Episode 5: Certified Financial Planner Jeb Jarrell discusses year-end tax planning. There are some changes ahead, so Jeb will offer his perspective on how to determine if those changes will affect you and what you should plan for if they do. He’ll address estate planning, tax planning and charitable giving. The 3 topics often go together.
Estate planning is often closely related to tax planning. You typically have three options. You can give your estate to your heirs. You can give to charity, or you can give it to the government. Effective tax planning helps to ensure you give more to the first 2 groups and less to the third.
Significant Change for Estate Planning
There is a proposal to dramatically reduce the estate tax exemption level. Currently, federal estate taxes become an issue if your assets are $25,000,000 or more. If you have a family business or farm, you can quickly hit that level. The proposal is to reduce that level to $12,000,000 per couple (the pre-2017 level).
People who are getting closer to retirement may still have time for their assets to appreciate, which could put them at risk. You need to have a plan to protect your estate. This also goes for younger people who are generating wealth. You have to look ahead.
Trusts are good tools for protecting assets. They legally remove the assets from your estate. There are various types of trusts you may consider, depending upon your specific situation.
A trust is a standalone, legal entity. There are irrevocable and revocable trusts. The revocable trust doesn’t typically provide tax advantages, because you can revoke the distribution of assets to and within the trust. An irrevocable trust makes it much more difficult to pull back the assets placed in the trust. Because of this factor, there may be tax advantages.
Jeb recommends looking as a family, as a couple and as a person to your long-term goal for your wealth. This perspective can help you to choose the proper tools, such as the specific type of trust to be created and funded. In Episode 2, Jeb spent time explaining some of the goals you should be establishing for your future and your wealth.
Charitable Giving via a Charitable Lead Trust
There are various ways to continue your charitable giving, even after you’ve passed. You can set up your estate plan to establish how funds could be given to a charity either all at once or over time. A charitable lead trust is can fund a charity over time. This type of trust is irrevocable. It avoids capital gains taxes and you get a tax deduction when you fund it. This may also be a good way to deal with passing down a family business.
This is an end of year strategy, given the relatively high standard deduction already available. A donor advised fund is a bank account enabling you to control your donations to various entities. You receive a tax deduction upon depositing assets into the fund. This may also help to avoid capital gains.
Qualified Charitable Distribution (QCD)
Another year-end tax strategy deals with your required minimum distribution (RMD). You can use your IRA to pay charitable donations directly to a charity. The key is to avoid depositing the funds into your own account first. This method counts toward your annual RMD, but doesn’t count on your taxes. You can take the standard deduction and still use the QCD on top of it.
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