Wealth Planning Newsletter

Transcription

1 Issue In This Issue Charitable Giving Made Easy Don t Leave Them in the Dark Social Security: Understanding Spousal Benefits Original Medicare vs. Medicare Advantage Is an Irrevocable Trust Really Irrevocable? As another year draws to a close, many clients are seeking ways to meet their philanthropic goals while maximizing tax benefits. There are a variety of charitable giving strategies available, including donor-advised funds, pooled income funds, charitable remainder trusts, and private foundations. Although they all provide both income tax and estate tax benefits, each of these strategies is unique. Donor-Advised Funds A Donor-Advised Fund (DAF) is a fund created and administered by a charitable organization to which donors contribute assets. Each donor s contributions are held in a separate account earmarked for charitable giving. Over time, the donor can recommend that distributions be made to an individual charity or charities. Over the past several years, DAFs have significantly increased in popularity due to their flexibility and overall simplicity. They have no upfront costs or administrative hassle, such as annual tax filings, and they accept a wide range of assets as contributions. Because DAFs handle the administrative burden, they do charge a small administrative fee. Donor(s) Charitable Giving Made Easy Give Cash or Securities Receive Immediate Dollar-for-Dollar Tax Deduction Charitable Fund You Decide When and How Much to Give Charities You Recommend The tax benefits of DAFs also make them very appealing. When a donor contributes assets to a DAF, he or she receives an immediate income tax deduction while decreasing the value of his or her estate for estate tax purposes. Capital gains tax is also avoided on appreciated assets contributed to the DAF. DAFs are generally appropriate for individuals who want to make charitable gifts using a low-cost strategy that provides administrative convenience and flexibility. Those individuals who benefit most from DAFs are focused on maximizing immediate tax benefits, rather than retaining an income stream from the contributed assets. Pooled Funds A Pooled Fund (PIF) is a fund created and administered by a charitable organization to which individual donors contribute assets. The property contributed by the donor is commingled with contributions from all other donors and managed as one large pool of assets. The donor will receive income based on the annual performance of the fund. Upon the donor s death, his or her portion of the fund is distributed to the charity or charities selected by the donor. For more information, contact your Stifel Financial Advisor. PIFs are generally appropriate for a donor who wants to make a charitable gift for the income tax and estate tax benefits, but who also wants to retain an income stream without being subject to the high costs associated with a charitable remainder trust. Individuals who benefit most from a pooled income fund are not focused on maximizing immediate tax benefits, as the income received by the donor reduces the income tax deduction. Donor B Donor A Donor C Contribution Contribution Contribution Pooled Fund Remainder Charity Continued on page 2. 1

2 Charitable Remainder Trusts There are several different types of charitable trusts, all of which involve a contribution of assets to an irrevocable trust created by the donor. The most popular type of charitable trust is called a charitable remainder trust (CRT). The trustee will distribute trust income to the donor for a certain period. At the end of that period, the trustee will distribute the remainder to the charitable beneficiary named in the trust. Donor Contribution Charitable Remainder Trust Remainder Charity CRTs are generally appropriate for a donor who wants to make a charitable gift for the income tax and estate tax benefits, but who also wants to retain an income stream from the assets. Individuals who benefit most from a charitable remainder trust are comfortable with the significant upfront costs to setup the trust and the ongoing administrative burdens caused by annual trust tax filings. Finally, they are not focused on maximizing immediate tax benefits, as the income received by the donor reduces the income tax deduction. Private Foundations A private foundation is a legal entity created by an individual or group of individuals for some philanthropic purpose. Although many individuals inquire about private foundations, they are generally most appropriate for individuals with substantial wealth who aim to maximize control while hosting charitable events or paying wages to family member employees. Private foundations are subject to the highest level of IRS scrutiny. When determining which charitable giving strategy is right for you, consider the advantages and disadvantages of the strategies discussed above. The chart below will help provide you with this comparison. If you have any further questions, speak with your Stifel Financial Advisor, attorney, and tax professional. DAF PIF CRT Foundation Upfront Costs None None Professional Fees Professional Fees Stream None Yes, this income is taxable Yes, this income is taxable None Tax Deduction* Up to 50% of AGI for cash Up to 30% of AGI for appreciated assets Up to 50% of AGI for cash Up to 30% of AGI for appreciated assets Up to 50% of AGI for cash Up to 30% of AGI for appreciated assets Up to 30% of AGI for cash Up to 20% of AGI for appreciated assets Estate Tax Benefits Assets removed from estate Assets removed from estate, but income added Assets removed from estate, but income added Assets removed from estate Administrative Concerns Small fees Small fees Annual trust tax returns and any associated fees Annual trust tax returns, excise taxes, and various others * tax deductions are limited to a certain percentage of adjusted gross income (AGI) with a five-year carry forward. 2

3 Don t Leave Them in the Dark Recent studies suggest that many parents are reluctant to discuss their money matters with their children. It can be an uncomfortable topic to discuss, but if your children don t have at least a basic understanding of your financial situation, you re essentially leaving them in the dark. Sooner or later hopefully later your remaining assets will transfer to your children, and a lack of communication can cause headaches down the road. If you were to pass away today, would your children know where your assets are held? How would they find them? Do they know where you intend for your assets to go? Will they need to pay estate taxes or other settlement costs? These are all questions your children should be able to answer. Bringing your children into the conversation can also help them answer questions they may have already considered, but have been reluctant to bring up. Questions like, about how much might I inherit, and what impact could an inheritance have on my financial situation? As you discuss these matters, let them know what is important to you, what you have done in the past, what you are doing today, and what you plan to be doing in the future. This will help them appreciate what you have worked so hard to accumulate. Involving your children can also help them avoid surprises. Unfortunately, individuals who inherit unexpected windfalls don t always make the best decisions with their newfound wealth. It may give them a false sense of financial security. Inexperienced investors, for example, may try to retire early only to realize they didn t have enough assets to meet their needs. Bringing your children to your next meeting with your Stifel Financial Advisor is an excellent and non-threatening way to shed some light on your situation and help them build a relationship with your trusted advisor. Your assets are eventually going to transfer to your heirs with the lights on or off; you are doing a disservice by keeping them in the dark. If you were to pass away today, would your children know where your assets are held? 3

4 Social Security: Understanding Spousal Benefits Part I of III: Married Couples Understanding Social Security spousal benefits is important for all spouses so that they can be sure to receive all the Social Security benefits for which they may be eligible. This article touches on spousal benefits for married couples. Future articles will tackle this issue in the context of divorced spouses and surviving spouses. In order for married individuals to qualify for spousal benefits, their spouses must have already filed to receive Social Security on their own work record. Assuming a full retirement age (FRA) of 66, at age 62, you can claim 35% of your spouse s Primary Insurance Amount ( PIA ). An individual s PIA is the amount he or she is eligible to receive at FRA. If you wait until age 66 to claim, you would receive 50% of your spouse s PIA. Spousal benefits do not earn delayed retirement credits. There is no benefit to waiting beyond your FRA to claim spousal benefits. As explained above, your spousal benefit is a percentage of your spouse s PIA. What determines the percentage you receive is the age at which you apply for the benefit, not the age at which your spouse applies for Social Security based on his or her own work record. Therefore, if your spouse claims his or her own Social Security benefit at age 62 and you wait until FRA to apply for spousal benefits, you will receive 50% of your spouse s PIA. If your spouse applies for his or her maximized Social Security at age 70, and you apply for spousal benefits at FRA, you will still only receive 50% of your spouse s PIA. It is important to understand Social Security s deeming provision. This provision states that anytime you apply for a benefit prior to reaching your FRA, you are applying for both your own work record benefit (if you have one) and a spousal benefit based on your spouse s work record. Social Security will look at both benefits and pay you only the larger of the two. Individuals born prior to January 2, 1954, have options for claiming spousal benefits that those born later do not have. For these individuals, the deeming provision ends at FRA. This means that once they reach FRA, and their spouse has filed for his or her own Social Security benefit, they can file a restricted application for only spousal benefits. This allows their work record benefit to earn valuable delayed retirement credits of 8% per year until age 70 while they collect spousal benefits from FRA until age 70. For individuals born on or after January 2, 1954, the deeming provision extends beyond FRA. Accordingly, any time they apply for benefits, they are applying for both benefits simultaneously, and Social Security will only pay the larger of the two. Be certain you understand Social Security spousal benefits and the strategies that may be available to you and your spouse. By understanding these rules, you can ensure that you are maximizing the Social Security benefits available to you and your spouse. 4 Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation.

5 Original Medicare vs. Medicare Advantage Which One Is Right for You? Upon initial eligibility for Medicare, many beneficiaries consider enrolling in a Medicare Advantage plan. Other beneficiaries who are already on original Medicare may consider switching to a Medicare Advantage plan during the annual Medicare Advantage open enrollment period from October 15 to December 7. It is important for all Medicare beneficiaries to understand the differences between the two so that they can select the one that will best meet their needs. Original Medicare comes with Part A (i.e., coverage for hospital care, skilled nursing care, etc.), Part B (i.e., coverage for doctor s visits, outpatient procedures, etc.), and Part D (i.e., coverage for prescription drugs). Part A is free for almost all beneficiaries. Part B comes with a monthly premium ranging from $105 to $390. The amount you pay is based upon your modified adjusted gross income from two years prior. Part D monthly premiums average approximately $35. However, you may be required to pay a surcharge of up to an additional $72.90, depending on your modified adjusted gross income from two years prior. Most people with original Medicare also purchase a Medigap policy (also known as a Medicare Supplement Insurance policy). Medigap policy monthly premiums average approximately $188. With original Medicare, you can go to any doctor or hospital in the United States as long as they accept Medicare patients and you can make an appointment. However, original Medicare will not cover all of the associated costs. Accordingly, a Medigap policy may be necessary to cover those costs not covered under original Medicare. By having both original Medicare and a Medigap policy, you are better able to predict your future costs. In fact, you may have no out-of-pocket costs other than your premiums and potential prescription drug co-pays, depending on which Medigap policy you choose. If you choose a Medicare Advantage plan (also known as Medicare Part C), you must still be enrolled in Parts A and B and be paying your Part B premiums, but do not need or want a Medigap policy. A Medicare Advantage plan is an all-in-one Medicare plan. It combines the coverage provided by Parts A, B, and your Medigap policy. Your Medicare Advantage plan may or may not come with a monthly premium. These monthly premiums average $33, but it is not uncommon for a Medicare Advantage plan to have a $0 monthly premium. Most Medicare Advantage plans also cover prescription drugs. This means you do not have to purchase a separate Part D plan. If your Medicare Advantage plan does not include prescription drug coverage, you will need to purchase a separate Part D plan. You still have to pay the income-related surcharges associated with Parts B and D when in a Medicare Advantage plan, regardless of whether it includes prescription drug coverage. With a Medicare Advantage plan, your ongoing costs are typically lower, but you pay more out-of-pocket costs when you receive care in the form of co-pays for doctors, specialists, emergency room visits, prescription drugs, hospitalization, etc. Medicare Advantage plans typically work like an HMO or PPO, where you are confined to using a specific group of doctors and hospitals; you cannot go anywhere you want and have your plan pay the bill. Medicare Advantage plans also offer benefits not covered under original Medicare. For instance, you may have some benefits for vision, dental, hearing, and health clubs. The choice between original Medicare or a Medicare Advantage plan is a personal decision with many factors to consider. It is important to note that at any time during your first 12 months in a Medicare Advantage plan, you can switch back to original Medicare and have special rights to purchase a Medigap policy. Be sure to ask your Stifel Financial Advisor for a copy of our Medicare Fact Sheets, as they are packed with useful information to help you make a more informed decision. 5

6 Is an Irrevocable Trust Really Irrevocable? Part1: Drafting Trusts to Create Flexibility Maya Angelou once said, If you don t like something, change it. Unfortunately, this sage advice does not apply to irrevocable trusts. Or does it? An irrevocable trust generally refers to any trust that cannot be modified or revoked after it is created. When an individual transfers assets to an irrevocable trust, that person is no longer considered to be the owner of those assets. Irrevocable trusts are commonly recommended by estate planning attorneys as part of a comprehensive estate tax planning strategy. Nonetheless, many clients are reluctant to utilize irrevocable trusts because they are unwilling to relinquish control of their assets to a trust that cannot be modified. Is this reluctance justified? Is an irrevocable trust really irrevocable? This article is the first of a two-part series addressing this question. Part 1 will discuss drafting techniques that can be utilized by an attorney to create flexibility in an irrevocable trust. Part 2 will explore various methods of modifying certain terms of an irrevocable trust after it has been established. The only constant in life is change. Family dynamics change. Personal wishes change. Laws change. With regards to irrevocable trusts, the easiest way to account for the inevitability of change is to draft the document to provide maximum flexibility. This can be accomplished in a variety of ways, including the following: providing the grantor with certain powers, providing the beneficiaries with certain powers, and appointing a trust protector. Grantor Powers When creating your irrevocable trust, you may want to discuss with your attorney giving yourself, as grantor, the power to remove and replace a trustee. By doing so, you can protect against a trustee who fails to perform his or her duties in a satisfactory manner. Your attorney will be careful to emphasize that a replacement trustee cannot be related to or subordinate to the grantor. Otherwise, you risk losing the estate tax benefits for which you established the trust in the first place. You may also want to discuss with your attorney giving yourself, as grantor, the power to cancel or modify withdrawal rights. In some types of irrevocable trusts, such as an irrevocable life insurance trust, the grantor gives the beneficiaries the power to make withdrawals from the trust when contributions are made. By doing so, the grantor ensures that contributions made to the trust qualify as annual exclusion gifts. However, the intention is for the beneficiary to not exercise this power so that the funds can be used for other purposes (e.g., to pay life insurance premiums). By reserving the right to cancel or modify withdrawal rights, you will be able to deal with uncooperative beneficiaries. 6

7 Beneficiary Powers For the same reasons that you would give yourself, as grantor, the power to remove and replace a trustee, you may also want give your beneficiaries the power to do so. In order for the beneficiaries to exercise this power, you can require that they act unanimously or by a majority vote. You may also want to give your beneficiaries a power of appointment. A power of appointment allows a beneficiary to control the ultimate distribution of the trust assets. By giving a beneficiary a power of appointment, you can protect against unforeseen circumstances that would have made the original distribution terms of the trust undesirable. There are two basic types of powers of appointment limited and general. A limited power of appointment allows the beneficiary to direct the ultimate distribution of trust assets among a limited group of recipients. A general power of appointment allows the beneficiary to direct the distribution of trust assets without limitation. Be aware that if you give a beneficiary a general power of appointment, the assets in the trust may be includible in his or her estate. This may conflict with the ultimate goal of certain irrevocable trusts. Trust Protector When working with your attorney to establish an irrevocable trust, you may want to consider naming a trust protector. A trust protector is a person appointed to oversee a trust to ensure that it is not adversely affected by any changes in the law or circumstances. The powers granted to a trust protector can be as narrow as removing and replacing a trustee or as expansive as altering the terms of the trust to account for any unforeseen changes. As you can see, with proper drafting, an irrevocable trust is not really irrevocable. Therefore, you should not be reluctant to take advantage of the various benefits that an irrevocable trust can provide. If there is something amiss with your flexibly drafted trust in the future, you, the beneficiaries, or the trust protector can heed Maya Angelou s advice and change it. Stifel does not provide legal advice. You should consult with your estate planning attorney regarding your particular situation. 7

8 Wealth Planning Newsletter Issue Please contact your Stifel Financial Advisor if you have any questions about the articles or for copies of the other materials mentioned in this newsletter. 501 North Broadway St. Louis, Missouri Stifel, Nicolaus & Company, Incorporated Member SIPC & NYSE Stifel does not provide legal or tax advice. You should consult with your estate planning attorney and tax advisor regarding your particular situation. PCR#