individual or couple who comes in for a consultation, and when shocked by the fact that a tax liability exists, but can be eliminated, decides to "think about it"; until it's too late and a spouse passes away thereby loosing some leverage in the planning process.
The estate planning attorney provides the expertise required to ensure your assets pass according to your expressed wishes and with a minimal, if any, cost to the heirs. The financial consultant works with you, as well as the estate planner, to ensure that information pertaining to assets and liabilities is correctly documented. Also, the financial planner must work with the estate planner to create the right receptacle for your assets, and to be sure the assets are titled properly so they will pass to the beneficiaries as intended. The estate planner, and financial planner, should review, on an annual basis, changes in your financial "picture" as well as changes you may have with respect to your intentions, as the same are impacted by changes in the law or recent judicial decisions. It is also very important for estate planners and financial planners to review at least annually your personal changes as well as monitor health conditions, this is necessary to soothe the transition during a difficult time, such as death or disability, for the benefit of your spouse and family. Not only must you have the peace of mind that you have the right comfort level with your estate and financial planners, remember that upon death or disability this team should also fit well with your family and fiduciaries, when you find this team you will have the peace of mind you deserve - and your family will appreciate all you have accomplished for yourself and them.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting, or specific advice to your situation.
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