Gift that gives back

Susman Insurance Agency Podcast, with Karl Susman

What is better than giving? Receiving you say? How about a gift that gives you back! Join Karl Susman and guests this week as they discuss ways to give and get back! Transcript below. JIM: Welcome to today’s program. Today I’m flying solo and talking about a subject that’s near and dear to my heart which is charitable giving. With this being the holiday season, many of us are in a giving mood whether it’s Christmas or Hanukah or Festivus or whatever holidays that we’re celebrating over this season, it’s generally regarded as a time of giving and whether we’re giving to our family members or those that we care about or to our favorite charities, it’s important to understand the benefits of planning with your giving to get the most impact that not only can benefit your favorite charity but can come back to benefit you which might in turn mean you can do more for your favorite charities so today I’m going to cover some of the planning options that are available to you and it’s something that we as advisors a lot of times fail to bring up. With some of the changes that have happened in the tax code you really want to be aware of these opportunities for you because it can save you a lot of money in taxes. I remember reading a book a while back and it’s called Tax Planning From The Heart. To sum up that book in just a couple sentences, it basically says you have you and your family, you have charities, and you have Uncle Sam. Pick two of the three because with charitable planning we can control where our money is going whereas when we pay taxes we really don’t have a lot of say as to how that money is being spent so before I talk about the tax benefits, I think it’s important that people understand the taxes so then you can better understand how to plan and how to benefit from your charitable giving. Our tax system is set up into brackets and I know when I ask people what their bracket is most people look at me like a deer in headlights. Talk to your accountant, to your tax advisor, your insurance professional, your financial advisor, talk to whoever you’re working with to help you understand what bracket you’re in so the way the brackets work is the first few dollars that you earn you have deductions and exemptions that offset any tax on the first few dollars of taxes that you earn so that’s a 0% bracket. Then your taxable income starts and the first few dollars of your taxable income will be taxed at 10%. Then it goes to 15%, then it goes to 25%, and it keeps bracketing up all the way to 39.6 and that’s just the federal tax. You have the same thing on the state level and there might be things like the Affordable Healthcare Act taxes. There are other taxes, capital gain taxes, all of these different things go on to your final tax return and they determine what your bracket is for your ordinary income so the things like interest income, your wages, your distributions from IRAs, they all go into your ordinary income that are affected by all of these brackets. One thing that’s really important to understand is where your brackets are. Now we’ve had a couple of changes in the tax code over the last few years. One affects itemized deductions so what goes into itemized deductions is money that you’ve paid for your property tax, state income tax, your medical expense, and your charitable contributions, and one of the big changes that happened here is it used to be your medical expenses, your non-reimbursed medical expenses, anything that exceeded 7.5% of your income could qualify toward going to those itemized deductions while a few years ago they changed the rule and made it 10% so less of your medical expenses can go toward itemized deductions and if you’re over 65 this will be the last year that you can use the 7.5% because starting next year in 2017 the itemized portion of your medical expense goes to 10% like it is for the rest of us right now so why is that important. I talk to a lot of clients, they take in all of these receipts, and they think they’re itemizing on their taxes but they don’t have enough of these deductions and they end up getting the standard deduction so it’s real easy to look at your tax return and you can see whether or not you’re getting the standard deduction. Now every year that changes and it depends on your age, whether you’re disabled or whatever, what you get for standard deduction so it’s different for everybody but you just want to look at your tax return and see if you’re qualifying for that because if you end up just defaulting the standard deduction it means you’re not getting any additional deductions for your charitable contributions so it’s really important to understand that when doing charitable planning. Let’s talk about some of the options that are available to you. First of all, for those of you that are over 70-1/2 and are subject to required minimum distributions from your retirement accounts, when you reach 70-1/2 for traditional retirement accounts the government says you have to start taking money out. It doesn’t matter whether you need the money or not, you have to start taking distributions and that percentage that you have to take is determined based on your year-end account value and applying the percentage based on your age and basically it starts out at 3.6% and every year it’s a little bit of a higher percentage so let’s say for the sake of discussion you have a couple hundred thousand dollars in an IRA and when you get to 70-1/2 your required distribution is going to be around $7000. Now let’s say you don’t need that money and let’s say for the sake of discussion you’re giving $5000 to your favorite charity or charities every year. Well, what happened at year-end last year, 2015, they passed a law and it had been a temporary law that they kept kicking down the road and passing a temporary law, temporary law, and, unfortunately, they didn’t pass that until very end of the year so it was very difficult to do planning. Well, at the very end of the last year they made this law permanent so it gives us some real opportunities to do some meaningful giving so what happens with the charitable contributions is if I’m already giving $5000 let’s say to my church and I have a 7000 required minimum distribution, I can contact my IRA holder and have them make the check directly to my charity and they have to be registered as a registered charity, a 501(c)(3) or some other qualified charity, they have to pay the check directly to the charity so instead of you donating money let’s say every week when you go to church, you would probably want to make it easy on yourself and just do it once and have it done. Now by doing that the money that comes out does not get included in your taxable income and if you’re just getting the standard deduction that’s like reducing your taxable income by $5000 and you save the taxes on that so that’s something you definitely, for anybody over 70-1/2 that is giving money to any charity, you want to work with your professionals to make sure that you’re taking advantage of that so in a $5000 let’s say donation to charity, if you’re in a 15% bracket that means you would save $750 in taxes and then if you’re in a state that has an income tax you would add that savings to that as well so that is an important tool that I see a lot of people aren’t made aware of that, that you should be looking to take advantage of for those of you that are turning over 70-1/2. Now we’re going to take a short break and when we come back we’re going to talk about some other planning techniques that you don’t need to be 70-1/2 to take advantage of. Please stay tuned. [BREAK] 8:42 JIM: Welcome back as we’re exploring some real benefits to doing charitable planning. I know many clients that give to charities on a regular basis because it’s the right thing to do. They want to make a difference and they want to help out those causes that are near and dear to their heart and they don’t really think about the tax impacts so something that you want to do though is if you look at this and you say, geez if I could save $2000 on taxes, well that’s either $2000 in your pocket that you control or maybe you could do another $2000 of giving and it doesn’t cost you any additional money, you’re just reallocating money that you would’ve been sending to Uncle Sam and now controlling where that money is spent by giving it to your favorite charity. Let’s talk about a couple of different things you can look at. One thing is there are donor-advised funds in which you can make contributions to a fund. It’s kind of like setting up a family foundation and you get a charitable deduction today and you can advance payments so let’s say again, for example, you’re giving money to your favorite charity every year and you’re not getting a deduction. Well, if you’re sitting on some cash you might be able to make the gift for let’s say the next 15 years, lump-sum it one of these donor-advised funds, and then give the money out over years and still have control of that money. There are different mutual fund companies that have these type of things available and you want to talk to your financial advisor as to what opportunities might be there but that’s something you can do. The disadvantage of this is they don’t offer a lot of flexibility and ultimately all of the money has to go to charity so one of the solutions that we look at that could possibly fill this void and give you a little bit more control is the charitable lead trust and what a charitable lead trust is, it’s something where you put money in a trust for the purpose of charitable giving and then money every year gets doled out to a charity over a specified period of years. Now I know you can do a lot of different options with this and depending on what options you pick will determine what the deduction is but what we’ve done is we look at a charitable lead trust with a lot of my clients and we’ve looked at a 20-year charitable lead trust. It just seems like that’s an efficient way to do it and what happens is each year, whatever we put in that charitable lead trust, then we have to have 5% of what we put in be donated to charity each year so what I do is let’s say, for example, I have a client giving away $3000 to the church every year, I look at their tax return, they’re not getting any deductions, and then we look and see they have maybe $60,000, $70,000, $80,000 somewhere that they’re not using for other purposes and I say, well let’s take $60,000 and put it in a charitable lead trust. Well, if I have someone that’s let’s say in their late 50s/early 60s, they’re not able to itemize anymore, they’re empty-nesters, they lost the child deductions, and the interest on their mortgage is lower now, so we get to the point where they’re not really able to get much of a deduction. If we put that money in a charitable lead trust what determines the deduction is the current interest rates and the period of time that the money is being paid out. Right now with very low interest rates what ends up happening we actually get fairly high deductions so in a case like that if we put $60,000 in we might get a deduction around $55,000 as a charitable deduction. Now we’re able to itemize. Now in today’s program I don’t have a lot of time to go through all of the numbers plus it’d be pretty confusing but if you’re in a position where you’re giving money regularly to charity and you’re going to continue doing it in the future and if you have a little bit of cash laying around there’s an opportunity to maybe accelerate those gifts and drive a deduction where you’re not getting any now and all we’re really doing is taking economic benefit of an asset and committing toward giving to charity every year. Now one of the big advantages of that charitable lead trust is we can set it up at the end of those 20 years to go to the kids, we can set it to come back to us so if we feel we want to relook at it, maybe do it again, we could drive another deduction or maybe we need money back to supplement our retirement income, whatever the case may be, but it’s something that you want to sit down with your accountant, your financial advisor to figure out if that’s something that could work for you but we’re seeing a lot of clients taken advantage of because most of them didn’t even realize they weren’t able to get those deductions that they had gotten for so many years but now they had lost them and didn’t realize it so that’s something you may want to look at. Another type of charitable planning that’s real popular is the charitable remainder trust. This is pretty complicated and I could take a couple of hours explaining it but it’s exactly the opposite of a charitable lead trust so what happens is we give money to the trust, the trust pays us income, and whatever is left goes to charity. In a nutshell where these are really popular is if we have people that, let’s say they have rental properties that they’ve depreciated, they’re in a business, they have equipment that’s depreciated or maybe they have real estate that’s appreciated or a stock portfolio that’s appreciated, and they want to reposition that. Well, when you do that a lot of times you trigger some pretty high capital gains and if it’s a once-in-a-lifetime-type event where you might have several hundred thousand or several million dollars that are all subject to taxes, I know here in my state if I look at the federal income tax, the state tax, ObamaCare tax, in some instances some of those dollars might be taxed at over 50%. Well, one of the big advantages of a charitable remainder trust is it is tax exempt. We can donate items into it, sell them, and reposition them, no tax. Now when we get the income from it we’re going to have to pay income tax as the money comes to us but we’re avoiding the big hit all at once because that income obviously is probably going to be coming in and we’re going to be in a much lower bracket by spreading out that income over our lifetime. When all is said and done money is going to charity, whatever is left in there, so if we have charitable intentions that fits very nicely. If we don’t have charitable intentions or don’t have that strong of charitable intentions there’s going to be a problem with the family because that money goes to charity and according to the IRS rules charity does not begin at home. One thing that we find is if we’re getting income from an asset that has not been taxed, okay so let’s just say we are avoiding a 20% capital gain rate. Now some rates might be higher, some might be lower, and we don’t really have time to go into it in today’s program but let’s just say our average tax is 20%. Well, if we had a $500,000 asset, paid a 20% tax, that means we have 400,000 let to invest. Well, if we have 500,000 paying us income because we avoided the tax, that income is going to be much greater than 400,000 of income and what we do with some families if they’re important on taking care of the family we look at replacing what we gave to charity by using life insurance and it’s just a numbers game. I’m not here to sell life insurance necessarily but it’s a tool in the toolbox so let’s say the family decides, well if we were going to sell it anyway that means we took 400,000 out from what our family would get, we’d buy 400,000 of life insurance. I’ve had some clients where the numbers worked to replace the whole 500,000. I’ve had other clients where they’re in an estate tax situation where they look at it and because the charitable trust is tax exempt the family does not have to pay any federal estate tax on that money and let’s just say we’re at a 40% rate, I know it’s a little bit more than 40%, but for simple math that’s $160,000. If I take $160,000 off what was remaining of the 400,000, what would the family have actually gotten. Now we’re looking at 240,000 so I’ve had some families just replace what ultimately would go to those kids so there are ways to solve the problem. One of the other benefits of a charitable remainder trust is what do we get when we give money to charity. We get a tax deduction. Now being that this is the opposite of a charitable lead trust, we talked about some pretty rich deductions in the charitable lead trust and what drives a charitable remainder trust is the age of the clients and the interest rates and with the low interest rates it actually drives the charitable trust deductions down and right now if we have somebody in retirement we’re seeing deductions in the 10% to 15%, maybe a little bit higher percentage range but if you’re dealing with a $500,000 asset and let’s say you get a 10% deduction, hey you just avoided the capital gain, you’re getting more income in retirement. The deduction a lot of times is icing on the cake. Lots of opportunities in charitable planning. Talk to your advisors about charitable planning and see if it fits for you, especially if you are charitably inclined anyway, you want to take a look at what you’re doing, are you getting deductions for it. If not might there be a way of taking advantage of one of these tools and driving a deduction. The other thing that I want to emphasize, too, even if you’re not charitably inclined, if you’re looking at a significant capital gain event, you might want to look at the charitable remainder trust. You might be able to accomplish what you want to accomplish anyway and by structuring that create some tremendous tax advantages for yourself and your family but don’t go this alone, you need a team to help guide you through this, go to your insurance professional, your financial advisor; they’re typically a good lead because they probably have the best understanding of your total circumstances and they’re going to want to team up with a CPA that understand this as well as an attorney and do the math, see if it makes sense, but during this holiday season evaluate the gifting that you’re doing and seeing if there’s a way to take advantage of it. Thanks for joining us this week and tune in again next week as we explore another phase of the Real Wealth process and remember if anything you heard in today’s show you’d like to get more information about contact your Real Wealth advisor. Also if you feel that any of this information would be helpful to a friend or family member, just click the forward to a friend button. JADE: The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by any registered representative. A registered representative is not a tax advisor and does not provide tax advice. Before taking any specific action, be sure to consult with your tax professional.