Damian Sylvia
Managing Partner
Retirement Income Solutions
Tuesday, March 31, 2015
The Best Places to Work in Retirement
Just over a quarter (26.2 percent) of people age 60 and older remain employed. But in some cities, nearly a third of the population continues to work during the traditional retirement years, according to 2012 Census Bureau data. Here are the places those age 60 and older are the most likely to be employed.
Saturday, March 28, 2015
The 3 Secrets to Maxing out Social Security Spousal Benefits
When it comes to social security there are many combinations available. If you need help planning for social security, contact my office at 732-508-6044.
To review a few different scenarios highlighted on TimeMagazine.com, click here.
Damian J. Sylvia
Managing Partner
Retirement Income Solutions
To review a few different scenarios highlighted on TimeMagazine.com, click here.
Damian J. Sylvia
Managing Partner
Retirement Income Solutions
How Social Security Funding Affects Your Retirement
The first person to receive a monthly Social Security retirement benefit, Ida May Fuller of Ludlow, Vermont, earned quite a return on her tax dollars.
Fuller paid $24.75 in payroll taxes, which is used to fund Social Security, over three years while working as a legal secretary. She retired at age 65 in November 1939. On Jan. 31, 1940, she received her first Social Security check of $22.54. From then until 1970 when she died at age 100, Fuller collected a total of $22,888.92 in Social Security retirement benefits, according to the Social Security Administration (SSA).
Fuller paid $24.75 in payroll taxes, which is used to fund Social Security, over three years while working as a legal secretary. She retired at age 65 in November 1939. On Jan. 31, 1940, she received her first Social Security check of $22.54. From then until 1970 when she died at age 100, Fuller collected a total of $22,888.92 in Social Security retirement benefits, according to the Social Security Administration (SSA).
Damian Sylvia
Managing Partner
Retirement Income Solutions
The Secrets to Making a $1 Million Retirement Stash Last
More and more Americans are on target to save seven figures. The next challenge is managing that money once you reach retirement.
More than three decades after the creation of the 401(k), this workplace plan has become the No. 1 way for Americans to save for retirement. And save they have. The average plan balance has hit a record high, and the number of million-dollar-plus 401(k)s has more than doubled since 2012.
More than three decades after the creation of the 401(k), this workplace plan has become the No. 1 way for Americans to save for retirement. And save they have. The average plan balance has hit a record high, and the number of million-dollar-plus 401(k)s has more than doubled since 2012.
Damian Sylvia
Managing Partner
Retirement Income Solutions
Why putting off retirement savings until you make more money is a big mistake
People in their 20s have a list of excuses for putting off saving for retirement: Their paychecks are too small. They don’t know how long they’ll stay with a company. Why worry now about something that feels a million years away?
But a report from the Employee Benefit Research Institute drives home the point that waiting until you’re older and making more money to start saving for retirement could be a bad call.
But a report from the Employee Benefit Research Institute drives home the point that waiting until you’re older and making more money to start saving for retirement could be a bad call.
Damian Sylvia
Managing Partner
Retirement Income Solutions
Thursday, March 26, 2015
Why post-retirement planning is harder than ever
You have heard the exhortations to save, save, save. Perhaps you have even managed to sock away a decent retirement nest egg. If so, good for you.
But do you have a plan for how to draw down that money?
For millions of Americans, the answer is no. While 401(k) plans usually offer a defined array of investment choices, online tools and other guidance, there is no such system in place for when workers retire.
But do you have a plan for how to draw down that money?
For millions of Americans, the answer is no. While 401(k) plans usually offer a defined array of investment choices, online tools and other guidance, there is no such system in place for when workers retire.
Damian J. Sylvia
Managing Partner
Retirement Income Solutions
5 ways to beef up your retirement savings
Research shows that many people are worried about having enough money saved for retirement.
Some don't think they'll be able to live comfortably with what they have tucked away, and even those with significant savings fear going broke, one survey showed.
But take heart. Financial experts have given this problem a lot of serious thought, and in today's special report, we look at five ways to beef up your retirement savings.
Some don't think they'll be able to live comfortably with what they have tucked away, and even those with significant savings fear going broke, one survey showed.
But take heart. Financial experts have given this problem a lot of serious thought, and in today's special report, we look at five ways to beef up your retirement savings.
Damian J. Sylvia
Managing Partner
Retirement Income Solutions
Monday, March 23, 2015
The Great Illusion of Retirement Savings
The nation is facing a looming retirement income crisis. Average retirees today are not well off. Tomorrow's average senior is likely to be in worse shape.
Instead of addressing this looming crisis, too many of the nation's policymakers and elites propose to make it worse. They tell the American people that Social Security's earned benefits must be cut, despite their modest size. They tell public-sector workers that their pensions are unaffordable, despite the fact that workers have already earned those benefits, indeed foregoing current compensation in the process.
Instead of addressing this looming crisis, too many of the nation's policymakers and elites propose to make it worse. They tell the American people that Social Security's earned benefits must be cut, despite their modest size. They tell public-sector workers that their pensions are unaffordable, despite the fact that workers have already earned those benefits, indeed foregoing current compensation in the process.
Continue reading the source article at HuffingtonPost.com.
Damian J. Sylvia
Damian J. Sylvia
Managing Partner
Retirement Income Solutions
Retirement Income Solutions
Sunday, March 22, 2015
The Best Way To Invest For Retirement
Turn on CNBC for two minutes and it’s easy to believe you need to stop everything and invest in the hot stocks the “experts” are recommending and get out — NOW! — of the ones they’re bearish about.
Chris Minnucci, author of the ironically titled The Death of Buy and Hold: How Not to Outlive Your Money — Investing for, and in, Retirement, says do so at your own peril.
Chris Minnucci, author of the ironically titled The Death of Buy and Hold: How Not to Outlive Your Money — Investing for, and in, Retirement, says do so at your own peril.
Damian Sylvia
Managing Partner
Retirement Income Solutions
How to pump up retirement income by as much as 30%
Worried you won’t have enough for a comfortable retirement? If you’re willing to spend down your assets, as well as take a few other steps, you could boost your annual income by perhaps 30%.
Imagine a couple, both 62 years old. We’ll keep things simple and assume there’s just one breadwinner—and we’ll be politically incorrect and assume it’s the husband. They claim Social Security right away, even though they can’t receive full benefits for another four years. He qualifies for $15,000 a year and his wife is eligible for spousal benefits worth $7,000.
Imagine a couple, both 62 years old. We’ll keep things simple and assume there’s just one breadwinner—and we’ll be politically incorrect and assume it’s the husband. They claim Social Security right away, even though they can’t receive full benefits for another four years. He qualifies for $15,000 a year and his wife is eligible for spousal benefits worth $7,000.
Damian Sylvia
Managing Partner
Retirement Income Solutions
Saturday, March 21, 2015
Wake up! Your retirement is your problem
There is no magic wand that will instantly create a secure retirement for everyone. The fact of the matter is that Americans are responsible for creating their own financially stable retirement. Though Social Security keeps most seniors out of poverty, it provides a bare minimum of retirement income. And experts expect some changes to the program in the not-too-distant future.
Most Americans have to develop a siege mentality to retire securely. The battle to secure consistent retirement income involves a two-pronged attack: Save a lot and work a long time. Individuals are not entirely cast to the wolves, though: Regulators and lawmakers, with the help of employers, are constantly working to help Americans prepare for retirement.
Continue reading the source article at BankRate.com.
Damian J. Sylvia
Managing Partner
Retirement Income Solutions
Most Americans have to develop a siege mentality to retire securely. The battle to secure consistent retirement income involves a two-pronged attack: Save a lot and work a long time. Individuals are not entirely cast to the wolves, though: Regulators and lawmakers, with the help of employers, are constantly working to help Americans prepare for retirement.
Continue reading the source article at BankRate.com.
Damian J. Sylvia
Managing Partner
Retirement Income Solutions
Wednesday, March 18, 2015
Why Your Empty Nest May Be Hazardous to Your Retirement
You may want to live a little when your kids leave home. But what you do with that money can make or break your retirement, a new study finds.
How well prepared you are for retirement may come down to one simple question: what do you do with money that once would have been spent on your kids?
Tuesday, March 17, 2015
5 Ways to Know If You’re on Track to Retire Early
More than any numerical calculation, your financial behaviors are a reliable indicator for early retirement.
Interested in retiring early? How do you know if you’re on track? The usual answer is a financial formula: A given amount of savings, plus some investment return, equals a certain lifestyle, for a certain number of years. It’s simple math. Or is it?
Damian Sylvia
Managing Partner
Retirement Income Solutions
Saturday, March 14, 2015
'Boomerang Kids' Are Ruining Their Parents' Retirement
Having your adult children living in your basement is worse than you think. Boomerang kids can actually hurt your chances of a sound retirement.
Those 65 years or older with financially independent children are more than twice as likely to be retired than people of the same age group who financially support their adult children, according to a new report that retirement market research firm Hearts & Wallets shared with CNBC.com.
That's because those who are still supporting their kids are often putting off retirement to do so, said Hearts & Wallets co-founder Chris Brown.
Damian J. Sylvia
Wednesday, March 11, 2015
Retirement ‘Not Happening’ — For Those With No Retirement Plan
This article originally appeared from the American Society of Pension Professionals & Actuaries
By Nevin Adams • October 24, 2014
There were some mixed messages in a new survey about retirement savings.
The headlines were (as usual) all about retirement non-saving: the 34% reportedly not currently contributing anything to a 401(k), an IRA or other retirement savings vehicle, according to the fifth annual Wells Fargo MiddleClass Retirement study.
The survey went on to point out that a whopping 41% of middle-class Americans between the ages of 50 and 59 are not currently saving for retirement, while nearly half (48%) of middle-class Americans in their 50s said they wouldn’t have enough to “survive” on in retirement. Oh, and in a new (and likely to be broadly cited finding), 22% of the middle class say they would rather “die early” than not have enough money to live comfortably in retirement.
On the other hand (and you probably won’t hear nearly as much about these findings), 70% of those same survey respondents say they have a 401(k) or equivalent plan available to them through their employer, and the vast majority of them (93%) are currently contributing to their plans. Indeed, approximately two-thirds (67%) of those in a plan say they contribute enough to maximize their company’s 401(k) match, and the median contribution rate for those between the ages of 30 and 59 is 7%.
Sacrificial Lines
Then there was the 61% of middle-class Americans, across all income levels included in the survey, who admit they are not sacrificing “a lot” to save for retirement (38% say that they are sacrificing to save money for retirement), though 72% of all middle-class Americans say they should have started saving earlier for retirement, up from 65% in 2013.
Despite the middle-class positioning of the respondents, asked if they would cut spending “tomorrow” in certain areas in order to save for retirement, half said they would — but look at what they identified as areas to cut back:
• 56% say they would give up treating themselves to indulgences like spa treatments, jewelry or impulse purchases;
• 55% say they’d cut eating out at restaurants “as often;” and
• 51% say they would give up a major purchase like a car, a computer or a home renovation.
However, just 38% report that they would forgo a vacation to save for retirement.
Here again, those who have access to a 401(k) are more likely to say they would give up certain expenses, big purchases or expenditures like eating out in order to save for retirement, at a rate approximately 10 percentage points higher than those without access to a 401(k)
Saving ‘Accounts’
Perhaps not surprisingly, about two-thirds (68%) of all respondents affirm that saving for retirement is “harder than I anticipated,” and more than half (55%) say they plan to save “later” for retirement in order to “make up for not saving enough now.”
For those between the ages of 30 and 49, 59% say they plan to save later to make up retirement savings, and 27% are not currently contributing savings to a retirement plan or account.
401(k) Impact
Respondents between the ages of 30 and 49 said they were putting away a median amount of $200 each month for retirement, while those between the ages of 50 and 59 are putting away a median of $78 each month for retirement.
Once again, it was not surprising to find that 85% of those with access to a 401(k) or equivalent plan from their employer affirm they “wouldn’t have saved as much for retirement” if they did not have a 401(k). Moreover, 90% say the 401(k) or equivalent plan “makes it easy to save for retirement.”
Examining retirement savings by age, the median amount saved by those in their 40s is $40,000; for those in their 50s, it is $20,000; and for those between 60 and 75 it is $25,000. Here again, having a 401(k) made a difference, particularly for those who are younger. Middle-class Americans between the ages of 25 and 29 with access to a 401(k) plan have saved a median of $10,000 versus a median of zero savings for those without access, while respondents between the ages of 30 and 39 with access to a 401(k) have saved a median of $35,000 versus those without access, who have saved a median of less than $1,000. Those between the ages of 40 and 49 with access to a 401(k) have saved a median of $50,000 versus the $10,000 saved by those without access.
Having access to a 401(k) also seems to positively impact a sense of what is possible. Nearly 6 out of 10 (58%) non-retirees without access to a 401(k) plan say “it is not possible” to pay bills and “still” save for retirement, compared with about a third (32%) of those who have access to a plan but say they can’t save and pay bills at the same time.
Working longer or into traditional retirement years appears to be a predicted reality for a third of middleclass Americans, who say they will need to work until they are “at least 80 years old” because they will not have enough retirement savings, holding steady from a year ago. Half of those in their 50s say they will need to work until age 80. In another new question asked this year, a quarter (26%) of middle-class Americans say working into their 80s is something they plan to do even if it’s not a financial necessity.
On behalf of Wells Fargo, Harris Poll conducted 1,001 telephone (901 landlines and 100 cell phones) interviews with middle-class Americans in their 20s (ages 25-29 only), 30s, 40s, 50s, 60s and 70-75, surveying attitudes and behaviors around planning, saving and investing for retirement. The survey was conducted from July 20 to Aug. 25, 2014.
By Nevin Adams • October 24, 2014
By Nevin Adams • October 24, 2014
There were some mixed messages in a new survey about retirement savings.
The headlines were (as usual) all about retirement non-saving: the 34% reportedly not currently contributing anything to a 401(k), an IRA or other retirement savings vehicle, according to the fifth annual Wells Fargo MiddleClass Retirement study.
The survey went on to point out that a whopping 41% of middle-class Americans between the ages of 50 and 59 are not currently saving for retirement, while nearly half (48%) of middle-class Americans in their 50s said they wouldn’t have enough to “survive” on in retirement. Oh, and in a new (and likely to be broadly cited finding), 22% of the middle class say they would rather “die early” than not have enough money to live comfortably in retirement.
On the other hand (and you probably won’t hear nearly as much about these findings), 70% of those same survey respondents say they have a 401(k) or equivalent plan available to them through their employer, and the vast majority of them (93%) are currently contributing to their plans. Indeed, approximately two-thirds (67%) of those in a plan say they contribute enough to maximize their company’s 401(k) match, and the median contribution rate for those between the ages of 30 and 59 is 7%.
Sacrificial Lines
Then there was the 61% of middle-class Americans, across all income levels included in the survey, who admit they are not sacrificing “a lot” to save for retirement (38% say that they are sacrificing to save money for retirement), though 72% of all middle-class Americans say they should have started saving earlier for retirement, up from 65% in 2013.
Despite the middle-class positioning of the respondents, asked if they would cut spending “tomorrow” in certain areas in order to save for retirement, half said they would — but look at what they identified as areas to cut back:
• 56% say they would give up treating themselves to indulgences like spa treatments, jewelry or impulse purchases;
• 55% say they’d cut eating out at restaurants “as often;” and
• 51% say they would give up a major purchase like a car, a computer or a home renovation.
However, just 38% report that they would forgo a vacation to save for retirement.
Here again, those who have access to a 401(k) are more likely to say they would give up certain expenses, big purchases or expenditures like eating out in order to save for retirement, at a rate approximately 10 percentage points higher than those without access to a 401(k)
Saving ‘Accounts’
Perhaps not surprisingly, about two-thirds (68%) of all respondents affirm that saving for retirement is “harder than I anticipated,” and more than half (55%) say they plan to save “later” for retirement in order to “make up for not saving enough now.”
For those between the ages of 30 and 49, 59% say they plan to save later to make up retirement savings, and 27% are not currently contributing savings to a retirement plan or account.
401(k) Impact
Respondents between the ages of 30 and 49 said they were putting away a median amount of $200 each month for retirement, while those between the ages of 50 and 59 are putting away a median of $78 each month for retirement.
Once again, it was not surprising to find that 85% of those with access to a 401(k) or equivalent plan from their employer affirm they “wouldn’t have saved as much for retirement” if they did not have a 401(k). Moreover, 90% say the 401(k) or equivalent plan “makes it easy to save for retirement.”
Examining retirement savings by age, the median amount saved by those in their 40s is $40,000; for those in their 50s, it is $20,000; and for those between 60 and 75 it is $25,000. Here again, having a 401(k) made a difference, particularly for those who are younger. Middle-class Americans between the ages of 25 and 29 with access to a 401(k) plan have saved a median of $10,000 versus a median of zero savings for those without access, while respondents between the ages of 30 and 39 with access to a 401(k) have saved a median of $35,000 versus those without access, who have saved a median of less than $1,000. Those between the ages of 40 and 49 with access to a 401(k) have saved a median of $50,000 versus the $10,000 saved by those without access.
Having access to a 401(k) also seems to positively impact a sense of what is possible. Nearly 6 out of 10 (58%) non-retirees without access to a 401(k) plan say “it is not possible” to pay bills and “still” save for retirement, compared with about a third (32%) of those who have access to a plan but say they can’t save and pay bills at the same time.
Working longer or into traditional retirement years appears to be a predicted reality for a third of middleclass Americans, who say they will need to work until they are “at least 80 years old” because they will not have enough retirement savings, holding steady from a year ago. Half of those in their 50s say they will need to work until age 80. In another new question asked this year, a quarter (26%) of middle-class Americans say working into their 80s is something they plan to do even if it’s not a financial necessity.
On behalf of Wells Fargo, Harris Poll conducted 1,001 telephone (901 landlines and 100 cell phones) interviews with middle-class Americans in their 20s (ages 25-29 only), 30s, 40s, 50s, 60s and 70-75, surveying attitudes and behaviors around planning, saving and investing for retirement. The survey was conducted from July 20 to Aug. 25, 2014.
By Nevin Adams • October 24, 2014
Tuesday, March 10, 2015
Saved $1 million and living my dream retirement
Roy Nash long dreamed of retiring at the age of 55.
A self-taught investor, he diligently stashed all the savings he could in stocks and mutual funds. So by 2009, when he did turn 55, he says he had more than $800,000 saved -- enough to step away from his nearly three decade long career at a natural gas distributor in St. Louis.
Damian Sylvia
Retirement Income Solutions
Tuesday, March 3, 2015
Making Gifts Sooner Than Later ... Accelerating Charitable Bequests
This article is by Brian Kaplan of Synergy Life Brokerage Group LLC. Damian Sylvia of Retirement Income Solutions was given permission by Brian Kaplan to repost the entire article.
Over the last few years, the estate and financial planning community has adjusted its use of various planning tools and techniques to reflect the reality of significantly higher exemptions from federal estate taxes beginning in 2011.
For 2012, the most recent year that both Internal Revenue Service and national death statistics are available, some 2.543 million Americans passed away. Of that group, just 8,423 estates exceeded the $5.12 million threshold for gift and estate tax exemptions. This figure means that 99.7 percent of decedents in 2012 weren’t subject to federal transfer taxes. While 19 states and the District of Columbia impose estate or inheritance taxes, just 38 percent of Americans reside in these jurisdictions. The states that don’t impose such taxes include a number of highly populous ones, such as California, Florida and Texas.
So, what does this new paradigm mean?
Non-Tax Motivations
This new estate tax reality means that planners will increasingly need to consider the non-tax motivations that have always, in reality, been of great importance in the decision-making process underlying testamentary charitable gifts. The majority of gifts through estates have always come from those who make these decisions from more deeply held beliefs and motivations than simply the desire to reduce estate taxes.
According to Giving USA, the total bequest giving of $27.7 billion in 2013 was the second highest total on record, and more than half of that amount came from non-taxable estates.
Family members, close friends, associates and charities are the primary entities found in wills or other estate plans. It could be said, therefore, that when an individual includes a charity in an estate plan, he’s, in effect, elevating that charity to the status of a family member. This inclusion typically requires a great deal of donative intent.
But, does this insight mean that philanthropically inclined individuals should disregard tax considerations when they decide the most effective ways to make gifts at death? No, but planners should take a broader view of a client’s tax situation when planning these charitable gifts.
In many cases, it may appropriate to broaden the discussion with the client to include income tax issues and other concerns, such as the desire to protect assets, provide income for himself and/or loved ones and other desirable outcomes that can result from more effective philanthropic estate planning.
Let’s look at some of the benefits of “accelerating” estate gifts.
Life Income Gifts
Charitable individuals will often indicate a desire to make gifts larger than ones they believe they can prudently make. The reasons they don’t make these gifts, typically, revolve around a number of common concerns, including fears that they’ll die before taking care of loved ones; outlive their resources; or suffer debilitating illness or economic reversals.
Fortunately, many planning tools have evolved that make these seemingly impossible gifts possible. Also, immediate tax benefits associated with these gifts may largely “replace” the estate tax savings that, in many cases, are no longer available given higher estate tax thresholds.
For example, take the case of Jeffrey. He’s a childless widower, age 79, with $5 million in assets. He’s planning to leave $4 million to his nieces and nephews and the residue of his estate, estimated at $1 million, in equal shares to two charitable interests—one that he’s supported over time and the other to his late wife’s favorite charity. In today’s tax environment, this $1 million residuary testamentary gift would result in no federal estate tax savings.
Jeffrey owns securities worth $500,000 with a cost basis of $150,000. These securities yield dividends of 1 percent, or $5,000 per year. A sale to diversify these holdings may result in capital gains taxes of as much as $52,500 at the federal level and, possibly, more at the state level. He’s, understandably, reluctant to sell and diversify these assets.
Charitable Remainder Unitrust
What alternatives might he consider? If he were to fund a 5 percent charitable remainder unitrust (CRUT) using the appreciated securities, his income would increase from $5,000 to $25,000 the first year, with the possibility that it could grow with the value of underlying trust assets over time. No capital gains tax would be due at the time he funds the trust, and the trust, as a tax-exempt entity, won’t be liable for tax on future capital gains or on its undistributed ordinary income.
Given his age and current federal discount rate of 2.2 percent, Jeffrey would be entitled to an immediate charitable income tax deduction equal to 66 percent of the amount transferred, or $331,000. In his 28 percent tax bracket, this alternative could save him just under $93,000 in federal income taxes over a period of as long as six years, depending on his adjusted gross income and gifts of appreciated assets he may have made in the past.
From Jeffrey’s perspective, he’s increased his spendable income without incurring capital gains taxes, while enjoying capital gains and income tax savings that could exceed $145,000 over time. While he can’t recover the funds in the trust, these assets are also beyond the reach of creditors or individuals who might take advantage of him in later years. The charity that’s the remainder beneficiary will enjoy the knowledge that it will benefit from the remainder of the trust and will receive the funds without them being encumbered by the expense and delay of probate.
Another aspect of interest to Jeffrey’s asset managers is the ability to diversify the assets on a tax-free basis inside the trust and continue to actively manage the assets for the remainder of Jeffrey’s life.
Fixed Income Alternatives
Suppose Jeffrey is also interested in assuring a source of fixed income for the remainder of his lifetime. In this case, he might also decide to transfer $500,000 in low yielding cash to his wife’s charitable interest to fund a charitable gift annuity (CGA) that would make annual fixed payments to him of 6.6 percent, or $33,000, for the remainder of his lifetime. Depending on a number of factors, he might instead choose to fund a charitable remainder annuity trust (CRAT) that would make payments of the same or a similar amount. This option would allow his current advisors to continue to managed these funds.
Whether in the form of a CGA or CRAT paying 6.6 percent, this gift would give rise to a charitable deduction of 48 percent of the gift amount, or $242,000. While he may not be able to use a deduction of this size in addition to the deduction for the CRUT, if he chose the CGA option, some 79 percent of his annual payments would be received tax-free as return of his investment in the contract for a period of his life expectancy of 10 years. Income from a CGA may be taxed more favorably than a CRAT in the near term, while the CRAT may be the better option if he lives beyond his life expectancy.
In any event, the combination of these two types of gifts would afford him a balance between a higher fixed income from the gift annuity or CRAT and a source of income that can grow over time with the performance of assets in his CRUT.
Through the interplay of these two gifts, each charity has the knowledge that it’s the irrevocable beneficiary of a gift that will result in eventual benefits in the range of $500,000, depending on the performance of the trust assets and the underlying gift annuity reserve fund.
In each case, the funds aren’t subject to claims or creditors or possible erosion that could reduce the amount of a residuary bequest if Jeffrey continued with his current plan to leave the funds in the form of a bequest via his will or other testamentary vehicle.
It’s also possible that Jeffrey may decide at a future point that he no longer needs the income from the life income gifts he’s established. In this case, he could decide to relinquish his right to all or a portion of his remaining income interests and allow his gifts to fully or partially come to fruition during his lifetime. He’d then enjoy additional tax savings through deducting the value of the remaining income interest he’s foregone.
Endowments
Along the same lines, Jeffrey might decide to use a portion of his payments each year to begin funding an endowment. In a variation on a “virtual endowment,”5 he might give a portion of his $58,000 in additional income each year to start his endowments during his lifetime. This commitment could be made revocable, so that he makes this decision on a year-by-year basis.
For example, if the charities would eventually spend 4 percent of the combined $1 million in endowment, or $40,000 per year, a portion of Jeffrey’s additional income each year could be directed toward making a part of that spending an immediate reality. He’d report the income each year, but it would be offset by a corresponding charitable deduction subject to any normal deduction limits.
Finally, it’s not unusual for donors who may have made a bequest commitment to a charitable interest at a younger age (when they had many years ahead of them and worried about outliving resources, for example), to decide in later years that they can actually afford to make an outright gift.
In Jeffrey’s case, he and his deceased spouse may have each made $500,000 bequest commitments in campaigns conducted by their charitable interests 15 years ago, when they were in their mid-60s. Now that he’s 79 and has survived his wife, he may decide to make an immediate $500,000 pledge to each of the charities involved and pay $100,000 toward each pledge annually for five years.
This pledge would reduce his estate by $1 million over the 5-year payment period, assuming his remaining assets didn’t grow, but at his age, he could reasonably assume that the remaining $4 million would be sufficient to see him through the remainder of his lifetime. From a tax planning perspective, Jeffrey could realize as much as $280,000 in federal income tax savings as a result of fulfilling the two pledges.
These are just a few of the ways Jeffrey might choose to “accelerate” his charitable bequest to provide him with significant tax and other financial benefits, while also putting the eventual charitable recipients potentially in a better position with a more predictable gift expectancy.
In today’s environment of higher income and capital gains taxes and lower transfer taxes at death, we believe the time may right for many charitably inclined individuals to consider ways to structure gifts that provide greater benefits to all concerned.
For 2012, the most recent year that both Internal Revenue Service and national death statistics are available, some 2.543 million Americans passed away. Of that group, just 8,423 estates exceeded the $5.12 million threshold for gift and estate tax exemptions. This figure means that 99.7 percent of decedents in 2012 weren’t subject to federal transfer taxes. While 19 states and the District of Columbia impose estate or inheritance taxes, just 38 percent of Americans reside in these jurisdictions. The states that don’t impose such taxes include a number of highly populous ones, such as California, Florida and Texas.
So, what does this new paradigm mean?
Non-Tax Motivations
This new estate tax reality means that planners will increasingly need to consider the non-tax motivations that have always, in reality, been of great importance in the decision-making process underlying testamentary charitable gifts. The majority of gifts through estates have always come from those who make these decisions from more deeply held beliefs and motivations than simply the desire to reduce estate taxes.
According to Giving USA, the total bequest giving of $27.7 billion in 2013 was the second highest total on record, and more than half of that amount came from non-taxable estates.
Family members, close friends, associates and charities are the primary entities found in wills or other estate plans. It could be said, therefore, that when an individual includes a charity in an estate plan, he’s, in effect, elevating that charity to the status of a family member. This inclusion typically requires a great deal of donative intent.
But, does this insight mean that philanthropically inclined individuals should disregard tax considerations when they decide the most effective ways to make gifts at death? No, but planners should take a broader view of a client’s tax situation when planning these charitable gifts.
In many cases, it may appropriate to broaden the discussion with the client to include income tax issues and other concerns, such as the desire to protect assets, provide income for himself and/or loved ones and other desirable outcomes that can result from more effective philanthropic estate planning.
Let’s look at some of the benefits of “accelerating” estate gifts.
Life Income Gifts
Charitable individuals will often indicate a desire to make gifts larger than ones they believe they can prudently make. The reasons they don’t make these gifts, typically, revolve around a number of common concerns, including fears that they’ll die before taking care of loved ones; outlive their resources; or suffer debilitating illness or economic reversals.
Fortunately, many planning tools have evolved that make these seemingly impossible gifts possible. Also, immediate tax benefits associated with these gifts may largely “replace” the estate tax savings that, in many cases, are no longer available given higher estate tax thresholds.
For example, take the case of Jeffrey. He’s a childless widower, age 79, with $5 million in assets. He’s planning to leave $4 million to his nieces and nephews and the residue of his estate, estimated at $1 million, in equal shares to two charitable interests—one that he’s supported over time and the other to his late wife’s favorite charity. In today’s tax environment, this $1 million residuary testamentary gift would result in no federal estate tax savings.
Jeffrey owns securities worth $500,000 with a cost basis of $150,000. These securities yield dividends of 1 percent, or $5,000 per year. A sale to diversify these holdings may result in capital gains taxes of as much as $52,500 at the federal level and, possibly, more at the state level. He’s, understandably, reluctant to sell and diversify these assets.
Charitable Remainder Unitrust
What alternatives might he consider? If he were to fund a 5 percent charitable remainder unitrust (CRUT) using the appreciated securities, his income would increase from $5,000 to $25,000 the first year, with the possibility that it could grow with the value of underlying trust assets over time. No capital gains tax would be due at the time he funds the trust, and the trust, as a tax-exempt entity, won’t be liable for tax on future capital gains or on its undistributed ordinary income.
Given his age and current federal discount rate of 2.2 percent, Jeffrey would be entitled to an immediate charitable income tax deduction equal to 66 percent of the amount transferred, or $331,000. In his 28 percent tax bracket, this alternative could save him just under $93,000 in federal income taxes over a period of as long as six years, depending on his adjusted gross income and gifts of appreciated assets he may have made in the past.
From Jeffrey’s perspective, he’s increased his spendable income without incurring capital gains taxes, while enjoying capital gains and income tax savings that could exceed $145,000 over time. While he can’t recover the funds in the trust, these assets are also beyond the reach of creditors or individuals who might take advantage of him in later years. The charity that’s the remainder beneficiary will enjoy the knowledge that it will benefit from the remainder of the trust and will receive the funds without them being encumbered by the expense and delay of probate.
Another aspect of interest to Jeffrey’s asset managers is the ability to diversify the assets on a tax-free basis inside the trust and continue to actively manage the assets for the remainder of Jeffrey’s life.
Fixed Income Alternatives
Suppose Jeffrey is also interested in assuring a source of fixed income for the remainder of his lifetime. In this case, he might also decide to transfer $500,000 in low yielding cash to his wife’s charitable interest to fund a charitable gift annuity (CGA) that would make annual fixed payments to him of 6.6 percent, or $33,000, for the remainder of his lifetime. Depending on a number of factors, he might instead choose to fund a charitable remainder annuity trust (CRAT) that would make payments of the same or a similar amount. This option would allow his current advisors to continue to managed these funds.
Whether in the form of a CGA or CRAT paying 6.6 percent, this gift would give rise to a charitable deduction of 48 percent of the gift amount, or $242,000. While he may not be able to use a deduction of this size in addition to the deduction for the CRUT, if he chose the CGA option, some 79 percent of his annual payments would be received tax-free as return of his investment in the contract for a period of his life expectancy of 10 years. Income from a CGA may be taxed more favorably than a CRAT in the near term, while the CRAT may be the better option if he lives beyond his life expectancy.
In any event, the combination of these two types of gifts would afford him a balance between a higher fixed income from the gift annuity or CRAT and a source of income that can grow over time with the performance of assets in his CRUT.
Through the interplay of these two gifts, each charity has the knowledge that it’s the irrevocable beneficiary of a gift that will result in eventual benefits in the range of $500,000, depending on the performance of the trust assets and the underlying gift annuity reserve fund.
In each case, the funds aren’t subject to claims or creditors or possible erosion that could reduce the amount of a residuary bequest if Jeffrey continued with his current plan to leave the funds in the form of a bequest via his will or other testamentary vehicle.
It’s also possible that Jeffrey may decide at a future point that he no longer needs the income from the life income gifts he’s established. In this case, he could decide to relinquish his right to all or a portion of his remaining income interests and allow his gifts to fully or partially come to fruition during his lifetime. He’d then enjoy additional tax savings through deducting the value of the remaining income interest he’s foregone.
Endowments
Along the same lines, Jeffrey might decide to use a portion of his payments each year to begin funding an endowment. In a variation on a “virtual endowment,”5 he might give a portion of his $58,000 in additional income each year to start his endowments during his lifetime. This commitment could be made revocable, so that he makes this decision on a year-by-year basis.
For example, if the charities would eventually spend 4 percent of the combined $1 million in endowment, or $40,000 per year, a portion of Jeffrey’s additional income each year could be directed toward making a part of that spending an immediate reality. He’d report the income each year, but it would be offset by a corresponding charitable deduction subject to any normal deduction limits.
Finally, it’s not unusual for donors who may have made a bequest commitment to a charitable interest at a younger age (when they had many years ahead of them and worried about outliving resources, for example), to decide in later years that they can actually afford to make an outright gift.
In Jeffrey’s case, he and his deceased spouse may have each made $500,000 bequest commitments in campaigns conducted by their charitable interests 15 years ago, when they were in their mid-60s. Now that he’s 79 and has survived his wife, he may decide to make an immediate $500,000 pledge to each of the charities involved and pay $100,000 toward each pledge annually for five years.
This pledge would reduce his estate by $1 million over the 5-year payment period, assuming his remaining assets didn’t grow, but at his age, he could reasonably assume that the remaining $4 million would be sufficient to see him through the remainder of his lifetime. From a tax planning perspective, Jeffrey could realize as much as $280,000 in federal income tax savings as a result of fulfilling the two pledges.
These are just a few of the ways Jeffrey might choose to “accelerate” his charitable bequest to provide him with significant tax and other financial benefits, while also putting the eventual charitable recipients potentially in a better position with a more predictable gift expectancy.
In today’s environment of higher income and capital gains taxes and lower transfer taxes at death, we believe the time may right for many charitably inclined individuals to consider ways to structure gifts that provide greater benefits to all concerned.
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