May 2013 – Estate Planning Strategies in a Rising Market

It’s hard to believe that the stock market was below 7,000 just a few years ago and now parvati1has more than doubled to 14,000 and above.  Who would have believed that even the real estate market would rebound despite the continued glut of foreclosed homes? It’s almost enough to make even a hard-core pessimist hope for a balanced federal budget.

Yes, there is light at the end of the tunnel and we have reason to hope that it is not just another train coming right at us.

New Strategies for 2013
With the stock market hitting all-time highs and the prospects still strong for continued growth, the financial advantages of charitable estate planning have returned.  Since there is once again long-term capital gains to be avoided, the tax advantages of funding gifts with stocks held over one year have returned.  However, with the Federal Bank still holding down interest rates, the investor/donor has to develop a gifting strategy and make choices which recognizes current circumstances.

Charitable Gift Annuities
For our California donors, the Charitable Gift Annuity (CGA) still has higher rates of return than currently found from Certificates of Deposit, savings accounts and bonds.  It is when the tax savings are factored in plus the favorably-taxed income mix of tax-free, long-term capital gains and taxable income, the real return of the CGA – compared to the all-taxable income of interest and dividends – becomes very attractive.  Combined with the ability of funding these gifting arrangements with relatively small amounts of money (compared to a Charitable Remainder Trust) and the fact that they “lock in” a gift to your favorite charity, the Charitable Gift Annuity becomes a viable and do-able option. Since rates of return fluctuate with the age of the annuitant, call our office for more details as to your personal circumstances.

Charitable Remainder Trusts – Unitrust & Annuity Trust
There is a saying, “a choice of one is no choice at all,” which may be why Congress and the IRS fashioned two Charitable Remainder Trusts to appeal to two different sets of charitably-minded donors.  Both the Charitable Remainder Unitrust and the Annuity Trust “wash” the long-term capital gains from the appreciated securities or real estate used to fund them.  However, the low rate of return for bonds and other interest-paying assets makes choosing the Unitrust the better strategy for trusts funded with appreciated assets.

Add in the other factors of the very flexible Unitrust, and it becomes the obvious choice:
– Assets can be added to the Unitrust in later years as your portfolio grows and more highly appreciated assets – including real estate – are identified.  By using this strategy of “peeling off” such assets and periodically using them to fund one’s Unitrust, what may start as a relatively modest trust could end up as a significantly sized trust with funding for multiple charitable beneficiaries.

– The “spigot on, spigot off” option is something not possible with the Annuity Trust.  It’s called the “net income with make-up provision” or NIMCRUT, a unique feature of the Unitrust. This allows the trustee to manage the flow of income from the trust to match not only the income-earning capabilities of the assets but also the financial needs of the income beneficiaries.  If little income is needed, the trustee manages the assets so that little income is produced (spigot off), while the assets experience tax-free capital growth.  When it is decided that the beneficiaries need and/or want income, assets are sold off and capital gains income is generated (spigot on).

American Taxpayer Relief Act of 2012
It is hard to believe that there is much relief in the American Taxpayer Relief Act of 2012, but there are projections that charitable giving will increase by 1.3% in individual giving for 2013.  Here’s why:

– The top income tax rates for single persons making over $400,000 and for married persons making over $450,000 increase from 35% to 39.6%.  For donors in that income tax bracket, the cost of giving has just been reduced by 13%.

– The long-term capital gains rates for top incomes increase from 15% to 20%.  For single tax payers earning over $200,000 and married taxpayers earning over $250,000, there is an additional 3.8% Medicare tax that applies to any long-term capital gains they report. Their top long-term capital gains rate therefore is 23.8%.

– Single taxpayers earning $250,000 and married taxpayers earning $300,000 will have a 3% “floor” on their itemized deductions.  These taxpayers will lose part of their itemized deductions based on their level of income over that “floor,” up to a maximum of 80% of the deduction.

– The “applicable exclusion amount” for estates in 2013 for a single taxpayer is $5.25 million and for married taxpayers it is $10.5 million. This estate tax exemption amount will be indexed for inflation in future years.

– The IRA charitable rollover is restored and permits IRA owners 70.5 years and older to transfer up to $100,000 per year to their favorite charities without incurring taxes. The IRA rollover is not a taxable event, does not impact other income and the amount is not tax deductible in the year it is rolled over.

The Personal Charitable Relief Act of 2013”
Astute taxpayers and donors understand that we have choices and decisions to make. Which entity – government or charity – will make the best use of the money which we have earned. This means that we have to develop our own Personal Charitable Relief Act for 2013 and the years ahead.

While it is illegal to avoid paying taxes entirely, it is permissible and tax-code encouraged to support those charities which represent the values we believe will make our country and our community the best place to live, raise children, retire comfortably and live peaceably.  This requires that we strategize what we want to accomplish with the blessings we have received and accumulated. 

Please consider the Janaka Foundation and the future of Ananda in your planning, and remember, we are to here to help.