June 15, 2018
A Word from the Editor by Kit-Victoria (Weil) Wells – Culture & Communications Officer
Since 1998, clients, friends, and the team at CWC have enjoyed the benefit of our Founder and Chairman’s 35,000-foot world and industry view in the form of his quarterly Report & Commentary: the product of more than 50 years of work experience (and 80 years of life experience). For those of us advised and mentored by him, his knowledge and opinions are pure gold; and for as long as Chris is willing to share these reflections, CWC will gratefully publish them. Chris launched his Report & Commentary after experimenting with rapid and expansive growth, and then reimagining his business back to a one-man-band with a small, devoted support staff. In the ensuing years, CWC has grown, this time slowly and with a hefty dose of forethought. We are now a team of twenty-six diverse and skilled advisory, investment, operational, and administrative professionals. Our bench is sufficiently deep so as to warrant formal information-sharing on a regular basis. We hope you enjoy our inaugural Mid-Quarter Newsletter. As ever, we welcome your comments. Should you have any questions about this, or anything else regarding your financial world, please reach out to any member of the team.
Making Charitable Gifts from Your IRA by Robert Gaan, CFP®
In December 2017, Congress passed a tax reform bill, making the most significant changes to the tax code in over 30 years. It’s time to start thinking about how the new tax law will affect your tax liability for 2018 and beyond.
The new tax code materially changes the standard deduction. For married couples filing jointly, the standard deduction has increased to $24,000. For couples over age 65, the standard deduction is now $26,600. In addition, some itemized deductions have now been capped. Some taxpayers who have itemized their deductions in the past may find, going forward, that they are better off using the standard deduction.
The new tax law does not change the deductibility of charitable donations. However, in order to deduct charitable donations, you will need to itemize. If you elect the standard deduction, you will not be able to claim additional deductions for charitable gifts. If you are age 701⁄2 or older and have an Individual Retirement Account (“IRA”), there is a way to retain the tax benefit of making a charitable gift without itemizing. You can make a Qualified Charitable Distribution (“QCD”) directly from your IRA to an end charity. The amount of any gift will be counted toward your Required Minimum Distribution (“RMD”) for that tax year, but without the corresponding requirement to declare the income. Instead of getting a deduction for making the gift, you avoid the recognition of taxable income. Avoiding income provides a tax benefit whether or not you itemize deductions.
The IRS allows up to $100,000 per year for the QCD strategy, giving ample opportunity to be generous and support worthy causes, and enjoy a tax benefit whether or not you itemize. (Macy Olivas is our dedicated CWC Philanthropy Specialist. She stands ready to assist you with your charitable gifting needs. Please feel free to give her a call.)
Using your IRA (instead of personal assets) as the source of charitable gifts upon your passing may also prove to be advantageous to your heirs. Let’s use two examples for an estate plan that calls for a $5,000 gift to a favorite charity. In example #1, $5,000 in an after-tax account is gifted to a charity, and $5,000 in an IRA is left to an heir. In this example, the heir incurs a tax liability each time he or she withdraws funds from the IRA. Consider example #2, using the opposite approach: $5,000 in the after-tax account is left to the heir and $5,000 in the IRA is gifted to the charity. In example #2, there is no tax liability to either entity because the charity is a non-profit and does not pay taxes. Both the charity and the heir receive the full $5,000 on an after-tax basis.
The IRS has not established a separate distribution code for reporting QCDs. The amount of the distribution that you direct to a charity will be reported as a “Normal Distribution” on the 1099R that you receive for filing your taxes. The IRS assumes that the entire amount listed on your 1099R is taxable income unless you tell them otherwise. For that reason, it is very important that you tell your tax preparer that you made a QCD. If you do not alert your preparer about the QCD, you risk having the entire amount of the gift reported as taxable income on your return.
If you have an IRA with CWC, making a QCD is simple. Just give us a call with the name of the charity and the amount of the gift. Our Client Service Team will prepare a distribution form and send it to you for signature. Once you sign and return the form, they will coordinate with Fidelity to make the gift. Please give us a call if you have any questions regarding making charitable gifts from your IRA.
Should my Trust be the Beneficiary of my IRA? by Tyler Hewes, CFP®
Recently we’ve had several clients asking for recommendations on whom to name as the beneficiary of their IRAs (or other retirement accounts). Should they name their spouse, their children, or skip naming any individuals and name their living/family trust instead? Though each client’s circumstances are unique, we generally recommend beneficiary strategies that give the heirs the greatest ability to receive their inheritance in a tax-efficient manner.
The most meaningful benefit of a retirement plan account comes from its tax-deferred status. No taxes are due on dividends, interest, or capital gains while the funds remain in the account. Without the burden of taxes, retirement accounts have the potential to grow and perform more efficiently than their after-tax counterparts. But tax-deferred status doesn’t last forever. At age 701⁄2, account holders must begin taking distributions from the account in annual amounts based on the account holder’s age. This ability to “stretch out” distributions over one’s life expectancy is a powerful tool, and one of the few true tax shelters available to most people.
Like the original holder of the retirement account, beneficiaries who receive the account when the owner passes can also take advantage of “stretching out” payments based upon his or her own life expectancy. However, the original account holder must be thoughtful as to how beneficiaries are named for a retirement account. For a beneficiary to “stretch out” payments from a retirement account, the beneficiary must first have an identifiable life expectancy. According to IRS guidelines, individuals have life expectancies, but other entities (such as living trusts) do not. Naming a trust as the beneficiary of a retirement plan account may interfere with the ability of beneficiaries to stretch out payments from the inherited account. If beneficiaries are not able to draw out the funds based on their life-expectancy, they must take distribution of the funds over 5-years or in a lump sum. Both scenarios potentially could require heirs to pay taxes sooner than if they were able to “stretch out” payments over their lifetimes.
Unless there are extraordinary circumstances at play, we generally recommend married couples name their spouse as the primary beneficiary of their IRA accounts. Spouses are able to treat an inherited IRA as if they had always owned it themselves. They can even roll over the inherited retirement account into their own retirement account. A spouse is the only beneficiary afforded this treatment.
When naming children, grandchildren, or any individual other than a spouse, claiming strategies will be determined by a few factors: the owner’s age at passing, the beneficiary’s age when inheriting, and whether the beneficiary was named directly or named as a beneficiary of the trust. Consider the following:
If an IRA holder names a living trust as the beneficiary of his/her IRA and the trust names multiple beneficiaries, the IRA must be distributed over the life-expectancy of the oldest named beneficiary, rather than calculated for each beneficiary. If an IRA owner names both his 70-year old brother and his 18-year old granddaughter as equal beneficiaries of the trust, the granddaughter would have to draw out funds from her portion of the IRA based on the life expectancy of her uncle, rather than her own, considerably longer life expectancy. If each of the beneficiaries is named in the IRA beneficiary form (rather than the trust), they would each be able to take out their portion of the IRA based on their individual life expectancies.
We have heard of instances where retirement plan holders neglect to name a beneficiary on their account paperwork. In that instance, the beneficiary will be the account holder’s estate. Not only could this affect the heirs’ ability to stretch out distribution payments, but the heirs may also have to go through probate. This will add both time and expense to the process.
Trusts, in many instances, pay income taxes at a higher rate than individuals. (This only applies to income that is accumulated within the trust.) If the trustee does not manage the trust in a tax efficient manner, a higher tax cost could be imposed on the beneficiaries compared with the tax liability if they filed as individuals.
In our experience, individually named IRA beneficiaries are generally best able to withdraw funds in the most tax efficient manner. For this reason (as well as the ease of transferability to heirs), we generally recommend naming individuals as the beneficiaries of IRAs. Circumstances can be nuanced, and you should consult a tax or estate planning professionals. If you would like to review your beneficiary arrangements and how all of this might apply to you, please give us a call.
Information contained in this publication is obtained from sources believed to be reliable; however, no representation as to accuracy and completeness of this information/data can be provided. Data used may be based on historic returns/performance. There can be no assurance that future returns/performance will be comparable. Neither the information, nor any opinion expressed herein, constitutes a solicitation by us for the purchase or sale of any securities or commodities. This publication and any recommendation contained herein speak only as to the date hereof. Christopher Weil & Company, Inc., with its employees and/or affiliates, may own positions in these securities.
All investments involve risk, including the risk of losing principal. It is vitally important that you fully understand the risks of trading and investing. All securities trading is speculative in nature and involves substantial risk of loss. Further, the investment return and principal value of an investment will fluctuate; Upon liquidation, a security may be worth more or less than the original cost. Past results do not guarantee future performance.
Investment in mutual funds is also subject to market risk, investment style risk, investment adviser risk, market sector risk, equity securities risk, and portfolio turnover risks. More information about these risks and other risks can be found in the funds’ prospectus. You may obtain a prospectus for CWC's mutual funds by calling us toll-free at 800.355.9345 or visiting www.cweil.com. The prospectus should be read carefully before investing. CWC's mutual funds are distributed by Rafferty Capital Markets, LLC—Garden City, NY 11530. Nothing herein should be construed as legal or tax advice. You should consult an attorney or tax professional regarding your specific legal or tax situation. Christopher Weil & Company, Inc. may be contacted at 800.355.9345 or info@cweil.com.
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