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Estate Planning Blog

Serving Clients Throughout North Central Missouri

estate planning

Couple’s Charitable Remainder Trust Helps University Students

Florida resident Robert Larson of Leesburg recently donated $1.4 million to the Minnesota State University, Mankato in honor of his late wife, Virginia, the Minnesota State University, Mankato recently announced.

A story entitled “Minnesota State Mankato Receives $1.4 Million Gift to Support Education, Music, ROTC Scholarships” said that Larson’s gift will support scholarships for students studying elementary education (75%) and music (20%), and the remaining 5% is earmarked to establish Minnesota State Mankato’s first Reserve Officer Training Corps endowment. At least 14 students annually will receive scholarships as a result of the gift.

“This gift is especially meaningful because of the many years that Robert and Virginia Larson spent planning for it,” said Minnesota State University, Mankato President Edward Inch.“ Students will benefit from this gift for many generations to come.”

The Larson’s originally planned their gift by creating the university’s first-ever charitable remainder trust in 1987. The trust was set up to benefit University students after both Robert and Virginia died.

A charitable remainder trust (CRT) is a gift of cash or other property to an irrevocable trust. The donor gets to keep an income stream from the trust for a term of years or for life. The charity then gets the remaining trust assets at the conclusion of the trust term. The donor receives an immediate income tax charitable deduction when the CRT is funded, based on the present value of the assets that will eventually go to the named charity.

Mr. Larson later decided he wanted to give a larger sum to the university to be able to have an effect on students while he was still living. Therefore, he decided to forego the annual payments he received and terminated the charitable remainder trust early.

His wife Virginia graduated from Minnesota State Mankato in 1961 with a bachelor’s degree in elementary education. She began teaching fourth grade in Lakeville, Minnesota. She then taught third grade in Poway, California, and finally taught fourth grade and English as a second language in Chula Vista, California. She died in 2020.

“Virginia really enjoyed her time as a student at Minnesota State Mankato, and we started planning for this gift out of a desire to help students,” said Robert Larson.

Reference: Minnesota State University, Mankato (August 12, 2021) “Minnesota State Mankato Receives $1.4 Million Gift to Support Education, Music, ROTC Scholarships”

 

estate planning

How to Prepare for Higher Taxes

Taxing the appreciation of property on gifting or at death as capital gains or ordinary income is under scrutiny as a means of raising significant revenue for the federal government. The Biden administration has proposed this but proposing and passing into law are two very different things, observes Financial Advisor in the article “How Rich Clients Should Prepare For A Biden Estate Tax Regime.”

The tax hikes are being considered as a means of paying for the American Jobs Act and the American Families Act. Paired with the COVID-19 relief bill, the government will need a total of $6.4 trillion over the course of a decade to cover those costs. Reportedly, both Republicans and Democrats are pushing back on this proposal.

A step-up in basis recalculates the value of appreciated assets for tax purposes when they are inherited, which is when the asset’s value usually is higher than when it was originally purchased. For the beneficiary, the step-up in basis at the death of the original owner reduces the capital gains tax on the asset. Taxes are reduced significantly, or in some cases, completely eliminated.

For now, taxpayers pay an estate tax on the value of the assets and the basis of appreciated assets is stepped up to fair market value. The plan under consideration would treat appreciated assets owned at the time of death as sold, which would trigger income tax and subject those assets to estate tax.

Biden’s proposal would also subject many families to the estate tax, which they would not otherwise face, since the federal estate tax exclusion is still historically high—$11.7 million for individuals and $23.4 million for married couples. Let’s say a widowed mother dies with a $3 million estate. Most of the value of the estate is the home she lived in with her spouse for the last four decades. Her estate would not owe any federal tax, but the deemed sale of a highly appreciated home would generate income tax liability.

The proposal allows a $1 million per individual and $2 million per married couple exclusion from gain recognition on property transferred by gift or owned at death. The $1 million per person exclusion is in addition to exclusions for property transfers of tangible personal property, transfers to a spouse, transfers to charity, capital gains on certain business stock and the current exclusion of $250,000 for capital gain on a personal residence.

How should people prepare for what sounds like an unsettling proposal but may end up at a completely different place?

For some, the right move is transferring properties now, if it makes sense with their overall estate plan. Regardless of what Congress does with this proposal, the estate tax exemption will sunset to just north of $5 million (due to inflation adjustments) from the current $11.7 million. However, the likelihood of the proposal passing in its present state is low. The best option may be to make any revisions focused on the change to the estate tax exemption levels.

Reference: Financial Advisor (June 28, 2021) “How Rich Clients Should Prepare For A Biden Estate Tax Regime”

 

Near Retirement Planning

How are Charitable Contributions Used to Reduce Estate Taxes?

Increasing tax changes for the wealthy are coming, and motivation to find ways to protect the wealth is getting increased attention, according to a recent article from CNBC entitled “Here’s how to reduce exposure to tax increases with charitable contributions.” Charitable remainder trusts (CRTs) and Donor Advised Funds (DAFs) are options for people who are already charitably inclined. The CRT is complicated, requiring estate planning attorneys to create them and accountants to maintain them. The DAF is simpler, less expensive and is growing in popularity.

Both enable income tax deductions, in the current year or carried forward for five years, on cash contributions of up to 60% of the donors’ AGI and up to 30% of AGI on contributed assets. These contributions also reduce the size of taxable estates.

CRTs funnel asset income into a tax-advantaged cash stream that goes to the donor or another designated non-charitable beneficiary. The income stream flows for a set term or, if desired, for the lifetime of the non-charitable beneficiary. The trusts must be designed, so that at the end of the term, at least 10% of the funds remain to be donated to a charity, which must be designated at the outset.

No tax is due on proceeds from the sale of trust assets, until the cash makes its way to the non-charitable beneficiary. When assets are held by individuals, their sale creates capital gains tax in the year they are sold.

CRT donors can fund the trusts with highly appreciated assets, then manage them for optimal returns while minimizing tax exposure by adjusting the income stream to spread the tax burden over an extended period of time. If capital gains tax rates are raised by Congress, this would be even better for high earners.

DAFs do not allow dispersals to non-charitable beneficiaries. All gains must ultimately be donated to charity. However, the DAF provides advantages. They are easy to create and can be set up with most large financial service companies. Their cost is lower than CRTs, which have recurring fees for handling required IRS filings and trust management. Charges from financial institutions typically range from 0.1% to 1% annually, depending upon the size, and a custodial fee for holding the account.

DAFs can be created and funded by individuals or a family and receive a deduction that very same year. There is no hurry to name the charitable beneficiaries or direct donations. With a CRT, donors must name a charitable beneficiary when the trust is created. These elections are difficult to change in the future, since the CRT is an irrevocable trust. The DAF allows ongoing review of giving goals.

Funding a DAF can be done with as little as $5,000. The DAF contribution can include shares of privately owned businesses, collectibles, even cryptocurrency, as long as the valuation methods used for the assets meet IRS rules. Donors can get tax deductions without having to use cash, since a wide range of assets may be used.

The DAF is a good way for less wealthy individuals and families to qualify for itemizing tax deductions, rather than taking the standard deduction. DAF donations are deductible the year they are made, so filers may consolidate what may be normally two years’ worth of donations into a single year for tax purposes. This is a way of meeting the IRS threshold to qualify for itemizing deductions.

Which of these two works best depends upon your individual situation. With your estate planning attorney, you’ll want to determine how much of your wealth would benefit from this type of protection and how it would work with your overall estate plan.

Reference: CNBC (April 20, 201) “Here’s how to reduce exposure to tax increases with charitable contributions.”

 

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