Tax-Smart Giving & Gifting Webinar: Video Transcript

Tax-Smart Giving Gifting Webinar Transcript

Good afternoon. Thank you all for joining us today on this webinar on tax-smart giving and gifting. My name is Rick Waechter.

I'm the founder of Old Peak Finance. Over the next hour, we're going to describe specific strategies that you can adopt to maximize the impact of your giving to nonprofits and your gifting to future generations. Congress has passed a variety of incentives over the years to incentivize this giving and gifting. We have discussions all the time with clients on this topic, so our goal through this webinar is to make sure you understand what these incentives are and how you can use them to magnify every dollar of your giving and gifting.

Now to do a brief introduction (for many of you, reintroduction) to Old Peak. We are a comprehensive financial planning firm. We work primarily with busy professionals and business owners as well as folks who are retired from careers as busy professionals and business owners. I founded the business 11 years ago. We now work with more than 140 clients and on their behalf, we managed just a little less than $400 million. While we're proud of our growth, what I'm proudest of is the fact that we're in a small percentage of advisors who are fiduciaries. That means we take an oath to always act in our clients’ interest and we back up that oath by not selling any products and by not having any financial incentives to do anything other than what's best for our clients.

I'd like to now introduce my colleagues that will be joining us on this webinar. Molly Stanifer, Katie Villegas and Dan Routh. The four of us are all CERTIFIED FINANCIAL PLANNER™ or CFP® professionals. The Old Peak Team now has eight members, and I want to give a special shout out to our newest colleague, Jo Beth Mullins, who joined us several weeks ago as a financial planning associate. We don't yet have her photo on the webinar or the website, but we'll make that happen soon. Jo Beth, welcome to the team.

I’m going to now just briefly go through the agenda, make a couple comments about the ground rules for the webinar and then we'll go into our first polling question. So, on this webinar, which should last no more than an hour, we'll start out with tax-smart strategies for giving to non-profits. Then, we'll move into strategies for gifting to future generations. Then, I’ll talk about what could change based on the Biden administration proposals (or what's been rumored in the way of tax changes). Finally, we'll have time for a Q&A session.

If you do have questions that you want to ask that come to mind during this webinar, please just use the Q&A button at the bottom of your screen and enter them in. We'll be monitoring that and will do our best to answer all of them before we finish up with the webinar.
Alright, let me launch the first question, which I will ask Molly to post.

(Molly speaking.)
So, this should pop up on your screen and you can just answer at any time. Related to giving and gifting…

Q: Over the next few years which do you expect that your main focus will be giving to nonprofits or to future generations? Your main focus will be…
a) gifting to future generations
b) giving to non-profits
c) both will be a focus or
d) neither will be a focus or
e) just not sure

We'll just give a short amount of time and then Rick will share the results just to see where everybody's head is right now. Answers are still coming in, so I’ll just be showing it here in another moment or two. All right, we'll wrap up. All right, so actually it's a split for both or forgive gifting to future generations, but a good portion of you still giving to nonprofits so great we'll touch on all of that.

(Katie speaking.)
Here we have some strategies that we have used with clients that we find particularly valuable in giving to non-profits. We're going to talk through each of these, but I’ll list them here briefly. The first one is lumping. Second, donor advised funds. Gifting appreciated securities. Giving qualified charitable distributions from your IRAs. Naming non-profits as retirement plan beneficiaries and creating charitable trusts. So, let's start with the first one.

Lumping. So, with the tax law changes in 2018, more tax filers take the standard deduction and fewer itemize their tax deductions. That means many tax filers receive no tax benefit for charitable gifts and most of you have probably seen this change in the last couple years on your tax return.

So, let’s take an example. Imagine you and your spouse file jointly. You qualify for the 2021 standard deduction of $25,100. Assume you have three annual expenses that qualify as itemized deductions. $10,000 of charitable gifts, $10,000 state and property tax and $5,000 of mortgage interest. So, your three itemizable deductions total $25,000. Unfortunately, this is slightly less than the standard deduction. So, over three years you will simply claim standard deductions totaling about $75,000. It's that smooth giver example here on the slide. But instead of giving $10,000 annually to nonprofits, you decide to lump three years of charitable giving into one year and you could itemize in your lumping year for a total of $45,000 in deductions (which includes those three years of giving). You would then take the standard deduction the other two years and your total deductions over three years would be about $95,000. This reduces your taxable income over that three-year period by about $20,000. This would be a great strategy to consider if you do not mind making significant gifts in one year.

If instead you have yearly commitments you would like to keep, you may want to consider our next strategy, which is a donor advised fund.

So, one of our clients recently, (she) sold a large portion of a highly appreciated stock, which resulted in a much higher than usual tax year. She decided to open up a donor advice fund and gave a significant amount so she could help offset the taxable gains she will have to pay. She then has the flexibility to gift out of the donor advice fund (or DAF for short) over the next several years but was able to capture that tax deduction in the year that she gave to the donor advice fund.

These do have a drawback we want to focus on here. You have made an irrevocable gift, which can also be a large cash outflow. There's no way to claim the money back if you face an emergency need for cash. But this is a great strategy to consider if you would like to take advantage of a large charitable giving deduction in one year and your cash flow allows for it, but you prefer to give to charities evenly over the years.

The next strategy is giving appreciated security. Thinking back to this client who opened up a donor advice fund during a high tax year, we also recommended that she give appreciated securities rather than (give) from her checking account cash, to her donor advice fund to reduce her future tax bill by never paying tax on the gain if she were to sell those securities.

Giving appreciated securities can actually be easier done by giving to a donor advice fund compared to giving directly to a charity. This is because some charities don't accept appreciated securities if they're (a) small (nonprofit organization). By giving to a donor advice fund, you're doing the paperwork once, rather than for all those different charitable giving that you want to do. There are a few limitations on giving appreciated securities, but it's typically easier to comply with the limitations.

For example, the appreciation must be long-term gain, meaning you owned the stock more than 365 days. This would be a great strategy to consider if you have stock funds in a taxable account that have grown in value over the years. You not only get a charitable deduction for the amount given but you have avoided capital gains tax on the appreciation by gifting rather than selling.

Next, I want to touch on qualified charitable distributions or QCDs (we've got lots of acronyms here). This is a gift to a nonprofit directly from an IRA by somebody after they obtain age 70 and a half.

Let's think of an example. Imagine you're after age 72, and you are required to start withdrawing from your IRA. You, in this year (of) 2021, are required to withdraw $50,000 so instead of distributing $50,000, less any tax withholding, to your bank account you make a series of qualified charitable distributions to nonprofits totaling $10,000. That means you only need to take out $40,000 from your IRA and declare that as taxable income. And remember, the non-profit does not have to report the income either.

QCDs do have a few limitations as well, but they're not onerous. For example, the annual maximum is a $100,000 and they can only come from IRAs (so not company retirement plans) and they must also go directly to an end charity.  Unlike gifting appreciated securities, you cannot do QCDs into a donor advised fund.

This is a great strategy to consider if you are 72 or older and you have large required minimum distributions and you want to reduce your adjusted gross income because with a lower adjusted gross income, this could save you on costs like Medicare premiums, for example.

Now I'd like to turn it over to Molly to continue talking about some of these strategies.

(Molly speaking.)

Great. So, for our clients who have decided that they would like to give or leave a portion of their estate to nonprofits as part of their legacy, we then have talked about which assets or accounts are best to leave to the nonprofits and then we've helped facilitate those updates.

The rule of thumb is to name the nonprofits as beneficiary to your retirement accounts and people as beneficiary to your taxable accounts - like your investment brokerage accounts. Of course, when I say retirement account, I mean non-Roth retirement accounts. Our direction, when we make these suggestions, all relates to taxes and remember all the savings in your retirement accounts have never been taxed before. When they're withdrawn by you or your heirs, that person claims whatever is withdrawn as taxable income. Of course, when a nonprofit receives the asset, they're not subject to income tax.

On a separate but related note, when you die and your estate balance is calculated, accounts with nonprofits named as beneficiary are not included in your taxable estate. So, converse to retirement accounts, the growth of investments within your brokerage accounts are taxed when they're sold. There's something called a step-up at death. That means when you inherit a taxable brokerage account, the cost basis (which is the amount that you invested originally) is stepped up to the fair market value on the date of death. That means your heirs will pay no tax if they sell the assets when there is no difference between the cost basis, which was stepped up to fair market value, and the sale value.

Here's an example. Janet bought a stock for a $1,000. It's now worth $10,000. If she gave it to her child and they sold it, they would owe tax on that $9,000 gain. Instead, if the child inherited the stock at Janet’s death, the new cost basis steps up from $1,000 to $10,000, which was the fair market value at her death, wiping out any taxable gain if sold when the value is close to (the stepped up value at her death of ) $10,000.

Another avenue to give to nonprofits are through charitable trusts - charitable remainder trusts and charitable lead trusts. They're both irrevocable trusts, so they are not included in your estate, and they can be used to save on income gift and estate taxes. In all cases, it’s only something to think about when you have that that charitable intent.

When we explore these trusts (strategies) with our clients. it's (clients) who they have made that decision as part of their financial plan, that giving to nonprofits is a goal, coupled with a combination of some of, or all of, an abnormally high tax year, and a need or desire for an income stream and in an estate that is large enough that could be subject to paying an estate tax.

Charitable remainder trusts are when you take an immediate charitable deduction by contributing assets into the trust. You name yourself, or you can name somebody else, to receive an income stream for a term of years or for life. Then, the remaining balance of that trust is donated to your named nonprofit. They're best (when) funded with highly appreciated assets because the trustee will sell the contributed property with no capital gains tax, and then they can reinvest the proceeds in income producing assets to give you that annual stream. Someone seeking to save on income tax now, but needing or wanting an income stream for a long time into the future, should think about using these.

Charitable lead trusts are sort of the opposite. The nonprofit receives the annual income stream for a defined period - perhaps 20 years or your lifetime - and at the end of that period your heirs receive what is left.

One of the major differences (of a charitable lead trust) is that the nonprofit will receive the annual benefit now of your donation, unlike the charitable remainder trust, which (the nonprofit) will not actually receive the benefits of your donation until far into the future.

In both cases, you did not receive a full charitable tax deduction of the gift because some of what you contributed into the trust is paid back to you or your heirs. And, because of the intricate rules and the added complexity (and there are some legal fees) these are really reserved for large donations.

If one of your hesitations is, “this makes sense” (after listening) to everything I just went through (above), but the hesitation is you just can't find (or) you can't decide on a cause to give one large donation to, you can use a donor advise fund as the named charity, and that could add a little more flexibility in your choice of causes you'd like to contribute toward.

(Dan speaking.)

Thanks, Molly. So, we've been talking about giving to nonprofits and this next section we're going to start talking about gifting strategies. Gifting to the next generation or people beneficiaries. But the different strategies we're going to touch on are the $15,000 annual gift exclusion, funding a low taxpayers Roth IRA, paying for education or medical expenses for a beneficiary, gifting appreciated securities (similar to what Katie touched on) and then funding an irrevocable trust (similar to what Molly just touched on).

But jumping into the first strategy – the $15,000 annual gift tax exclusion. So, exclusion is the word to remember. This is different from the lifetime gift exemption. The (lifetime) gift exemption- that's that really big number that you've seen on the news and articles, what's being talked about with legislation, 11.7 million dollars - that's the amount you can give away over your lifetime without paying (estate) gift tax.

The $15,000 annual exclusion is excluded from that $11.7 million. Annually this is the amount of money you can give to another person free of gift tax that does not count towards that (lifetime gift) exemption. The $15,000 can go to anybody as long, as it's equal to or below that $15,000 limit.

A popular strategy that we've recommended to clients and clients have come to us already using, is looking to help children with (potentially) a down payment on a home (or other large expense they may have). Two parents, each can give $15,000 to one child. So, $30,000 coming from the parents to the child and that counts in that year, and it does not go towards that lifetime (gift) exemption. But that's just one year of how this strategy can work. It's a very powerful strategy if it's done over a long period of time and it's repeatable.

In this example, which we've seen play out, is looking over a 20-year period. We have a married couple (with) three children. They want to give each of these children the annual (gift) exclusion amount - ¬¬so $30,000 from the parents going to each child. So, $90,000 a year is leaving their estate. So, over 20 years, if you just add it all up, we're looking at $1.8 million that's come gift tax free out of their estate by giving annually whereas at the end, if they were to give a lump sum and depending on where the lifetime exclusion amount is at that time with legislation, that could be subjected to estate tax upwards of 40%.

This example does not factor in potentially an even larger effect of this gift - that if the children then were to invest. Because you're giving away the dollars but you're also giving away the appreciation inside of your estate, and so that $1.8 million could be exponentially larger if the children were to invest that money over that 20-year period each year. This is a great strategy if you're looking to get money out of your estate, looking to help the next generation or (chosen) beneficiary with little to no administration in terms of keeping a record of it.

The next strategy is talking about funding a low taxpayers Roth IRA. Contributing to a Roth IRA makes sense for a low taxpayer for two main reasons. There's no upfront tax deduction, but also no tax payable later. A Roth IRA - there's no tax benefit this year, you contribute $6,000 (or $7,000 if you're over age 50) and (while) there is no tax benefit this year, it grows tax deferred and then in retirement, it's tax-free money.

If you're to contribute to a traditional IRA, you're going to get a tax deduction this year, so you're going to get help this year, but it's going to grow tax deferred and then it's taxable in retirement. When you're in a low bracket, there's not much benefit to that tax deduction this year, so it makes more sense for a low taxpayer to contribute to a Roth IRA.

The hard part is when you're making low income it's hard to find that money to actually make that contribution. This is where parents, grandparents, family friends could come into play if they wanted to gift something to maybe a late high school, college age child that's got their first job, or summer job. The child works, and then they (parent, grandparent, family friend), make a contribution on the child’s behalf to that Roth IRA.

The one thing to make sure you keep track of - don't over contribute. So, if that first summer job, the child makes $2,000 that year, that's the most that you can contribute. You can't do more than that. So, just make sure it's matching that. But this is an especially powerful tool and strategy for that young person because they have so many years for compounding to really take effect in that account. If this were to be started maybe as a late teenager, early college, those dollars have 30, 40, 50 years to compound in that account. It can be a really powerful strategy to give money to the next generation.

The next strategy is paying for someone's education or medical expenses. The main thing to keep in mind for both of these items, is you have to make direct payments to the institution or to the medical provider. Payments made directly to the provider are outside of the $15,000 annual (gift) exclusion as well as the $11.7 million lifetime (gift) exemption.

Looking at an example…maybe grandparents have a college age grandchild, maybe they're halfway through college and they're looking at a way to help that grandchild finish out college. It might not make much sense to contribute to a 529 because they're already in school. There's no time for that money to go into the 529 and be invested. You know the point of the 529 is to get that tax deferred growth while it's in the account.

So, they're looking for a way to help them (the grandchild) out, the best thing the grandparents could do is make direct tuition payment to that university. The child goes to UNC, they're going to make the check payable directly to UNC to pay for tuition and that's not going to count as an annual exclusion gift or a lifetime exemption gift. But make sure that payments (are made) directly to the institution instead of going to the grandchild first then to the institution.

The same thing applies for medical payments. I actually had a client years ago, they came to us; they had a son (so it's a multi-generational family that works with us) the parents had a successful business that they sold, and were looking to get money to the next generation.

So, on top of charitable giving, they wanted to direct money to their kids and grandkids. Unfortunately, one of their children has congenital heart disease and very high medical expenses. Their son was one of the first valve replacement surgeries back in the early 80s.

His medical consumption on an annual basis can be upwards of $40,000, $50,000, $60,000. The parents, on top of the $15,000 gifts they were already making, wanted to help out their son. They figured out, through advice, that if you make direct payments to those medical providers, they can pay the expenses on behalf of their son without eating into that lifetime (gift) exemption.

The one thing we did have to note though, was because it was a pretty serious and unique situation, that he was traveling out of state to hospitals, and we had to make sure that none of the travel expenses were being factored into being paid for by the parents - because that would count as a gift. Only direct payments to the medical provider are excluded from those gifts.

I mentioned 529s earlier with giving to education…So, giving to a 529 still can make sense, but it's best done early for that beneficiary. 529s do count towards that $15,000 annual exclusion, but 529s have a unique rule that you can front load those $15,000 gifts up to five years’ worth.

And so, one contributor can contribute five years/$75,000 to a beneficiary's 529. They can't make any more contributions for the next five-year period, so they have to wait till year six to potentially put more in, but they're getting that front load - meaning they can get those dollars invested and potentially have that growth in the meantime.

A popular strategy especially for parents looking to help grandkids would be both grandparents funding, or front loading those gifts, so upwards of a $150,000 could go into a 529. Ideally, you do that while the beneficiary is young that amount can grow for 10 to 15, 18 years and then those dollars can be used for educational expenses.

One a few pitfalls to think about this strategy, especially if you're going to have two people front load those contributions of $150,000, is it's really hard to know what life is going to look like for a very young child especially a 1, 2, 3-year-old. They might grow up and be academically gifted and get scholarships. They might be physically gifted and get athletic scholarships, so the child might not have a need for this (money). They might just attend a lower cost school - maybe community college or a state university - and then the main thing, which none of us have any idea about, is legislation could impact college expenses. So, this (strategy) really has to go back to the goals for the family, matching it to what the wishes are for the parents and potentially balancing this strategy with others.

(Molly speaking)
Several of our clients have told us that they would like to give to their children at a time in their lives when they really need it. And, in one of our clients’ cases. that was right after their son graduated college and before he started grad school.

Depending on where their son and his girlfriend were going to find a suitable grad school program meant that their son was going to need help paying for tuition, rent or a down payment on a house. It also meant that their son's income tax rate would be in a low tax bracket for the time being.

Now, tax imposed on capital gain has a specific tax treatment. It's really either 0%, 15% or 20% of the kind of main brackets. Most of the time you're paying 15% federal capital gains tax when you realize (or) sell capital property like stocks bonds and mutual funds at a gain. You can see how wide the range is at the 15% bracket.

One strategy, if you intend to give to your children or perhaps parents or loved ones in a different financial situation, is to give them appreciated securities for them to sell in their lower tax rate - which is what our clients did last year to their son.

When you gift assets to someone during your life, the cost basis carries over to them. But, if the gift recipient is in the 0% capital gains bracket when they sell it, it nets more gift to them. Just be mindful, if your child is still a dependent, which is 18 or younger or full-time students younger than 24, whose earned income does not exceed half of their annual expenses for their support, because then they're subject to “kiddy tax”. “Kiddy tax” is basically when most of their unearned income, like capital gains, is reported on their parents return. So, that would be a defunct strategy.

Funding irrevocable trusts are out of your estate because it's an entirely different entity. You do not own the asset any longer. As I mentioned prior, charitable trusts are irrevocable trusts, but you can also establish a more generic irrevocable trust to give to people, not necessarily non-profits.

For the clients with whom we have these conversations, when a goal in their financial plan is to give the most they can to their heirs, funding these trusts with assets likely to appreciate over time, are best. And of course, they should really only be considered if your estate is likely to be subject to an estate tax - which currently means, like Dan said, the balance of your estate is over $11.7 million or beyond $23.4 million for married couples.

But in these trusts, you can lay out how, when and why the beneficiary of the trust receives the assets. You do have a lot of control in that sense. For example, you could say in addition to health and education related expenses, my grandkids can use this money to purchase their first house, or to start a business. You just need to be really comfortable with your intentions because you give up a lot of flexibility once it's in there. They (trusts) also just add complexity to your financial picture, so you should carefully consider whether the benefits are enough for you
I think we're going to run another poll now, so if you could bring that up Rick, it should pop up on your screen again, before we transition into some more current topics.

Tax increases…
Q: How worried are you that taxes will increase in the next few years and have a significant impact on you?

Rolling in. Give me one more minute I’ll share it. I should mention, now may be a good time that you can throw in a question that you might have in the Q&A box - that button at the bottom - and after Rick speaks we're going to address those as well. All right… so, the results are in.

So not too worried or somewhat worried the kind of middle of the road is the general vibe it seems of our attendees.

(Rick speaking)
Thanks. Great. Thank you, Molly.

All right. Now, I’m going to talk about what could change in the way of tax laws based on either what the Biden administration has announced or what's been rumored. I want to start, though, by saying that we are in the very early stages of the negotiation over the new tax laws. And, given the thin majorities in both the house and the senate, one should probably assume that only a subset of what's been rumored or proposed will actually become law. So, we would suggest that you don't make any irrevocable decisions at this stage. It's a great idea to know what's been proposed and to think about strategies which you could deploy, but actually making firm decisions, going through with it, and is something that you can't take back - it could be dangerous, and we would typically not recommend that.

All right, so what's been proposed or rumored in the way of tax changes. Number one, a higher top tax bracket of 39.6%. That's where it used to be until a few years ago before it went down to 37%, proposing to take that back to 39.6% and that would impact income for a joint filer of a little bit more than $500,000.

Another change that's been rumored is increasing social security tax. Specifically, social security tax is payable on earned income up to approximately $140,000 currently, and there's been rumors about imposing that social security tax on any earned income above $400,000. So, you'd have Social Security tax in the first $140,000 (of earned income), nothing on the next $260,000 and then $400,000 and above would again attract social security tax - which is not an irrelevant tax it's 6.2% paid by each of the taxpayer and the employer.

All right, the second change that's been announced or the second proposal that's been announced is a higher rate for long-term capital gains and dividend income for people with taxable income of more than a million dollars for filers with taxable income more than a million dollars. Currently long-term capital gains and dividends get preferential rates. The top rate for long-term capital gain or dividend income is 20% and the proposal is for anyone with more than a million dollars’ worth of taxable income that would go up to the ordinary rate which would be 39.6%, effectively it ends up being 43% with some other charges.

The third proposal, which I would argue is sort of the biggest structural change to the current relatively current tax laws, is imposing a capital gains tax at death on unrealized income of more than a million dollars.

Let me go back to what we talked about earlier and make sure everyone understands the difference between this and the current tax law. So, under current tax laws as we talked about. There is a so-called step up at death. So, that means if I bought a stock for $10 in my lifetime and it was worth $50 of my death, my heirs could sell it the next day for $50 and pay no tax, or they could hold it for years and when they eventually sell it they'd only owe tax on the difference between the new $50 cost basis - which became the cost basis when I died - and whatever they sold it many years later.

So, the proposal is not only to eliminate the step up at death but actually to force a tax payment at death. In the example I just used, if I bought a stock for $10, it was worth $50, then my heirs would owe capital gains tax on that $40 worth of unrealized gain even if they didn't sell the stock.

All right, proposal number four is a limitation on itemized deductions, and even potentially standard deductions, for high earners if you're basically above a 28% tax bracket you wouldn't get 100% of the deduction that you claim you might only get 70% or 80%.
The fifth change to mention here is a reduced tax benefit for deferrals into retirement plans. So, right now if you're below (age) 50 you can put in, for example, $19,500.

Every year (you defer income) into a 401k or 403b, that reduces your taxable income that year by that exact amount. You'll owe tax on it years later in retirement when you take the money out. And that number that $19,500 (has a catch up) and is $26,000 for somebody who's 50 and older. The proposal is for people above a 26% tax bracket, you actually wouldn't get 100% deferral of that amount, you'd only get a portion of the amount that you put into your 401k as a deferral.

And then finally, a proposal that's been rumored, not been announced yet, is the lowering of the estate tax exemption and the raising of the state tax rate above that exemption. As we mentioned earlier on this webinar, you can, during your lifetime or at your death, give away almost $12 million without owing estate tax. Which means, (for) the married couple that number is doubles to $24 million. Anything above that amount is subject to a 40% tax rate and the rumors are that that that $11.7 million could come down quite significantly and that the tax rate on amounts above that new lower exemption would be higher than 40%.

All right, so let's talk about what the implications are of these potential changes. I'm going to give you six implications. First, a buy and hold strategy in contrast to an active trading strategy where you're constantly generating capital gains. A buy and hold strategy becomes that much more attractive because if capital gain taxes are higher you want to avoid capital gains tax as much as possible.

Second implication, qualified charitable distributions, which Katie mentioned early in the webinar, QCDs, become more attractive. If when you make a charitable contribution out of your bank account or your brokerage account, if you're not getting 100 cents on the dollar of that of that deduction then a QCD is more attractive because you do get all of the (tax efficiency) benefit of that.

The third implication is the giving appreciated securities, whether to nonprofits or to the next generation/kids, becomes more attractive. I want to use (because of course, capital gains tax rates if they're higher, then avoiding them just becomes that much more valuable), I want to particularly focus on giving to the kids.

Right now, the difference for capital gains tax between parents and kids is often the difference between 15% and 20%. It's not huge. If all of a sudden, with the new tax laws, we go into a situation where parents have a 43% tax rate on long-term capital gains, then giving away appreciated securities to their kids for their kids to sell them becomes a lot more attractive because their kids are only in a 15% tax bracket for capital gains.

Implication number four, Roth IRAs and Roth 401ks. We've done some preliminary modeling on this and it's quite likely that if the limitations to the deduction you can take by contributing to a traditional 401k are actually passed, that a Roth 401k, which many employers offer, could be more attractive than a traditional 401k - even for people with very high tax brackets. As a reminder, with the Roth contribution you don't get a tax break up front, but you don't owe tax when you take the money out. The reason that could be more attractive is if you're limited with your how much of a tax break you get by putting money into a traditional 401k it may not make sense. The Roth 401k could be (the) superior (option).

The fifth implication is the rise of the popularity of permanent insurance, whole life, variable universal life. I’ll mention a strategy that's likely to become more popular if estate tax exemption goes down and state tax rates go up. And it's a strategy that's been used over years, became less popular recently (because of the) just with a very high estate tax exemption.

You can set up an irrevocable trust, a trust outside of your estate, and gift money to the trust and that trust would use that money to pay premiums on your life on a life insurance policy on your life, or potentially a second to die on your life in your spouse's life. So, when either one or both of you is deceased the death benefit would pay out free of estate tax to your heirs, the beneficiaries of that trust, and they could use that money, for example, to pay for other estate tax that they owe on your estate.

And then finally, giving to an irrevocable trust just generally becomes more attractive as exemption as the estate tax exemption potentially goes down. I’m going to use a story here (about) a client that we're working with now, on why this can make sense even if you don't have an estate that's currently worth or don't expect to have an estate that's worth $24 million between you and your spouse when you pass away.

This client of ours, a married couple in their early 50s, are planning to make a $1 million gift into an irrevocable trust. So, (the money) is out of their estate, they won't have access to it, to benefit their heirs. You might say “well a million dollars it's a lot of money”, but is that really going to have a big impact on their estate tax at their death?

Because they're both in their 50s, it's quite likely that one of them will live at least another 40 years. That's the time when the next generation is going to get the money. So, in 40 years, it is quite possible that that $1 million that they're giving into the irrevocable trust is worth four million dollars. What they've done by giving up access to that $1 million today (and you obviously have to be able to afford to do that), but by giving away access to that today, they have created a $4 million (gift) estate-tax-free for the next generation. That strikes me as a good strategy.

All right, we're going to go to the Q&A session here in just a moment. I want to though close our prepared remarks with two observations and an offer. First the offer. We've got a seven-page white paper that describes all of these strategies in more detail. If you like it, just let us know. We are happy to send it to you, happy to send it to friends or relatives whoever you think might benefit from it.

Okay, the two observations. The first is, hopefully you've seen that each of these strategies can be valuable in any given year. The real power is if you deploy them over a long period of time as a long-term strategy. I’ll go back to an example that Dan raised earlier - the $15,000 annual gifting exemption. The example he used was a married couple who can give $30,00 if they've got three kids - that's $90,000. $90,000 is a lot of money you're giving away, free of estate tax. That's fantastic. But if you (give that $90,000) do it over 20 years, that's incredibly powerful. That's almost two million dollars that you've taken out of your estate, not including the (compounding bonus) appreciation that you mentioned as well. So, these strategies can really make sense over long periods of time.

The second observation I’ll make, is that while each of these strategies will make sense for someone on this call, I’m almost certain, it's improbable that all of them are going to make sense for everyone. So, we suggest you go back to your financial plan, look at your goals, your expenses your income, your assets, your financial risks to determine which of these strategies which of these specific strategies, make sense for you and which do not. Then once you've identified the ones that do, adopt them aggressively because they're powerful. They can absolutely magnify the impact of your giving and gifting.


Let me now open it up to Q&A. We had some come in before the start of this, and it looks like a few more, so let me pass the Q&A over to you Molly.

(Molly speaking.)
Okay, I’ll ask one of the questions that came in prior first and then we'll get to the ones that are typed in the Q&A button down below.

Q: So, the question was what happens when I give more than $15,000 to someone?... like what actually do I need to do is really the question.
I think Dan maybe that'd be a good one for you to answer.

Dan speaking.)
I’ll take this one. So, $15,000 is the annual exclusion. Separately, there's the $11.7 million lifetime exemption. If you give more than the $15,000 to any individual in any year, you still don't owe tax, because it will just go against that $11.7 million estate tax exemption. The one thing you do have to do is file a tax form that you're reporting the gift. There's no tax. It's just documentation that it happened. It's the Form 709 IRS form that you file, and you actually have to do it anytime an individual gives another individual more than $15,000.

(Molly speaking.)
Okay. A little bit of a related question that was just typed in here recently so I’m going to ask this, and I’ll have you answer it again Dan.

Q: If you give the maximum dollar per year into a child's Roth can they also contribute?

(Dan speaking.)
No, they cannot.

The total contribution is from any contributor. Let's say a child earned $6,000 in a given year and they have $2,000 which they can contribute. Someone else can contribute the balance of $4,000 to get up to that $6,000 limit. But it cannot be more than $6,000 in total, no matter who puts the money into the Roth.

(Molly speaking.)
Great. And we had a question in the chat box earlier, and I just typed in the answer because I think it's easier seen, but I’ll read it out loud.

Q: What is the earning cap for contributing into a Roth IRA?

I just typed it in, but it depends how you file. If you file jointly, the range is between $198,000 adjusted gross income, so this is above the line, it used to be called above the line deductions, $198,000 to $208,000. I just want to clarify, there's a range because if you're within that range you can't contribute the full $6,000, but you could maybe do a $4,000 contribution, so it's like there's a calculation within that range. And then single filers have a lower threshold which is $125,000 to $140,000 and again this is in the chat those numbers.

(Rick speaking.)
Any other questions Molly? No, not yet. Give it another couple seconds.

(Molly speaking.)
Here we go.

All right. Let's see. I'll pass it from Dan - seems like a Dan question, but I’ll give it to Rick this time.

Q: So, I give a thousand dollars a month to someone in Texas. The person might not be a citizen. Would I file a 709 or better not?
$1,000 a month is $12 000 a year, so you are below your $15,000. So, there's nothing you have to file. The fact they're not a citizen, I don't believe changes that. If it does, we'll come back to you.

(Molly speaking.)
Yeah, I would agree with you Rick, because it's the giver who would have to file. The recipient doesn't receive - you know there's no taxation on the recipient of receiving a gift. So, yeah, I would agree with you and so $15,000 the annual exclusion that's anybody so, I can get $15,000 to many people, and I wouldn't have to file a 709.

All right, there's more coming in now.

Q: Does it make sense to gift business shares to an irrevocable trust when the estate isn't really large enough yet assuming it (the shares) will appreciate largely?

Rick, I’m going to go back to you on this one.

(Rick speaking.)
So obviously, the first point is it's got to make sense for you. You’ve got to be able to afford not having that money and not having access to that for the rest of their lives, right, because obviously saving taxes is great but not if you're going to run out of money before you before you pass away. So, assuming you can afford to make the gift, then it can make a lot of sense for two reasons.

First guessing from the question, you're focused on appreciation, so the best asset to give to an irrevocable trust is the one that's going to appreciate the most because you've given away the future appreciation as well as the value of the gift at that time. So that's a particular powerful strategy.

The second reason it can make sense, is there are rules that permit you to structure, you can use, to give away business interests at lower than what you lower amounts than what you might think the business is worth. People very often do this through family limited partnerships or non-controlling ownership positions. Basically, the idea is that if you're giving away a percentage of your interest in a company, if the recipient can't control that business, doesn't have that ability to sell those shares, they're worth less than what they would otherwise be worth, so you can often claim a discounted value so you've used up less of your $11.7 million estate tax exemption. People adopt that strategy a lot. I just would go back to -- it's got to make sense for you first and foremost. You’ve got to be able to afford not having access to that money for the balance of your life.

(Molly speaking.)
Right. I’ve got quite a few coming in now, so Katie I’m going to give it back for you.

The first one is…
Q: Is there a maximum on gifting appreciated securities?

(Katie speaking.)
Great question. So, we didn't want to inundate you all with so much tax detail, but there is a max. So, if you give appreciated securities with a total value of more than 30% of your adjusted gross income, in any one taxable year, only 30% of your AGI qualifies as a deduction. But the balance carries forward, typically for up to about five years. This is in contrast to if you gave cash donations, so that limit would be 60% of your AGI would count. So, there is a lower threshold for giving appreciated securities, but there is the flexibility to carry some of that forward as well.

(Molly speaking.)
Right. And so the follow-up to that was - not necessarily related but a separate question kind of related…

Q: Should I give to a donor advise fund or a community foundation?

Great question. So, we work with clients who have done both. A donor advised fund can be opened at places like Schwab, a custodian - very easy to do, convenient. We have also had clients who say you know I’m really committed to the local community; I want to participate and have my money at a local community foundation. They can also set up basically the same donor advised fund vehicle. Sometimes, we've found it's a little less easy to manage or flexible, but if you have a connection and want to prioritize your local community, that could make sense as well.

(Molly speaking.)
I see three questions in the queue, so Dan…

Q: Do children, who are not dependent, receiving a gift or having educational medical expenses paid on their behalf, do they have to claim any of that money as income on their taxes?

(Dan speaking.)
Looking at educational or medical expenses, if those are paid directly to the institution, they do not need to worry about tax or the giver doesn't need to worry about going against their annual or lifetime gift limits. And if those are paid directly (to the university or medical institution), it's the easiest and best solution. And then receiving a gift, they also don't need to pay tax. It's just, if it's larger than that $15,000, the giver would need to document it. But the receiving beneficiary does not owe any tax.

(Molly speaking.)
Right. Yeah, so really that the gift tax means the burden is on the giver. Right, anytime we say gift tax, we're thinking about the giver.

Q: Potentially being due gift tax, of $15,000 -is this calculated for both (giving) to non-profit and (gifting to) next generations or only for the next generation?

(Rick speaking.)
So, that does not apply to charitable giving. You can give unlimited amounts to nonprofits. There are, as we talked about earlier, some limitations that how much can take as a deduction, but those limitations are very high. So, the $15,000 is really about giving to people effectively.

(Molly speaking)
Q: How about giving the money to pay my children's mortgage? Will it help reduce my tax or not?

No. yeah right. I mean I was going to ask Rick but he's shaking his head. I’ll just clarify or follow up on that. Yeah. I mean, again, the giver would potentially be the person who would have to think about this. It wouldn't reduce any tax though, of course. What you would have to think about is gift tax. But as Dan has explained, you get the $15,000 annual exclusion, which you don't even have to think about filing. Then, you get that massive annual exemption, so our lifetime exemption.

(Rick speaking.)
We should maybe let's take one final question. I’m conscious of the time.

Is there anything left? That's it. Oh, great. Perfect.

We’d like to close up the webinar. Thank you all very much for joining us today. As I mentioned before, we've got a paper if you want, with more detail. Just shoot us an email. I’d be happy to send it to you. We thank you for your time. Have a great afternoon.

Disclosure: The information in this whitepaper was obtained from sources believed to be reliable. However, the accuracy or completeness of this information is not guaranteed. This whitepaper is not an offer to sell or a solicitation of any investment products or other financial product or service or an official confirmation of any transaction. It is a general discussion and may not consider unique issues faced by an individual reader. Securities and insurance products are not FDIC-insured, are not guaranteed, may lose value, are not a bank deposits and are not insured by any federal government agency. Past performance is no guarantee of future results. Old Peak Finance LLC (“Old Peak”) is an SEC-registered investment adviser based in North Carolina. Old Peak will only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.

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