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Planting Season for a Harvest of Tax Savings

After what has been a rough winter in many parts of the country, spring is finally here.  Spring is the time to plant in the garden, but may also be the time to consider ways to save on income taxes, long before year’s end.  Here are a few suggestions for a bumper crop of savings:

  • Contribute the maximum possible to an IRA or to your company’s 401(k) plan.  The maximum for IRAs is $5,500 ($6,500 for those ages 50 and older).  The 401(k) limit is $18,500 ($24,500 for those ages 50 and older).  The earlier in the year that you make your 2018 contribution, the longer your funds have to grow tax-deferred.  Certain age and earnings limits apply.

  • Review your investments with your financial adviser.  The market has been on a roller coaster ride in recent months. It might be time to determine whether your portfolio is still in balance or if you need to make changes to your holdings.  If you have appreciated investments that you’ve held more than one year, consider using the shares to make your charitable gifts for 2018.  You’ll be entitled to a deduction for the full fair market value of the shares, if you itemize your taxes, and you’ll avoid the capital gains tax you would owe if you sold the shares (generally 15%).  If you want to dispose of shares that have gone down in value since you bought them, consider selling the shares and contributing the proceeds to charity.  You’ll be entitled to a charitable deduction in addition to the loss deduction that will offset some capital gains.

  • If you’re turning 70½ in 2018, determine what the required minimum distribution is for your IRA or 401(k) accounts.  You have until April 1, 2019, to take the first distribution, but if you wait until next year, you’ll have two required distributions in the same year.  A more satisfying option may be to have the custodian of your account send a check for a portion of the distribution directly to the charities you support — a qualified charitable distribution (QCD).  Although there is no charitable deduction, the QCD can satisfy some or all of your required withdrawals for the year.  This will help reduce your taxable income and income taxes.  Eligible IRA owners can make tax-free gifts of up to $100,000 annually in this manner.

  • Estate tax laws changed significantly at the end of last year.  This might be a good time to have your attorney review your estate planning documents to see that your will and/or living trust still reflect your wishes for the distribution of your estate.  Minor changes can be made with a simple codicil, or for more comprehensive changes, a new will might be in order.  Either way, it’s easy and satisfying to include a gift in your plans for the charities you support.

Special Planning for Special Needs

Parents who have a son or daughter with disabilities may find it inadvisable to leave that child a large inheritance.  Adverse consequences might include the disqualification from eligibility for various types of government assistance or the inability of the child to manage the inherited assets properly.

Professional advisers often suggest parents establish a special needs trust that will benefit the child but safeguard qualifications for government assistance.  The trust typically would allow the trustee discretion to provide nonessential services and items to the child, such as piano lessons or recreational equipment.  Special needs trusts must be carefully drafted to comply with state law.

In general, the trust must be specifically drafted to be supplemental, providing only “extras” for the son or daughter.  Consult an estate planning attorney with expertise in special needs trusts to ensure proper wording.  Parents should also write a “letter of intent” to the trustee explaining the child’s history, setting priorities for care and services and stating their own hopes and expectations for the child.  In some cases it may be possible to direct that funds remaining in the trust at the child’s death pass to charity.

Who Should Be Your Executor?

Careful thought should be given to choosing your executor (personal representative at death).  Your executor will be legally responsible for settling your estate and carrying out all the provisions of your will.  It is not an easy task, even though an estate attorney provides legal assistance.  Your executor will have to collect and preserve assets, wind up accounting procedures, file tax returns and worry about investments and cash needs.

You might nominate your spouse as your executor, or a competent and experienced friend or relative or the trust department of a bank.  Or you may wish to name a spouse, friend or relative together with the trust department of a bank, to serve as co-executors.

Write to Your Family, Right from Your Heart

A will is basically a document in which you tell how you want assets distributed at death.  There’s another document you should consider that tells why.  It’s often called a letter of instruction, and it’s addressed directly to family members, not to the probate court.

In a letter of instruction you can explain why you distributed more assets to one child than another (e.g., medical hardships, financial need, to balance gifts made during your life).  You can also direct certain items of personal property to a particular family member.  For example, a grandmother might leave her knitting needles or crochet hooks to the granddaughter she taught to do needlework.  Although these items may not be valuable in the monetary sense, they may carry special sentimental value.

Your letter of instruction is an opportunity to make the personal statements to your family that will help them understand the terms of your estate plan.  In it you can also make special requests — that they continue supporting the charities that were important to you, in your memory.

A letter of instruction is not a substitute for a valid will.  It is not enforceable in probate court because it is not witnessed as required by state law.  Because it is not witnessed, it can be changed without the need to adhere to the legal technicalities of wills.


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