More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
There’s no “new new” in philanthropy, but standbys come back into favor with changing times, according to Carol Kroch, managing director for wealth and philanthropic planning at Wilmington Trust.
“Because of the increased wealth from the past couple of years — certainly this year has been a very good year in the equity market — people are focusing more on the philanthropic side,” Kroch said in a recent telephone interview.
She noted that her clients have shown particular interest in three areas.
From a tax-planning perspective, appreciated securities have returned to the fore, Kroch said. Wealthy taxpayers are allowed to take a 30% deduction for gifts of appreciated stock to public charities and certain foundations.
“In 2008, when you touted the virtues of being able to transfer your appreciated securities and diversify them in a tax-deferred mechanism, people looked at you and asked, ‘What appreciation?’” It has taken time to build back up after 2008, Kroch said.
“It’s not new, but a good time for them.”
Another tax-favored technique that has gained renewed interest as tax rates have increased is charitable remainder trusts. A CRT allows the donor to benefit a charity and benefit himself or a family member with annual payments from the trust for up to 20 years or the lives of the beneficiaries. At the end of the term, remaining assets are distributed to one or more qualified charities.
Kroch said a CRT was highly attractive to charitably minded people with highly appreciated assets. She said an important feature of a CRT was when it sold appreciated assets. The capital gains tax is deferred, making it useful for a donor who wants to diversify an asset and then derive income from it.
As each distribution is made to a non-charitable beneficiary, it is included in that person’s income. Depending on the amount of ordinary income earned by the trust, a portion of the distribution may represent capital gains previously earned by the trust. A CRT doesn’t avoid tax on capital gains, but merely defers it until distributed.
At the same time, the vehicle allows all proceeds from a sale by a CRT of an appreciated asset to be invested and grow rather than having to pay all the capital gains tax in the year of the sale.
“Depending on the amount of gains and amount of other income, it could be a very long time before they’re all fully paid out or until any are paid out,” she said. Again, not new new.
There are also “soft side issues,” Kroch said. “People do philanthropy for a lot of reasons, but it generally comes down to values. They want to do it tax efficiently because if you can give more to charity and save more money, that’s great. But I don’t think that’s ever the first motivator.
“A lot of values-oriented issues are very much top of mind for philanthropic families.”
Working together on a philanthropic project can help parents teach their children about the family’s wealth and to what uses it can profitably and charitably be put.
Philanthropy is a platform that can be neutral, though not always noncontroversial. “It’s less fraught with emotion,” Kroch said.
“The transmission of values issues is one that resonates for people year round.”
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