Michigan Estate Planning Blog

What are Biggest Blunders in Wealth Transfer?

 

When it comes time to transfer what we’ve work so hard to accumulate, the way in which we transfer our wealth can have a big impact on how much of our wealth is actually received by our heirs and how much is transferred to the federal government.
Forbes’ recent article entitled “Top 7 Tax Mistakes Made in Planning a Wealth Transfer” says that tax mistakes can mean losing a lot of hard earned money, if you’re not careful. Here are some of the biggest mistakes made in wealth transfer planning.
1. IRD Taxes. Most people are unaware of this tax. It stands for “Income in Respect of the Decedent.” It’s the income tax your heirs will pay on tax-deferred assets, such as traditional IRAs, 401k’s and annuities. In many cases, these taxes will push heirs into a higher marginal tax bracket. You should plan to reduce or eliminate the IRD Tax, if you have a 401k, IRA or annuities. For example, if you gift IRA and 401k assets to charity and non-IRD assets to your heirs, you can save them in IRD Taxes! The use of a Charitable Remainder Trust can provide a tax-efficient way to create a “charitable stretch IRA” for your children or grandchildren.
2. Charitable Giving Mistakes. Most people do charitable giving with after tax cash from their income. However, this isn’t the most efficient way to give. Gifting highly appreciated securities, real estate, or even business interests can give you a double tax benefit: it can eliminate capital gains taxes and still get the charitable tax deduction.
3. Dying without a Comprehensive Estate Plan. About three-quarters of Americans die without a will. A will, by itself, subjects your assets (and your heirs) to probate. A well-designed estate plan can help reduce or eliminate both probate and estate taxes. Ask an experienced estate planning attorney about creating a comprehensive estate plan for you or review the one you have.
4. No (or Improper) Beneficiary Designations. This can result in a loss of inheritance for your family. With retirement accounts like IRAs or 401(k)s, properly designating beneficiaries is essential to avoid the loss of further income tax deferral at death. If you don’t have primary and contingent beneficiaries named on all your accounts, these assets will have to go through probate and could cost unnecessary IRD taxes.
5. Improper Titling of Business Interests. A business is frequently titled only in the name of the business owning spouse. However, when that spouse dies, the business itself must go through the costly process of probate, which can create issues for the operation of the company.
6. Bad Choices for Ownership & Beneficiary Designations on Life Insurance. Life insurance can be a great financial planning tool and provide liquidity. It can also be a great wealth transfer tool in estate planning or business planning. However, if the ownership and beneficiaries are done incorrectly, the life insurance benefits can be subject to estate taxes. Ask an experienced estate planning attorney about an irrevocable life insurance trust (ILIT).
7. Giving the Wrong Assets to your Heirs. A common mistake that people make in wealth transfer planning, is to leave a percentage of their estate to their children, another to their grandchildren and another to their favorite charities (or Donor Advised Fund) in their will or via a trust. However, this isn’t the smartest way to distribute your assets from a tax perspective. Doing so could subject them to IRD taxes. Instead, use IRA (and other IRD assets such as 401k) for your gifts to charity and, give non-IRD assets (such as cash, real estate, life insurance, or a Roth IRA) to your children and grandchildren.
Reference: Forbes (Dec. 15, 2021) “Top 7 Tax Mistakes Made in Planning a Wealth Transfer”

Handing Over The Reins: Tricks To Converting Foundations Into Donor-Advised Funds

To run the charitable foundation is to have absolute control and discretion over the charity, its goals, its practices, and all the decisions regarding where the money is to go. While this can be richly rewarding, it can be exhausting. Now there is a popular alternative to a full foundation and a move to collapse back into what is known as a donor-advised fund. That noted, there are some tricks to the transfer and limitations to the fund worth understanding. If you or your family run a charitable foundation and are considering this alternative, The Wall Street Journal had a few points to consider in a recent article titled “Risks to Consider With Donor-Advised Funds.” First, what is a donor-advised fund? Unlike a foundation that is run much like a business, a fund is much more like an investment vehicle run by an expert. As the name suggests, donors give to the fund and then advise it how to ultimately donate the money it takes in. There are some ways to more carefully form the fund so as to grant greater or lesser control. Ultimately, however, it is simply a different kind of animal than a foundation. It also means that there are far fewer administrative burdens (especially on you as the donor), far fewer fiduciary requirements, fewer taxes, and greater privacy. The original article has a helpful chart you might peruse to understand the differences. So what are the problems? First, to transfer from a foundation to a fund means coming to terms with the new benefits and shortcomings of the fund, and that may be a family activity. Second, the transfer will mean winding up the foundation and this ought to be done with care. State regulations can affect how to wind up the foundation, or how and when to give notice that you are doing so, so there is a bit of red tape. Then there are the foundation assets themselves. What if some of the assets are illiquid or otherwise difficult to move? Indeed, you need to at least leave enough assets in the foundation to let it get through the expenses involved in the windup. There are a few more issues addressed in the original article, and even more besides that may affect your particular foundation and/or assets. These are certainly issues to think about, but for many the message is also that there are options out there if the foundation has gotten out of hand. Either way, how does the foundation or the donor-advised fund fit into the overall plan?

Reference: The Wall Street Journal (April 13, 2014) “Risks to Consider With Donor-Advised Funds”

For more information, see www.jerryreiflawyer.com

Donor-Advised Funds For The Savvy Philanthropist

There has been a lot of interest this year in “donor-advised funds (DAF),” as a savvy tool for charitable giving. As we head further into the season of giving (and, with it, year-end tax planning), and 2012 thereafter, it might be a perfect time to consider establishing your own DAF. As a recent Reuter’s article asked, “do donor-advised funds make sense?” They certainly do from a tax standpoint, as you receive a charitable deduction upon giving to the fund, just as you would for giving directly. You then gain the ability to “advise” the fund, along with the other investors, toward worthy charities as you discover them. The final say comes down to the fund directors themselves, and the other investors may have opinions that vary from your own. It does mean that you can give large amounts of money to charity without already having formulated a specific and exhaustive plan regarding to whom and how much you wish to give. That said, with some DAFs, there may be other detractions, like the administrative costs. After all, these funds are overseen by the major money-management companies and they will charge fees for the service, usually in relation to the amount of your gift. As the thought goes, being charged for a money-manager to make more money for you is one thing, but to be charged from the money that was to go to a good cause might just be something else entirely. There certainly are those would be philanthropists who don’t like the practice for this reason. Local “community foundations” are an excellent alternative to the DAFs managed by the for-profit major money management companies. Their fees typically are much lower and the local community itself benefits by being, well, local. As with anything financial, it is best to do your own due diligence before proceeding. For more reading you can check out the New York Times article from a little while ago written by a Boston College Professor, Ray Madoff: “Tax Write-Off Now, Charity Later”

Reference: Reuters (December 5, 2011) “Charitable Giving:  Do Donor-Advised Funds Make Sense?”