July Personal Finance Newsletter
July 14, 2011 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The July personal financial planning newsletter is now available.
Because of the tumultuous investment markets and economic uncertainty, the newsletter includes two investing columns — one a recap of the second quarter market performance with a look forward, and another by Jim Parker with Dimensional Funds providing some compelling data on the importance of maintaining investment discipline.
The newsletter also has information on the new IRS mileage rates for the second half of 2011, a summary of how A/B and A/B/C trusts work for estate planning, and an overview of the tax and policy issues involved in taking a loan from your life insurance policy.
Plus, there’s an invitation to my social security workshop this coming Tuesday at the library.
Click here to read the newsletter.
April Personal Finance Newsletter
April 15, 2011 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The April 2011 Personal Finance Newsletter is now available. This month’s newsletter includes a reminder on Monday’s 2010 IRA contribution deadline and information on social security statements being suspended. We also have articles on the estate tax exemption portability and the opportunity for some to do Roth conversions inside their 401(k) plans. Plus — it’s my pleasure to introduce Keener Financial Planning’s new Planning Assistant, Megan Horst. To read the newsletter, please click here.
March Personal Finance Newsletter
March 14, 2011 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The March personal financial planning newsletter is now available. It includes an update on the investment market, tips on cutting discretionary spending to build your cash reserve, planned charitable giving, and social security survivors benefit. There’s also a special guest column from attorney Rania Combs on the complexities of dying intestate (without a will) for individuals in blended families in Texas. Click here to read the newsletter.
Charitable Giving as Part of Your Estate Plan
November 3, 2009 by Jean Keener, CFP, CRPC, CFDS · 1 Comment
As the holidays approach, it’s a good time to consider charitable giving as a potential part of your estate plan. Giving provides a sense of personal satisfaction, and it can be beneficial from a financial planning perspective.
If you’re one of the 2% of Americans currently subject to the estate tax, planned charitable giving can be a powerful estate planning tool. Even if estate taxes aren’t an issue for you, charitable giving can still provide a satisfying opportunity to leave a financial legacy. And a well-planned gift can maximize its benefits to you and the charity.
Usually when people leave a gift to a charity as part of their estate, it’s an organization they’ve had significant contact with during their lifetime. However, it’s still a good idea to check out how the charity uses donated funds prior to planning for a substantial estate donation. You can do this through a charity tracking organization like Charity Navigator or by asking questions directly of the charity about their use of funds, the percentage of donations that go directly to programs, and how your gift would be used.
Once you’ve selected the charity or charities, here are some of your options for gifting techniques.
Put the charitable gift in your will
The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will that names the charitable beneficiary and states the amount of your gift. The outright bequest is especially appropriate when the amount of your gift is relatively small, or when you want the funds to go to the charity without strings attached.
Name the charity as beneficiary of an IRA or retirement plan
If you have funds in an IRA or employer-sponsored retirement plan, you can name your favorite charity as a beneficiary. Naming a charity as beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account.
Use a charitable trust
Another way for you to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust.
A charitable lead trust pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. You would use the charitable lead trust when you’re optimistic about the future performance of the investments you place in the trust.
A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction. A charitable remainder trust takes advantage of the fact that lifetime charitable giving generally results in tax savings when compared to testamentary charitable giving.
However you choose to give, planning for it in advance and considering its overall impact both to your estate and the charity can provide maximum impact for your generosity.
Roth conversion as estate planning technique
September 28, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The 2010 lifting of income limits for Roth IRA conversions creates a sizable opportunity to reduce estate taxes. We’ve already discussed Roth IRA conversion basics, and who might want to convert. But if your estate is potentially subject to the estate tax at your death, you have an additional reason to take a close look at this opportunity.
For 2009, the estate tax exemption is $3.5 million. Under current law, the estate tax is scheduled to be completely revoked for 2010 and then in 2011 revert back to a $1 million per person exemption. Very few people think that the current law will stand as is. But no one knows right now what congress will do. So, for planning purposes, it’s prudent to consider Roth IRA conversion if your estate is potentially at or even near current estate tax levels. If you’re not sure about your estate, there’s a neat little calculator at SmartMoney.com.
How does converting help?
When you pass money in a traditional IRA to your heirs, you are passing the funds pre-income-tax. When you pass money in a Roth IRA, you are passing post-income-tax funds. Either way, the total being passed counts toward your taxable estate. So if you pay the taxes on the IRA funds before your death by converting traditional IRA funds to Roth, you reduce your taxable estate by the amount of the income taxes paid.
Let’s look at an example simplified for the case of illustration.
Suppose Mr. Smith has $5 million in assets that he will be passing to his son when he dies. Using the $3.5 million exemption, $1.5 million will be subject to the estate tax, and estate taxes would be approximately $675,000. $1 million of these assets are in a traditional IRA. Mr. Smith is in the 35% tax bracket.
If Mr. Smith converts the $1 million traditional IRA to a Roth, he will pay $350,000 in income taxes for the conversion, reducing his estate to $4,650,000. After conversion, only $1,150,000 will remain subject to the estate tax, and his estate tax will go down to $517,500 – a savings of approximately $157,500.
Other considerations with this strategy:
- What tax bracket is the beneficiary in?
- How much do we expect the IRA to grow between conversion and estimated life expectancy?
- What other estate planning techniques are available to Mr. Smith to otherwise reduce estate taxes?
In any case, if your assets potentially make your estate subject to the estate tax and you have a traditional IRA, converting to a Roth IRA merits consideration as an estate planning technique.
Who should consider Roth conversion
September 18, 2009 by Jean Keener, CFP, CRPC, CFDS · 2 Comments
Given the historic opportunity of 2010 to spread the tax payment over 2 years in 2011 and 2012, everyone with a traditional IRA should take at least one look at Roth IRA conversion for next year.
It is most beneficial to you when all of these apply:
- You’ll pay the resulting “conversion” tax with non-IRA funds
- You have 10 years or more before you will be taking distributions from the Roth IRA
- You will be in the same or a higher tax bracket when you start taking those distributions.
But even if only some or none of these apply, it doesn’t mean you should rule conversion out.
There are still many times where it can make sense, and some that don’t. It’s easiest to discuss these by looking at few examples.
I did an analysis for a 64-year-old who didn’t have the money to pay the tax with non-IRA funds, so the taxes were going to come out of his IRA. He also only had 6 years until he planned to start taking distributions. He was going to be in the same tax bracket in 2011-2012 and in retirement. In his situation, he still came out ahead with conversion – having over $1,000 more in after-tax retirement income by converting. He won’t be subject to the 10% penalty on the amount withdrawn to pay the tax because he is over 59 ½. His situation was also helped by not planning to take social security until age 70. If he was already receiving social security benefits, we would have needed to consider any additional income tax implications on his social security benefits for the years he claimed the conversion income.
Another analysis was for a 32-year-old woman. She has a pre-tax employer
401k and was also trying to decide if conversion made sense. She also does not have the funds to pay the taxes with non-401k money, and she would be subject to the 10% penalty by withdrawing funds from the 401k before age 59 ½ to pay the taxes. We estimated her tax bracket in 2011-2012 and in retirement as the same. In her case, conversion did not make sense. But it was quite close. If she believed that her tax rates were going to be higher by the time she retired by even 1%, the conversion would have significantly increased her after-tax income.
One last example – 44 year old. He had a traditional IRA and had money to pay the taxes from a non-IRA account. However, we estimated that his tax bracket in retirement would likely be lower than it is now, by about 3%. In his case, conversion was still a great deal even with the projected lower retirement tax rate. Having all those years of after-tax growth more than off-set the potential for a slightly lower rate in retirement.
If you have a traditional IRA, an analysis is in order.
The above examples illustrate that even when your situation doesn’t meet the “ideal conversion” criteria, it still may make a significant difference in your after-tax retirement income. If you’d like to see the specific calculations on any of the examples listed above, please feel free to contact me and I’d be happy to send them to you.
A few other considerations to keep in mind
If your estate is potentially subject to the estate tax, a Roth conversion can be a powerful planning tool.
The market’s relative “high” or “low” value when you convert is also a factor in how good a deal conversion is – low values mean you pay tax on a lower amount.
There are also opportunities to convert in early 2010 and undo the conversion later based on circumstances or market performance. We’ll discuss this in future posts.
July 2009 Newsletter
July 1, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The July 2009 newsletter is now available online. It reviews some blog information on FDIC insurance limits, establishing an emergency fund, and down market estate planning opportunities. It also covers new information on whether or not you should refinance your mortgage and considerations in diversifying your investments. Click here to read it.
Estate Planning Opportunities in a Down Market
July 1, 2009 by Jean Keener, CFP, CRPC, CFDS · 1 Comment
Note: This article discusses federal tax rules only. Individual states impose their own property transfer taxes using rules that may be different from the federal rules.
Basic Gifting
Each year, you can make gifts of up to $13,000 to anyone you want, to as many people as you want, tax free under the annual gift tax exclusion. You can give away twice that amount if both you and your spouse make the gifts together (this is called gift splitting). And, you can give away an unlimited amount if you pay tuition or medical bills on behalf of another person (just be sure to make these payments directly to the school or health-care provider
Family loans
You can lend money to your children at the current IRS minimum interest rate (known as the AFR, which changes monthly), and then potentially forgive an amount equal to the gift tax exclusion each year. (The gift tax exclusion amount is adjusted for inflation; $13,000 is the figure for 2009.
Grantor retained annuity trust (GRAT)
A GRAT is an irrevocable trust with a specified term (e.g., 10 years) into which you gift assets that you expect will greatly increase in value in the future. You receive annuity payments during the trust term, and at the end, your beneficiaries receive any remaining propertyThe transfer of assets to the GRAT is a taxable gift to the trust beneficiaries. The value of the gift for tax purposes is determined based on the current IRS rate (known as the 7520 rate, which also changes monthlyTax savings are achieved because the annuity payments are calculated to result in a gift tax value of zero. It’s anticipated, however, that the actual interest earned will be higher than the 7520 rate, leaving a substantial value in the GRAT at the end of the term. This remaining value is passed on to your beneficiaries tax free.
Intentionally Defective Grantor Trust (IDGT)
An IDGT is an irrevocable trust that has a purposeful flaw (i.e., you retain some control over the trust) so that you, and not the trust entity, pays the income taxes on trust income (thus, an IDGT is ideal when you want to transfer income-producing assets). Even though you retain some control over the trust, IDGT assets will generally not be included in your taxable estate at your deathYou sell assets to the IDGT in return for an installment note, with interest calculated based on the current AFR. There is no gift tax because it is a “sale” (except for an initial gift that “seeds” the trust). However, because you and the trust entity are considered the same taxpayer, no gain is recognized on the sale, and interest you receive under the note is not considered taxable income>Tax savings are achieved because, hopefully, the value leaving your estate via the sale will exceed the value returned to your estate via the note. You also reduce your estate by paying the income taxes on IDGT income.
Charitable lead trust (CLT)
A CLT is an irrevocable trust with both charitable and noncharitable beneficiaries. It’s called a lead trust because it is the charity that is entitled to the first or lead interest from the trust property. After the specified term, the remaining trust property passes to you or another named noncharitable beneficiaryAt the time assets are placed into the CLT, you receive a current gift tax deduction equal to the present value of the income stream that will be going to the charity. The interest rate used is based on the current 7520 rate. The lower the interest rate, the higher the deduction. As with a GRAT or IDGT, it is hoped that the CLT assets will appreciate beyond the 7520 rate, allowing the excess to pass tax free.
These gifting strategies, and others, can turn this economic downturn into a mixed blessing.
June 2009 Newsletter
June 2, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The June 2009 newsletter is now available. It includes articles on the new credit card law provisions, energy-efficient tax credits, estate planning for second marriages, and social security planning. Click here to read it.
April 2009 Newsletter
April 6, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The April 2009 newsletter is now available online. It includes an update on market conditions, plus information on the Cobra subsidy, writing off worthless securities on your taxes, an estate planning pitfall to avoid, a conversation for parents about saving for retirement vs. college, and a how-to on budgeting. Click here to read the newsletter.