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Clock Is Ticking

If you’re over age 70½ and haven’t taken the required minimum distribution from your IRA this year, there’s still time to make a charitable gift and save income taxes.  The owner of an IRA can direct the custodian to send a check — up to $100,000 annually — to charity, without paying the income tax that’s normally due whenever funds are withdrawn from the account.  And while there is no charitable deduction for an IRA gift, there may be tax savings if the gift takes the place of required distributions.  For example, Bob is required to take $50,000 from his IRA this year, even though he doesn’t need the funds.  In his 28% tax bracket, he will owe $14,000 in income tax.  But if he instead tells the custodian to make a $10,000 gift directly to charity, that amount satisfies part of the required minimum distribution and reduces his tax by $2,800.  Bob’s gift must be made to a public charity, not to a donor advised fund, private foundation or to arrange a life-income gift such as a charitable gift annuity.

Even if you’ve already taken your required distribution for 2017, you may find it satisfying to make charitable gifts from your IRA.  It can help reduce the size of the account, which can result in lower required distributions in future years.

The Importance of Health Care Directives

Health care directives allow you to tell your family and medical care team the level of life-sustaining medical treatment, artificial nutrition or hydration you want maintained if you become unconscious and have no chance of recovery from an accident or illness.  Living wills state your preferences on life-sustaining treatment.  Health care proxies or a power of attorney name another person to make health care decisions for you if you are incapacitated.

Health care directives are governed by state law.  You should consult your advisers, especially if you live for part of the year in a different state.  Make sure responsible friends, family members and medical staff have copies of your instructions.  Have a serious discussion with the person you name as your agent under your power of attorney for health care.

Like other components of your estate plan, your living will or power of attorney for health care should be reviewed frequently to ensure that your needs and treatment wishes are unchanged and that the person designated to make health care decisions for you is still willing and able to serve.  Review all your health care directives, and the rest of your estate plan, at least annually.  Estate planning should encompass everything related to the end of life, including a living will and a health care power of attorney.

Two Year-End Gifts to Consider

  • Gifts of securities that have gone up in value can enable you to do far more for charity.  Friends who give appreciated stocks, bonds and mutual fund shares held more than one year receive tax deduction savings from the full current value of their investments, not just the original cost.  Donors also avoid the capital gains tax they would owe if they sold the shares.

  • Arrange a life-income gift.  In exchange for a gift of cash or stock, donors can receive payments for life, as well as income tax charitable deductions, from their gifts to fund charitable gift annuities and charitable remainder trusts.

To guarantee a charitable deduction for 2017, gifts must be complete by December 31. Gifts of stock generally may be completed in a few days, while gifts of mutual fund shares and life-income gifts may take several weeks to complete, so if you're considering such gifts, you should begin the process soon.

The Uncertainty of Estate Taxes

Ben Franklin is credited with the quotation that “nothing is certain but death and taxes.”  But even the fate of the estate tax is uncertain.  Among the tax proposals currently being considered in Congress are efforts to eliminate the federal estate tax.  For 2017, only estates in excess of $5.49 million are subject to tax (projected to rise to $5.6 million for 2018), meaning only a few thousand estates are taxed each year.  What can you do amidst the uncertainty?

  • Watch what Congress does, not only with income tax, but also with estate tax.  If estate taxes are eliminated, some appreciated assets owned at death may be subject to capital gains tax (above a specified amount).  The gift tax, which generally applies to annual gifts in excess of $14,000 per recipient (projected to rise to $15,000 next year), will likely remain. Total lifetime gifts up to $5.49 million in 2017 are sheltered by a gift tax exclusion.

  • Currently, 18 states and the District of Columbia have estate and/or inheritance taxes.  In some cases, the taxes apply to estates that are far below the $5.49 million federal level.  Your estate plans should consider ways to reduce or avoid these taxes.  Even if your own state does not tax estates, if you own real property in one of the states that does impose a tax, you may be subject to tax.  States with estate taxes permit deductions for gifts to charity through a will, living trust or beneficiary designation.

  • If the estate tax is repealed, have your estate plan reviewed by your attorney.  Many estate plans drafted years ago have formula clauses that may be obsolete in the absence of the estate tax.

  • Income tax charitable deductions might become more important if estate taxes are eliminated.  It may be time to accelerate charitable gifts in a will or living trust to lifetime gifts, including gifts that reserve payments for life for the donor and/or spouse, while providing a current income tax deduction.

  • While IRAs, 401(k) accounts and other qualified retirement plans might not be subject to estate tax, income taxes will still apply to withdrawals by beneficiaries.  If charity is named a beneficiary, income tax is avoided on the gift portion.


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