With rising taxes and inflation likely on the horizon, what are you doing to adjust your wealth management plan? CIG Capital Advisors’ managing principal Osman Minkara outlines a three-bucket strategy to help you prepare in MarketWatch.
As we enter the holiday season, plans for charitable giving are moving to the forefront. This year, the pandemic has reduced giving opportunities while simultaneously increasing need, causing donors to carefully review philanthropic options that include tax advantages. CIG Capital Advisors’ Senior Wealth Managers Eldin Foco and Martin Swiecki outline two strategies to consider in MarketWatch:
How to cut tax bills with smart charitable giving strategies
As we enter the holiday season, many naturally turn their thoughts to charitable giving. This year —clearly a highly unusual one in so many ways — there is even more need to carefully review philanthropic options that also have tax advantages. Click here to read more.
The combination of a low key interest rate and a large influx of cash some physician-owners may experience, after, for instance, selling his or her private practice, could make a CLAT (Charitable Lead Annuity Trust) a desirable vehicle for tax- and legacy-planning purposes.
An illustrative case* involves a hypothetical physician-owner selling his practice and sheltering $500,000 of the proceeds in a CLAT. You can see, in the flow chart below, that the one-time contribution of $500,000 to the CLAT allows for an annual gift to the charity of his choice of $26,117 over the next 20 years, and then an eventual tax-free gift at the end of those 20 years of $864,158 to the beneficiary of his choice:
This is, of course, a hypothetical example not indicative of any particular client, with a 7% annualized growth rate assumption over 20 years. What makes this strategy relative is that it relies on a favorable IRS 7520 rate to take advantage of an arbitrage opportunity. Right now, the IRS 7520 rate is extremely low, but those rates do fluctuate, as you can see in the table below:
An IRS 7520 interest rate of 3.6% vs. 0.42% can impact the trust’s remainder value by almost $400,000 ($479,518 using December 2018’s rate vs. $864,158 using August 2020’s rate), as in our case study of the $500,000 CLAT.
Please contact our wealth management team in order to properly evaluate if this strategy is right for you and begin the financial planning process. Please speak to your tax professional to understand the cost and tax implications of your particular giving situation.
*All case studies and references are hypothetical examples developed by the CIG Capital Advisors team and the values shown are not intended to represent those of a client or known person. Assumes annualized growth rate of 7%.
Policies around tax and some types of debt have changed during the pandemic, and some individuals may be able to take advantage of the new circumstances:
Lower Interest Rates: Interest rates are lower than they have been in several years, allowing some borrowers to refinance or take out a new loan or mortgage. If you currently have a mortgage or investment properties, restructuring the debt on these properties could yield large savings.
Charitable Deductions: Lower IRS 7520 rates for charitable trusts means that when gifting assets (cash or securities) to a Grantor Charitable Lead Annuity Trust, the IRS requires you to gift all the assets you contributed to the trust plus the interest. The interest rate used is the IRS 7520 rate. This rate is fixed for the life of the trust and sets the amount that needs to be distributed every year for the life of the trust. The difference between the fixed distribution and the growth within the trust will be passed to the beneficiary of the trust. The lower the 7520 rate, the greater potential for growth. For a CLAT with an initial value of $200,000, the below 7520 rates would yield the corresponding tax-free transfers to the remainder beneficiary:
Charitable Lead Annuity Trust (CLAT) is a plausible option to offset tax liabilities, gift annually, and set aside tax-free assets for a designated beneficiary in the future.
of cash/securities to trust in first year
deduction for gift to trust offsets…
- Increased level of income
- Realized Capital Gains
gift for a set term from the trust to…
- Public Charity,
- Family foundation, or
- Donor Advised Fund
- Remaining balance at end of term is transferred to Remainder Beneficiary as a tax-free asset
- Immediate deduction for gift to trust offsets…
Waiver for RMD in 2020: In March, required minimum distributions for retirement accounts were waived for 2020. An example of how a hypothetical person over age 70 could save on taxes by not taking RMD in 2020:
Increased 401k/403b Loan Limits: Previously, penalty-free early withdrawals was the lesser of $50,000 or 50% of vested balance. Now, penalties don’t kick in until the lesser of $100,000 or 100% of vested balance, allowing savers to borrow more from their retirement accounts without penalty.
Opportunity for Roth Conversion: In a down market, with depressed values of pre-tax IRA accounts, it could be a good time to convert the account to a Roth IRA, where the funds can grow tax-free:
This allows the saver to pay taxes on the lower account value this year, and once converted the money can grow, hypothetically, tax-free:
To take advantage of these or any other tax strategies, please schedule an intitial complimentary consultation at www.calendly.com/mswieckicig.
Charitable trusts and the difference between a charitable lead trust and a charitable remainder trust
For many of us, philanthropy can provide great personal satisfaction. However, when properly planned for, charitable giving can provide financial benefits both today (as an income tax deduction and/or capital gains tax shelter) and in the future (when the amount of taxes your estate may owe when you die can be reduced).
There are many ways to give to charity. A common vehicle for many families is a charitable trust, where a charity is named as the sole beneficiary. You may name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust.
What is a charitable lead trust?
A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members, or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, a charitable lead trust allows you to keep an asset in the family and still enjoy some tax benefits.
SOURCE: Broadridge Investor Communication Solutions, Inc. Copyright 2017
What is a charitable remainder trust?
A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members, or other heirs for a period of years, then the principal goes to your favorite charity. A charitable remainder trust can be beneficial because it provides you with a stream of current income — a desirable feature if there won’t be enough income from other sources.
SOURCE: Broadridge Investor Communication Solutions, Inc. Copyright 2017
Note: There are expenses and fees associated with the creation of a trust. Please speak to your financial and/or tax professional to understand the cost and tax implications of your particular giving situation.