by Adam S. Russell | Estate Planning
In the wake of the 2018 tax law changes that, among other things, increased the standard deduction to a baseline of $12,000 for an individual and $24,000 for a married couple filing jointly, much attention has been given to the effects such changes might have on conventional charitable giving (as opposed to, for instance, planned giving like gift annuities). In fact, we had a blog post around the time the law passed that predicted some changes in the patterns of charitable giving, including an expected decrease in annual giving. Just this month, news reports have indicated that the impact on giving was even greater than economists expected.
Among the charitable giving and tax planning tips that received significant circulation last year was the concept of gift “bunching,” where a donor would bunch up several years’ worth of annual gifts into one taxable year, to create a larger one-time deduction (as compared to normal pattern of year over year deductions for the same total gift amount), and otherwise relying on the increased standard deduction. The idea behind this was, if you are planning to make the charitable gifts (and we are assuming the gifts would be made even absent a tax benefit), you might as well structure it in a fashion to maximize the tax efficiency.
When the idea was new and being circulated regularly in estate and wealth planning circles, we did not hear many charities complaining. Donations made now are better than donations made later, of course. We did hear rumblings of concern that the bunching approach would lead to more fundraising variability – a greater amplitude in the hills and valleys – which would, in turn, create other budgetary pressures that might offset the advantage of any windfalls from bunching. But, institutions that offer donor-advised funds (DAFs), such as community foundations, were quick to jump in and inform everyone that they could, in fact, despite the adage, have their cake and eat it, too.
Combining bunched giving with a DAF allows donors to maximize their tax efficiency by concentrating the gift deduction into one taxable year (by making a bunched gift into a DAF) while allowing them to preserve the patterns of annual giving with which they (and the donees) had grown accustomed. Utilizing DAFs in this fashion allows the donor to retain all the flexibility of annual giving among their favorite charitable organizations while smoothing the hills and valleys for the charities, and no income tax deduction downside. This strategy may also, for some donors, increase disposable income during the intervening years between bunched gifts, which may present opportunities to employ additional gifting strategies, such as qualified charitable distributions from an IRA.
Want to learn if you can use a DAF as a philanthropic flexible spending account to support your favorite charities? Call 574.232.3538 for an appointment to discuss your goals.
Author: Adam S. Russell is an estate planning attorney at Tuesley Hall Konopa, LLP. Practice areas include trust and estate planning, estate administration, tax planning, charitable planning, and charitable trusts, trust funding, special needs trusts and supplemental needs trusts, prenuptial agreements, and probate. Additionally, Adam is licensed to practice in both Indiana and Michigan and regularly meets with clients in our South Bend, Elkhart and Cassopolis offices.
You can contact Adam by calling 574.232.3538 or by email arussell@thklaw.com.
Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.
by Adam S. Russell | Estate Planning
Much has already been written this fall since the House and Senate tax reform proposals were made public. What final form these bills will take when reconciled, or whether it passes at all, remains to be seen, but from what is known already there are plenty of planning considerations to make, some of which may impact individual taxpayer decisions before year-end.
In particular, I want to focus on the proposal to double the standard deduction, and the impacts such a change might have on charitable giving. For many Americans who itemize, the mortgage interest deduction, the deduction for state and local taxes, the medical expenses deductions, and the charitable deduction are often some of, if not the, most significant components of their Schedule A. Setting aside the first three for now, which are themselves also in the crosshairs for major changes or outright eradication, the tax advantage of the charitable deduction would decrease, and possibly evaporate entirely, for many charitably-minded taxpayers. One clear consequence of the doubling of the standard deduction would be a large reduction in the number of taxpayers who itemize, especially in combination with the reduced availability of other key deductions. Consequently, fewer annual charitable gifts will result in income tax deductibility for donors.
Now, it is probably fair to say that most folks who give to charity do not do so primarily for the tax benefits, and it may well be that the diminution of the charitable deduction’s tax benefits would not matter one whit to many donors. But, tax policy is more than just revenue, it has also long been used to incentivize certain behaviors we have elected as a society to favor, such as homeownership, capital investment, and, of course, charitable giving, to name but a few. The proposed changes would shift the calculus for many donors, not necessarily whether to give, but instead how and when they give. In my mind, the proposed changes to the deduction regime will likely lead to less annual giving, perhaps substantially so.
Instead of annual giving, taxpayers may consider shifting their giving to other strategies, such as qualified charitable distributions from IRAs, bequests at death, or other planned giving vehicles like charitable trusts or gift annuities. In particular, the comparative value of the qualified charitable distribution from an IRA (only available to taxpayers who are over age 70 ½), where a principal directs their IRA administrator to distribute their annual required minimum distribution directly to charity rather than to the principal (thereby avoiding income taxation on the RMD amount, but bypassing the charitable deduction), will increase dramatically if the proposed changes take effect. This will be compounded to an extraordinary degree if the stretch IRA rules also end up on the chopping block, as rumored, as will charitable giving at death through IRA beneficiary designations.
Charitable organizations need both annual giving and planned giving to survive and to thrive. These changes could shift the balance in ways that will have charitable organizations scrambling to adjust their fundraising and financial management. It will also change the calculus for individual charitable giving in ways that ought to be given thought. In the meantime, while we all wait to see what the final tax reform package will look like, on the eve of such changes, individual taxpayers would do well to consider (and consult their advisors on the advisability of) possibly front-loading their annual giving.
Author: Adam S. Russell is an estate planning attorney at Tuesley Hall Konopa, LLP. Practice areas include trust and estate planning, estate administration, tax planning, charitable planning, and charitable trusts, trust funding, special needs trusts and supplemental needs trusts, prenuptial agreements, and probate. Additionally, Adam is licensed to practice in both Indiana and Michigan and regularly meets with clients in our South Bend, Elkhart and Cassopolis offices.
You can contact Adam by calling 574.232.3538 or by email arussell@thklaw.com.
Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.
by Adam S. Russell | Blogs
Rarely does the world of estate planning enter into the public consciousness. Aside from the occasional “reading of the Will” scene (sadly, these do not happen in modern practice), the closest we get is probably the prenups. Known by many names, the pre-marriage agreement, traditionally called an antenuptial agreement, but universally known now as the prenuptial agreement, or “prenup” for short, is an agreement – a contract – between an engaged couple where they define their respective rights to their separate and/or collective property in the event of death or of dissolution of their marriage.
Prenups are done in a variety of settings, such as between second (or subsequent) marriages to deal with issues associated with disparate assets and/or blended families, or between business owners and their future spouses in order to mitigate potential disruptions in business operations, or between young couples who are the beneficiaries of trusts or expect significant inheritance.
A prenup is a contract between the two parties that waives and releases rights they may have under public laws and replaces those rights with a private arrangement, done in exchange for the promise to marry. All assets and liabilities must be disclosed in the course of the negotiation of a prenup. An individual cannot waive their legal rights or interests in property without understanding the scope of those potential rights or interests. For future anticipated inheritances, the line typically is drawn at disclosing any currently vested interests. Again, it is up to the parties and their counsel to decide what is appropriate for disclosure.
Any asset owned by an engaged partner prior to the marriage is considered a separate asset. To the extent that partner keeps that asset separate after marriage, it can remain so and be treated as separate in the event of death or divorce. The separate treatment is a one-way street – if a previously separate asset is put into joint name, or commingled, it loses its separate character forever. That toothpaste cannot go back into the tube. Also included under the umbrella of separate assets are all future received gifts and inheritances – again, provided the recipient keeps those assets separate after receipt. However, the inclusion within separate assets of all assets held prior to the marriage does not mean, necessarily, that any must be kept separate. All assets are disclosed as separate up front, but the parties can always choose what they choose to retain as separate or not. Collective assets include everything acquired together after the date of the marriage, including earned wages.
One issue that often requires special attention in the course of preparing and negotiating a prenuptial agreement is the treatment of retirement assets, in particular, employer-provided plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). This federal law grants surviving spouses certain rights in ERISA-governed plans, and how to handle these assets in the context of the agreement often becomes a central issue for both sides.
The arrangement in a prenup establishes a floor, not a ceiling. A married couple can always do more for one another, through joint ownership, gift, or their estate planning documents, than is guaranteed in the agreement. In fact, in my experience, the majority of couples do so. The agreement is also revocable at any time after marriage. Again, in my experience, the majority will tear it up some years down the road, and will greatly relish doing so.
Prenups are not a fun topic to bring up to a future spouse, even where there may be legitimate reasons to do one. Nor is it fun to navigate any of the above issues, but they do have an important role to play for many people, including recently for many longstanding same-sex couples who are now considering marriage. Do all marriages need a pre-marriage agreement? Absolutely not. But, if any of these issues resonate with you, the earlier you start the process, the better it is for everyone.
Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.
by Adam S. Russell | Estate Planning
Happy Holiday Gift, for Gift-Givers!
Spoiler alert: Charitable IRA Rollover Provisions Made Permanent
The end of the year is, probably more often than we would like, an exciting time for professional advisors, as Congress plays Santa and makes last-minute gifts, with the occasional lump of coal for good measure. It is a tall order to advocate sympathy for the IRS, at any time, but I can only imagine how frustrated they must feel each year around this time. This year, thankfully, Congress passed a tax bill that mostly contained gifts. In fact, the best kind of gifts — the kind that makes it easier to give more gifts! First, some background:
Charitable planning is one of our favorite topics to engage with our estate planning clients, not only because it is an opportunity to enable really good to be done in a win-win situation for both clients and the charities they support, but also because there are a broad array of fun (to us) tools available to accomplish our clients’ charitable goals. Most of these discussions start with charitable planning with qualified retirement assets, because virtually everyone has them, and they are the easiest tax-advantaged charitable vehicle.
Conventional qualified retirement accounts (non-Roth) are income tax-deferred, where the owner contributes pre-tax dollars, deferring the tax to retirement when they will, in most cases, be in a lower tax bracket, while enjoying all those years of tax-deferred growth of the IRA. As any retiree knows, the reckoning comes at age seventy and a half, when the required minimum distributions, and corresponding income tax, start. The IRA assets are taxed as income to the retired owner, but also to any individual designated beneficiary of the account after the owner’s passing unless that beneficiary is a charity. Qualified charitable organizations do not pay income tax, and so they receive one-hundred-cent-dollars from an IRA. Wonderful charitable option after you die, but what about the retiree taking RMDs each year from their IRA?
For the last several years, around this time of year, the IRS has authorized, for the taxable year just about to end, a direct charitable IRA rollover whereby the IRA owner directs a distribution directly to a charity and satisfies their RMD in the process — meaning the RMD does not get included as taxable income first. You are probably thinking, that is great, why would it not be a permanent feature of our tax regime? Great question!
The great news is that, with the PATH act passed by Congress last week, the charitable IRA rollover is now a permanent feature. Any IRA owner who is at least seventy and a half can now, on an annual basis, make a direct distribution from her IRA to a qualified charity in an amount up to $100,000, and such distribution can satisfy part or all of the RMD, and is not included in taxable income! There are some limits — the recipient charity cannot be a donor-advised fund, a charitable gift annuity, or a charitable trust. Be sure to consult with your tax advisor before giving your IRA plan administrator any directions for charitable distributions.
The PATH act included a few select other changes and extenders on the charitable giving front, including an expansion of the conservation gift deductions and clarification of S Corp gifts of appreciated property. All in all, a great start to tax season. Thanks, Santa!
Author: Adam S. Russell is an estate planning attorney at Tuesley Hall Konopa, LLP. Practice areas include trust and estate planning, estate administration, tax planning, charitable planning, and charitable trusts, trust funding, special needs trusts and supplemental needs trusts, prenuptial agreements, and probate. Additionally, Adam is licensed to practice in both Indiana and Michigan and regularly meets with clients in our South Bend, Elkhart and Cassopolis offices.
You can contact Adam by calling 574.232.3538 or by email arussell@thklaw.com.
Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.
by Adam S. Russell | Estate Planning
As we near the end of the year and look back on significant events that have affected the estate planning arena, we would be remiss if we did not mention the new opportunities which are available to same-sex married couples.
Every American knows that last summer, the U.S. Supreme Court issued a landmark decision in the Obergefell v. Hodges case which held that a fundamental right to marry is guaranteed to same-sex couples by the Fourteenth Amendment to the Constitution. Comparatively few Americans know that the Court’s landmark 2013 decision in United States v. Windsor, which held that key sections of the Defense of Marriage Act were unconstitutional, a decision that contributed to the accelerating pace of judicial decisions that culminated in the Obergefell case this summer, was an estate tax case.
This little-known fact is all the more relevant now that the legal landscape for treatment of same-sex married couples has stabilized nationwide, and it is worth pointing out why. The Windsor case involved a same-sex couple, legally married in Canada, but residents of New York when one of them, Thea Spyer, passed away. Her surviving spouse, Edith Windsor, claimed the marital deduction for federal estate tax purposes but was denied the application of that deduction by the IRS based on the provisions of DOMA then in effect. Edith appealed and won – Section 3 of DOMA was ruled unconstitutional, and she got back the tax she had paid, plus interest.
Why does it matter that this decision involved the estate tax? First, because it both brought into contrast the disconnect between the then-evolving definition of marriage and the systems of laws that rely on that definition but were created without anticipating the evolution. Second, because it highlighted the important considerations facing same-sex married couples as those systems of laws, over time, fell into step with that evolution.
Post-Windsor, same-sex married couples were faced with considerations they may not have countenanced previously – do we file income taxes jointly or separately? How does the marital deduction apply to us in estate and gift taxes? What the heck is portability and why should we care? If we create a joint trust as a married couple, will it be respected with regards to property, held in trust, but located in states that do not recognize our marriage?
All important, and at that point, relatively novel questions same-sex couples were asking. Some of them could not be answered with certainty until this summer. But now, same-sex couples who are married or who are considering marriage face a wide array of estate and tax planning considerations that will be new, and in some cases, altogether foreign concepts. From topics such as spousal rights in the medical context to asset titling decisions to all manner of income, gift, estate, and other tax considerations, it is more important than ever before for same-sex couples to educate themselves on the implications of these landmark decisions in their own lives and planning.
Author: Adam S. Russell is an estate planning attorney at Tuesley Hall Konopa, LLP. Practice areas include trust and estate planning, estate administration, tax planning, charitable planning, and charitable trusts, trust funding, special needs trusts and supplemental needs trusts, prenuptial agreements, and probate. Additionally, Adam is licensed to practice in both Indiana and Michigan and regularly meets with clients in our South Bend, Elkhart and Cassopolis offices.
You can contact Adam by calling 574.232.3538 or by email arussell@thklaw.com.
Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.
