Estate Planning Bits

Charitable IRAs – A great temporary estate planning tool

In early August of 2006, a law was finally signed called the Pension Protection Act of 2006. Within this law, there is a provision that allows individuals over the age of 70 ½ to make charitable gifts through their IRAs. Until this time, if money was withdrawn from an IRA, it was taxable income to the IRA owner, although the person making the gift would also obtain an itemized charitable deduction on their income taxes for making the gift.

Under the new law, a person may designate a trustee to make a transfer to any number of organizations they support without incurring any taxable income on the amount, up to $100,000.00. This is allowable in both 2006 and 2007.

Although it has not yet been determined, we hope that the IRS will consider that this withdrawal also qualifies to meet a person’s minimum distribution requirements for the year. In this case, the owner of the IRA will not have to also make a withdrawal that will be taxable to them in addition to this amount withdrawn and given to charity.

As with all laws, there are always technical requirements, and several are listed as follows:

• The donor must be at least 70 ½ and own a traditional or Roth IRA. Please note that 401K plans and other types of plans are not permissible, although a person may roll over their otherwise qualified plan into an IRA to achieve this withdrawal made.
• Only the IRA may transfer the amount to the organization. If the IRA owner takes the withdrawal himself, and then makes a charitable contribution, this will be taxable income to the donor in the year the withdrawal is made.
• It should be noted that no charitable deduction will be allowed, although the gift amount will also not be taxable income.
• The amount is limited to 2006 and 2007, and the IRA gift may not exceed $100,000.00. Transfers are not permitted to donor-advised funds or supporting organizations.
• These gifts may not be made to a Charitable Remainder Trust or other type of split interest gift, but must be an outright distribution to the qualifying charity.
  

As this law is in effect for only two years, individuals should consider reviewing the pledges they have made in the past, as well as their minimum distributions, and any effect these contributions may have in reducing their adjusted gross income. This could have a significant impact in the personal exemption and itemized deductions for those taxpayers who are in high income tax brackets.

By: Hyman G. Darling, Esquire

Reverse Mortgages – potentially great for seniors

Today, many older Americans are discovering reverse mortgages as a means to greater financial security. Reverse mortgages can be used for a variety of purposes including paying off a current mortgage, supplementing retirement income, or paying for healthcare expenses.

Unlike a regular mortgage, where monthly payments are made to a lender, a reverse mortgage allows eligible homeowners to receive cash in exchange for equity in their home. The amount that you can borrow depends upon several factors, including your age, the current interest rate, other loan fees, and the value of your home. Generally, an older applicant will receive the benefit of a lower interest rate than a younger applicant, and the amount that may be borrowed is based upon the value of the home and the geographical location in which the home is situated.

A reverse mortgage may eliminate the need to sell your home to pay ongoing monthly bills, as the money will not need to be paid back as long as you live in your home. Instead, a reverse mortgage is repaid upon death, sale of your home, or when the home is no longer your primary residence. Many reverse mortgages have no income restrictions, and the proceeds are generally tax-free.

In order to qualify for a reverse mortgage, you must be at least 62 years of age, live in the home to be mortgaged, and own the home outright or have a mortgage balance that is low enough that it can be paid off at the closing of the reverse mortgage.

By: Gina M. Barry, Esquire

United States Savings Bonds and their impact on estate planning

A significant percentage of the US population owns at least one United States savings bond. Many of the older population have retained bonds that were purchased during the second World War. These, commonly known as war bonds, were used to help finance the war itself.

On birthdays, births, anniversaries, weddings and other occasions, it was common for an older person to buy a younger person a savings bond. Many of these bonds have merely been put in a drawer or in a safe deposit box and probably forgotten about.

One of the problems with savings bonds is that it is difficult to have them reissued if they are lost. It will take an application to the United States Department of Public Debt in order to file the necessary documentation to have a bond replaced.

Based on the year the bond was purchased, the interest rate will be calculated, as well as the length of maturity of the bond. The maturity date of bonds is limited, and some bonds stop paying interest after 30 years, and some after 40 years. While savings bonds do not have any income tax payable to the state, in most cases however, they are Federally tax-deferred until interest is paid at the maturity date or the cashing in of the bond. However, the accumulation of the interest is payable in a lump sum.

There is an alternative to paying the taxes in one lump sum, and that is to pay the taxes due on an annual accrual basis. In this manner, it may be advantageous for a child to report a portion of the interest every year on his or her tax return. Then when the bond matures, there is no interest to be taxed except the final year. However, this does require a significant amount of recordkeeping, and probably less than one percent of all bonds are treated in this manner.

Savings bonds may be held in various names, singly, jointly or payable on death. It is important to consider how the bonds should be held, but in the event that any co-owner dies, the bond’s ownership normally reverts to the surviving co-owner. At that time, with some restrictions, the bond may be transferred to a new co-owner or possibly even a trust in order to avoid probate on the death of the second co-owner.

Upon death, when cashing in bonds, all of the interest is payable at the relative high fiduciary income tax rate. An alternative is to have all interest accrued through the date of death reported on the decedent’s final income tax return. Interest earned after the date of death is reportable on IRS Form 1041, which is the fiduciary income tax return. Additional forms must be filed with both the federal personal return and estate income tax return.

By: Hyman G. Darling, Esquire

Probate Estate vs. Non-Probate Estate v. Gross Estate - Huh?

Most everyone realizes that when they die, their estate will have to be sorted out. But many people don’t understand which assets in their estate will require probate and which won’t.

The term “probate estate” does not refer to all of a decedent’s estate. Rather, the probate estate consists of assets held in the decedent’s name alone that do not have a beneficiary designated. For example, a house or bank accounts held in the decedent’s name only would need to be probated.

Non-probate assets include assets owned jointly or that have a named beneficiary, such as in the case of a life insurance policy. These assets will pass in accordance with the joint ownership or beneficiary designation without the need for probate.

These forms of ownership are called “Will substitutes” because they pass assets as a Will would, but without the need for a Will. In fact, a Will does not speak to non-probate assets – it only controls the disposition of probate assets. As such, when planning your estate, it is important to determine whether your assets are held jointly or have beneficiaries designated because these assets will not pass in accordance with your Will. In addition, the wishes you express in your Will may be inadvertently undermined by “Will substitutes.”

A decedent’s gross estate includes all of decedent’s real and personal property, regardless of whether it is a probate asset. The purpose of calculating a gross estate is to determine whether the decedent’s estate will have any estate tax liability. While no one likes paying taxes, the good news is that in 2006, Massachusetts estates of less than 1 million dollars will not owe any state estate tax, and estates of less than 2 million dollars will not owe any federal estate tax.

By: Gina M. Barry, Esquire