#charitableplanning

When it comes to effective estate planning and wealth transfer strategies, Grantor Retained Annuity Trusts (GRATs) stand out as one of the best tools. They were popularized by the Walton family (best known for founding the retailers Walmart and Sam’s Club) as a way to get around owing the IRS millions in taxes. This strategy has been used by many other notable individuals like Phil Knight, the founder of Nike. You do not need to be a billionaire to get the same benefits!

A GRAT is an irrevocable trust into which an individual places an asset with the expectation that it will grow in value. In exchange for putting assets into the trust, the individual receives annuity payments for a specified number of years. At the end of that term, any assets left in the trust (typically the appreciated value) are transferred to the beneficiaries (like your children) tax-free.

Think of a GRAT like a special box where you put an asset (e.g., stocks, real estate, or other investments). This asset might be worth a certain amount today, but you believe it will be worth more in the future. The GRAT allows you to benefit from the asset’s growth while minimizing potential gift or estate taxes.

How does a GRAT work?

Imagine that a stock is like a Luke Skywalker action figure toy that’s worth $10 today, but you think it’ll be worth $100 in a few years.¹ You want to give this stock (toy) to your child in the future, but if you wait until it’s worth $100, you might have to pay a big gift tax. So, you use a GRAT:

1. You (the grantor) put the toy (stock) in a special box (the GRAT) and say that for the next few years, the toy will pay you back a little bit of its value each year. This “payback” is called an annuity. The annuity can be a stated dollar amount, fixed fraction, or a percentage of the initial fair market value of the property transferred to the GRAT.

2. If, at the end of those few years, the toy has grown in value more than you expected, everything extra (the remainder interest) goes to your child without any gift tax. *The value of the remainder interest is determined by subtracting the present value of the expected future annuity payments from the fair market value of the original transfer to the GRAT.

3. If the toy doesn’t grow in value, or if it’s worth less, that’s okay! You just got your annuity payments, and the toy goes back to you, so you’re still able to play with the toy after it spent its time in the GRAT.

Example:

Why Use a GRAT?

1. Tax Efficiency – When setting up a GRAT, the value of the gift is reduced by the annuity payments you’ll receive. If the assets grow more than expected, the excess growth passes to your beneficiaries free of gift tax.

2.  If the assets don’t appreciate as much as you hoped, no worries. The assets just revert to you with no adverse gift-tax consequences.

3.  Asset Protection – Assets in the GRAT are generally protected from creditors.

A Few Things to Remember:

• Timing is Essential – GRATs work best in low-interest-rate environments because the assets in the GRAT only need to outperform the IRS’s set interest rate (often referred to as the “Section 7520 rate”) to provide a benefit.
• Risk – If the grantor (the person who set up the GRAT) dies during the trust term, most or all of the trust assets may be included in their estate for tax purposes. Hence, it’s essential to select an appropriate trust term.
• Legal Counsel – Setting up a GRAT involves specific legal processes and paperwork. Always consult with an attorney or financial planner familiar with GRATs and your personal financial situation.

GRATs offer a unique avenue for individuals to pass on appreciating assets to beneficiaries in a tax-efficient manner. Like all financial strategies, it’s vital to understand the ins and outs and seek expert advice tailored to your needs. Remember, as with all financial decisions, it’s always wise to consult with a trusted financial advisor or attorney to ensure that a GRAT is right for your specific situation.

1. A 1978 Luke Skywalker figurine sold for $25,000 in 2015 as part of a $500,000 Star Wars collection at Sotheby’s.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA® Senior Financial Planner

Most of our clients as they get older want to begin to think of ways that they can take care of their grandchildren. Most commonly the discussion revolves around opening 529 plans and saving for college. Below are five alternatives that are worth considering if you are trying to take care of grandkids:

1. Pay for their first car. Another large expense for kids is getting them their first car. The costs of gas and insurance alone are a burden for parents. This can be a great way to bond with grandkids and help them get their first taste of freedom.
2. Pay for vacations with the grandkids. Raising kids is expensive and there may not be a lot of money left in the parent’s budget for nice vacations. Instead of material goods, create memories that will last their lifetime. Paying for vacations with the grandkids will help them have new experiences, learn new things, and create lasting memories. I will never forget the camping and fishing trips I had with my grandparents. I learned how to bait a hook, drive a boat, and appreciate the mountains because my grandparents did this for me.
3. Buy them their first stock. You can transfer shares to your grandkids, and this can save you on taxes since you don’t have to sell the shares. Investing on behalf of your grandkids is an excellent way to help them start on the right foot financially. This also creates a great teaching opportunity to help your grandkids to develop the right financial habits. Here are the best accounts to open for your grandkid’s future.
4. Help them with giving to charity. Most of our clients would prefer to pass on values than assets to their kids and grandkids. Something we do is work with grandparents and have them make charitable donations each year on behalf of their grandkids. You can have the grandkids choose the charity and even give a little pitch as to why the charity deserves the money. The kids tend to love this and expect some money to go to the local animal shelter!
5. Spend time with them. If you live close to them, kidnap the grandkids for the day. Spoil them and get them hopped up on sugar and send them home! This can provide a needed break for the parents and helps create a strong bond and lasting memories for the grandkids. At the end of the day, kids want time more than anything else (even though they won’t say it).

There are many ways to help provide for and take care of grandchildren. Many of these ideas can be done without having to break the bank or spend too much money. If you have questions or would like to discuss these ideas, please contact us at financialplanning@bfsg.com.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

You may donate money to charitable organizations throughout the year, for no other reason than your heart-felt desire to support causes that you care about. But if philanthropy is important to you, keep in mind that the associated tax breaks could potentially increase your ability to give. You might consider a more strategic approach to charitable giving, possibly as part of your year-end tax planning.

You can generally deduct charitable contributions, which reduces your taxable income, only if you itemize deductions on your federal income tax return. The deduction is currently limited to 60% of your adjusted gross income (AGI) for cash contributions to public charities. Otherwise, limits of 50%, 30%, or 20% of AGI may apply, depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.

If you claim a charitable deduction for a contribution of cash, a check, or other monetary gift, you should maintain a record such as a cancelled check, a bank statement, or a receipt or letter from the charity showing the name of the charitable organization and the date and amount of the contribution. Donations of $250 or more must be substantiated with a contemporaneous written acknowledgment from the charity. Additional requirements apply to noncash contributions.

Here are some strategies that may help enhance your charitable impact as well as your tax savings.

Bunch or time gifts and deductions

The Tax Cuts and Jobs Act roughly doubled the standard deduction beginning in 2018 and indexed it annually for inflation through 2025 ($12,950 for single taxpayers and $25,900 for joint filers in 2022). The result was a dramatic reduction in the number of taxpayers who itemize, now only about one out of ten.¹

If you find that the total of your itemized deductions for 2022 will be slightly below the level of the standard deduction, it could be worthwhile to combine or “bunch” 2022 and 2023 charitable contributions into one year, itemize on your 2022 tax return, and take the standard deduction on 2023 taxes.

Another option is to increase your charitable giving in years when you expect higher annual income. For example, charitable deductions could help offset the tax liability resulting from a business sale, capital gains, stock options, or a Roth IRA conversion.

Utilize a donor-advised fund

Another way to bunch contributions or generate a large charitable deduction for the current year — possibly before you know where you want the money to go — is to open a charitable account called a donor-advised fund (DAF). Donors who itemize deductions on their federal income tax returns can write off DAF contributions in the year they are made, then gift funds later to the charities they want to support. DAF contributions are irrevocable, which means the donor gives the sponsor legal control while retaining advisory privileges with respect to the distribution of funds and the investment of assets. DAFs have fees and expenses that donors giving directly to a charity would not face. (Note: BFSG can assist you with opening a DAF.)

Donate from an IRA

If you are an IRA owner who is 70½ or older, you can give to charity without itemizing and still get a tax break through a qualified charitable distribution (QCD). A QCD must be an otherwise taxable distribution from an IRA (generally, distributions from traditional IRAs are subject to federal income tax). QCDs are excluded from income and won’t affect your tax obligation. Moreover, once you reach age 72, a QCD can satisfy all or part of your required minimum distribution. To make a QCD, you would direct your IRA trustee to issue a check made out to a qualified public charity. You may contribute up to $100,000 from your IRA; if you’re married, your spouse may also contribute up to $100,000 from his or her IRA.

Consider a charitable trust

With a charitable remainder trust (CRT), you can donate money, securities, property, or other assets to the trust and designate a beneficiary — even yourself — to receive the income. Upon your death (or the death of your surviving spouse or designated beneficiary), the assets in the trust go to the charity.

Although the annual trust income is usually taxable, you may qualify for an income tax deduction based on the estimated present value of the remainder interest. Once assets are in the trust, the trustee may be able to sell them and reinvest the proceeds without incurring capital gains taxes.

Assets placed in a charitable lead trust (CLT) pay income to the designated charity until the trust ends (typically, upon your death). The remaining assets would then be returned to your heirs. This strategy might help reduce estate and gift taxes on appreciated assets that go to your heirs.

Both types of trusts are irrevocable, so assets cannot be removed from the trusts once they are donated. Not all charities are able to accept all possible gifts, so it would be prudent to check with your chosen organization in advance. Trusts incur upfront costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of experienced estate planning, legal, and tax professionals before implementing trust strategies.

Strive for effective giving

With so many nonprofit organizations seeking financial support, you may want to direct your money where it can do the most good. Here’s how you can help ensure that your donations are well spent.

Give directly to the charity.

Individuals who call on the phone or knock on your door are likely to be paid fundraisers, which can cut into the organization’s proceeds. Even worse, they could be questionable groups posing as more reputable and well-known charities. When contacted by fundraisers, never give out personal information over the phone or in response to an email you didn’t initiate. There’s no rush — take time to vet the charity before you donate.

Check out the charity’s track record.

There are several well-known “watchdogs” — such as CharityNavigator.org, GuideStar.org, and CharityWatch.org — that rate and review nonprofits. These organizations provide information that can help you evaluate charities and make wise choices. Find out how your gift might be used by looking into the charity’s mission, plans, and financial status. Charities with higher-than-normal administrative costs may not be spending enough on programs and services — or they could be in financial trouble.

Take advantage of “leverage” opportunities.

A wealthy benefactor or corporation may offer to match private donations to a charity during a certain window of time, and some employers have charitable giving programs that match funds donated by employees to qualifying organizations.

Sources:

1.  Internal Revenue Service, 2022

Prepared by Broadridge. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Michael Allbee, CFP®, Senior Portfolio Manager

There are many tax strategies available for business owners, but it requires proper planning throughout the year. Here are some things to consider as we approach the year-end to minimize your tax liability.

Take advantage of the expiring “Tax Cuts and Jobs Act” (TCJA) bonus depreciation

In 2017, the TCJA made it so business owners could deduct 100% of qualifying business property (i.e., new equipment, auto above 6,000 lbs., etc.) in the first year it was put to use. However, this regulation is expiring in 2022, and by 2023, owners will only be able to deduct 80% of qualifying properties within the first year of investment. Then, the percentage drops by 20% each following year. If you need to purchase business-related property, now is the time to do it.

Defer revenue and accelerate expenses (or vice versa)

Many small businesses use the cash method of accounting on their books and tax returns. Under the cash method, a company recognizes income when it’s received and expenses when paid — in other words, when cash actually changes hands. That creates some interesting tax planning strategies.

If you expect to be in a lower tax bracket next year, you might want to defer income to next year, when you’ll pay taxes at a lower rate. The same concept works with expenses. If you’re in a high tax bracket this year, you might want to accelerate expenses in 2022 to reduce your taxable income.

On the other hand, it might make more sense to accelerate income into this year — especially if you think tax rates will increase in the near future. In that case, you might want to send your invoice and try to collect payment from your client in 2022, so more income will be taxed at your current tax rate.

Here’s a handy guide for when to accelerate or defer income and expenses.

Consider the following strategies for executive compensation such as stock options

• Consider the timing of non-qualified stock option (NSO) exercises to fill lower marginal tax brackets.

• Consider qualifying disposition of incentive stock options (ISOs) for potential long-term capital gains treatment.

• Consider disqualifying disposition or tandem exercise of ISOs to avoid the alternative minimum tax (AMT).

Take advantage of the home office deduction (if you qualify)

If you have a home office, you may be eligible to deduct direct and indirect expenses for your home office. What can you deduct if you qualify? Read further here.

Use required minimum distributions (RMDs) to pay estimated taxes

Business owners typically pay quarterly taxes. For those that want to pay as late as possible, instead of quarterly taxes, you can have money withheld from IRA distributions to pay for taxes.

Take full advantage of tax-advantaged retirement accounts

Set-up or contribute to a retirement account. Deductible contributions to a retirement account such as an individual 401(k), SEP-IRA, or SIMPLE IRA can reduce your 2022 taxable income. Contributing to your retirement accounts may help you build retirement savings over time – without impacting your take-home pay as much as you may think.

Make charitable contributions

If you are charitably inclined, you should plan your donations in advance to ensure you maximize the tax benefits. The most common way to make a charitable gift is with cash. This works fine for smaller gifts (think one-time small charitable donations) but for larger charitable gifts there might be better alternatives to consider. Consider gifting appreciated assets or gifting from your IRA (Qualified Charitable Distributions).

If you’d like to learn more about tax planning strategies unique to your business, feel free to Talk With Us!

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

(This is part 4 of a four-part estate planning series)

In the previous posting, we discussed how Mark Zuckerberg of Meta Platforms, Inc. had the same strategies available, that you have available in order to reduce or possibly eliminate your estate tax bill.  In this final part of the estate planning series, we would like to review how gifting assets from your estate can be beneficial to your estate tax bill. If you have concerns regarding how these strategies could affect certain estate and gift planning transactions in which you intend to engage or have previously engaged, please contact your tax advisor and estate planning attorney to further discuss your estate and gift planning inquiries. Our firm is happy to work with you and your estate planning attorney on your unique situation and we can work together to help you achieve your estate planning goals.

During my CFP® studies, one of my professors quipped, “Some people are charitable by choice, but some people get to a certain level of net worth and are charitable by necessity.”  This means that even though some people aren’t charitably inclined, it may be best for their bottom line to be charitable for their own sake and/or their heir’s sake.

The Charitable Remainder Trust (CRT) and the Charitable Lead Trust (CLAT)

I’ve lumped these two strategies together because they generally both gift assets to charity and get assets out of the estate, but one pays the charity in a lump sum and the other pays an annual income stream to the charity over a stated number of years.  When a Charitable Remainder Trust (CRT) is funded, income gets paid to the beneficiary(ies) at least annually for a set number of years and the charity gets the remainder. The Charitable Lead Annuity Trust (CLAT) (sometimes referred to as just a Charitable Lead Trust) is structured where income gets paid to the charity over a stated number of years and afterward, the beneficiary(ies) gets the remainder. Both trusts are irrevocable and serve the purpose of lowering your taxable estate. The CRT allows for an immediate charitable deduction when you fund the trust, while the CLAT allows the estate to take a charitable deduction for the value of the interest paid to charity.

Here are some graphical examples of how a Charitable Remainder Trust and Charitable Lead Annuity Trust work:

Charitable Remainder Trust (CRT):

Charitable Lead Annuity Trust (CLAT)

Superfunding 529 Plans

The 529 plan is an investment account typically used for college planning that allows for tax-free growth and possible tax-free distributions if those distributions are made to pay for qualified educational expenses. One strategy that is available to you is using the annual gift tax exemption of $16,000 per person per beneficiary since (as we discussed in part 1 of this series) this is typically the maximum that you can gift without triggering the gift tax and having your gift tax exclusion reduced. However, we can do one better. You can “superfund” a 529 plan by making five years’ worth of gifts in one year.  Therefore, we can gift $80,000 per person per beneficiary (or if you are a married couple, you can use gift splitting and instead gift $160,000 per beneficiary) all without triggering gift tax and while getting that $160,000 out of the estate. Notice that the definition states: “per beneficiary”. The catch is that you need to live at least 5 years after the gift is made for it to have successfully left your estate. After the first five years are completed, you can do it again if you wish. If one of the 529 plan beneficiaries decides not to go to college, you can always change the beneficiary at any time, or even make a once per year rollover of 529 plan assets to another 529 plan beneficiary’s account.

529 Plan Superfunding Example:  Say you have six grandchildren, and you are benevolent Grandma and Grandpa. You want to superfund their 529 plans, so you then make a gift of $160,000 to each of the six grandchildren to their 529 plan accounts (for a total of $960,000). You wait 5 years and do it again, but unfortunately, passed away 2 years later. The first $960,000 that you gifted will be out of your estate. But the second time you tried to superfund their 529 plans for the second $960,000, it will be counted in your gross estate. In this example, there was still $1,920,000 contributed to the six grandchildren’s 529 plans and $960,000 left in your gross estate – all without triggering any gift tax.

In summary, there are many different estate planning strategies that can help reduce your overall income tax burden. If you would like to revisit any of our prior posts in this estate planning series here are the articles for easy reference:

• What is the Estate and Gift Tax
• Getting Assets out of the Estate
• Getting Future Growth out of the Estate

Furthermore, earlier this year we posted a white paper, “2022 Estate and Gift Tax Planning”, that discussed making gifts to children and grandchildren during 2022 while incurring little or no gift tax.

The bottom line is we are happy and willing to work with you and your estate planning attorney on your unique estate planning goals.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.