Category Archives: Estate Planning

June 14, 2018

An Intriguing Exit Strategy for Today’s Business Owner

Written by Andrew Hunt

One of the more difficult challenges facing a business owner is the formulation of a viable and economically beneficial exit strategy at retirement. Typically, the main goals of such an exit strategy are: 1) to identify a qualified buyer; and 2) to receive fair compensation for the business, which would, in turn, translate into a desirable retirement income. One obstacle in realizing these goals is the substantial capital gain that is often attributable to the sale of company stock. For some owners, one method of finding a suitable buyer, and at least delaying payment of capital gains taxes, is to sell stock back to the company in the form of an employee stock ownership plan (ESOP). For others, the realization of a significant capital gain proves to be a major psychological stumbling block that delays action, and results in maintaining stock ownership much longer than desired or initially anticipated. In either case, the charitable remainder trust (CRT) can be a practical mechanism for eliminating the capital gains tax issue altogether, while assisting the business owner in meeting his or her goals.

The CRT is a highly effective financial planning tool that can: 1) remove assets from a donor’s estate; 2) avoid current capital gain on the transfer of appreciated assets; 3) provide the donor with a potentially significant charitable deduction; 4) benefit a donor’s charity of choice; and 5) provide the trust beneficiary (usually the donor) with a steady income stream for life or over a term of years (not to exceed 20 years). The minimum income payout from a CRT is 5%, while the maximum is 50% (the payout rate must also satisfy rules under the Taxpayer Relief Act of 1997). Typically, the payout rate is somewhere between 5% and 12%. In addition, the charitable deduction is based on the amount of time the charity must wait to receive payment, the percentage rate payable to non-charitable beneficiaries, and the current rate of return as determined by the applicable federal rate (i.e., a monthly rate based on the interest rate the federal government pays on borrowed funds).

An owner who has already sold stock to an ESOP, as well as an owner who has yet to do so, can equally benefit from using a CRT. However, an owner who has already sold all, or a portion, of his or her stock to an ESOP will face additional technical requirements that merit closer examination.

Understanding ESOPs

ESOPs are defined contribution retirement plans and are subject to the same guidelines imposed on 401(k) and profit-sharing plans. However, ESOPs are designed to invest primarily in the stock of the business in which the employees work. As such, an ESOP gives all employees a vested interest in the profitability of the company—as the company’s fortunes increase, so does the value of each employee-shareholder’s stock.

An ESOP basically functions as a private marketplace, enabling retiring employees to recognize a retirement benefit by selling their shares back to the ESOP. For example, an ESOP is then used to buy out the interest of a retiring owner, providing an alternative to selling the business (or an owner’s share of the business) to an outsider. Frequently, the ESOP borrows from a commercial lender and uses the funds to purchase the shares of the withdrawing shareholder. The corporation is entitled to an income tax deduction for contributions to the ESOP, which are then used to pay both principal and interest payment on the loan.

Another significant benefit is that gain on the sale can be deferred under Internal Revenue Code Section 1042 if the ESOP holds at least 30% of the retiring owner’s company stock after the sale and the seller reinvests the proceeds into qualified replacement property (generally defined as securities of U.S. domestic operating corporations). This so-called “Section 1042 rollover” must take place within a “qualified period” (beginning three months prior to the date of the sale and ending twelve months after the sale), and the ESOP must have no publicly-traded stock outstanding. However, nonrecognition of gain is only allowed if the owner-shareholder has held the shares for at least three years prior to the sale to the ESOP.

While a retiring owner can liquidate his or her interest in the business on a tax-advantaged basis using a Section 1042 transaction, he or she should be aware of some limitations. From an investment perspective, the definition of qualified replacement property is somewhat restrictive. —it does not include mutual funds, real estate investment trusts (REITs), or U.S. government and municipal bonds. In addition, the deferral of taxation ends once the qualified replacement property is sold. Thus, active management of a qualified replacement property portfolio is not possible without incurring capital gains taxes. When these factors are taken into consideration, some estate planners have come to view qualified replacement property assets as ideal for funding a CRT. (Note: There may be a 10% excise tax for the plan sponsor if the ESOP does not hold on to the newly acquired stock for at least three years.)

Timing of the Stock Transaction

While the ESOP does serve a critical purpose (by creating a marketplace for the owner’s company stock), it is not necessary to sell stock to an ESOP prior to funding a CRT. Thus, an owner who has yet to take action may be better served to transfer the stock directly to the CRT, and then allow the CRT to sell the stock to the ESOP (or other qualified buyer). By doing so, the tax reporting and technical requirements for qualified replacement property under Section 1042 become a nonissue. Nevertheless, an owner who has already sold all, or a portion, of his or her stock to an ESOP may enjoy the same benefits of a CRT—the only difference being the reporting and technical requirements under Section 1042.

Since the CRT is a tax-exempt entity, it can sell the funding assets with reduced capital gains consequences. The CRT can then reinvest the proceeds without restrictions—with the ultimate goal of the donor (in this case, the selling shareholder) being the recipient of a steady income stream from the trust assets (in actuality, a portion of the income payout may be a capital gain distribution).

Moreover, there may be additional flexibility if the CRT is designed as a unitrust, as opposed to an annuity trust, because a unitrust can accept additional contributions while an annuity trust cannot. Since there is often a desire to sell company stock to an ESOP (or other buyer) in stages, the opportunity exists for funding the unitrust in stages.

A Viable Combination

An owner planning for withdrawal from his or her business (such as retirement) faces a variety of challenges that can have an impact on both the business and the owner’s estate. While an ESOP assures ownership will remain within the company, the CRT/ESOP combination can be a powerful business liquidation/estate maximization strategy. However, it is important for a business owner to recognize that how assets are transferred to the CRT (either in the form of qualified replacement property or actual company stock), generally, will have little impact on the effectiveness of the CRT. Thus, individual circumstances often play a greater role in dictating the timing of the sale of stock to an ESOP. Regardless of the situation, as is the case with all advanced planning issues, a thorough review of a business owner’s long-term goals and objectives is essential to determine an appropriate course of action.

March 21, 2018

You, Your Financial Well-Being, and the Federal Reserve

Written by Andrew Hunt

After nearly a decade of leaving the federal funds rate at zero percent, the time finally came on December 16, 2015: The U.S. Federal Reserve (the Fed) raised the federal funds rate by 0.25 percent. Because it was the first rate increase since June 2006, it was reported as “a historic moment.” Since then, the Fed has made several modest increases. You can find the most recent rate changes reported here.

But what do these rate changes mean to your financial well-being? Is there anything you should “do” to your investment portfolio when they occur? As is nearly always the case for economic events over which we have no control, we typically recommend that you remain informed – but that you act only on factors you can expect to manage within your personal investing.

In that context, let’s take a moment to share some insights about the Federal Reserve funds rate.

What Is the Federal Reserve?

As described on its consumer education site, the Federal Reserve is the central bank of the U.S. It was created by Congress as an independent government agency in 1913 “to provide the nation with a safer, more flexible, and more stable monetary and financial system.” Jerome Powell is its current board of governors’ chair. Before Powell, the chairs were Janet Yellen, Ben Bernanke and Alan Greenspan.

Powell and his board of governors are based in Washington, DC. They also oversee 12 regional reserve branches across the country and are tasked with three main roles:

  1. Monetary Policy – Promoting “maximum employment, stable prices and moderate long-term interest rates”
  2. Supervision and Regulation – Overseeing U.S. banks and gathering information to understand financial industry trends
  3. Financial Services – Serving as a bank for U.S. banks as well as for the country’s monetary operations – issuing currency, managing the government’s bank accounts, borrowing money in the form of U.S. Savings bonds and more

What Is Going On?

While you wouldn’t want to run a country without all three of these roles in place, monetary policy is where much of the headline-grabbing action is often found. The Fed continuously grapples with when, by how much, and how often it should raise the federal funds rate.

The Federal Reserve sets monetary policy through its Federal Open Market Committee (FOMC), which includes the Fed’s board members and a rotating representation of Reserve Bank presidents.

The FOMC holds eight regularly scheduled annual meetings to consider what actions to take (if any). In the days before those meetings, the financial press often reports on expected outcomes as if they were a done deal, and markets often respond accordingly. In reality, until those meetings have taken place, nobody knows what their outcome will be.

Still, while the FOMC has a number of ways to seek balance among the competing demands of the economy, raising or lowering the federal funds rate has long been one of its more powerful management tools. So, it’s no wonder the question becomes the media’s central focus whenever the FOMC is set to meet. It’s also no wonder that investors are bombarded with the usual volume of conflicting coverage on what is and is not at stake, and what may or may not come to pass. Depending on who you heed, higher federal funds rates could be anything from a panacea, to a global scourge, to a non-event in the markets.

What Does All This Mean to You and Your Money?

First, it helps to understand that there is an intricate interplay between developed nations’ monetary policies, global interest rates and the markets in general. Anyone who claims to know exactly what will happen in one arena when we pull a lever in another had best be able to present a functioning crystal ball if he or she is to be believed.

To cite one example, consider this March 2018 column by Wall Street Journal columnist Jason Zweig, in which he chastises various brokers for their still-anemic sweep account yields despite rising interest rates: “The Federal Reserve has driven short-term interest rates up a full percentage point since late 2016; one-month Treasury bills were yielding 1.6% this week. But you’d never know any of that from looking at the returns on the cash in your brokerage account.”

This illustration also demonstrates that the only interest rate the Fed has direct control over is the U.S. federal funds rate, which is the rate at which depository institutions (mostly banks), lend and borrow overnight funds with one another.

The resulting cash flow is the grease that turns the wheels of the country’s federal banking system, so it’s an important factor. But as Zweig illustrates, that doesn’t mean that there is a consistent cause-and-effect relationship between federal funds rate movements and other yields-based financial instruments such as U.S. or international fixed income funds, interest-earning accounts, mortgages, credit cards and so on.

A separate Wall Street Journal article substantiates: “Think all rates would tick a little higher as the Fed tightens? That isn’t how it works. … The impacts will be uneven. Some borrowing costs are likely to rise closely in sync with short-term rates, but others won’t.”

Why is this so? It’s partly the result of those multiple global factors at play, with the Fed’s actions representing only one among many others. A post by “The Grumpy Economist” John Cochrane even suggests that the Fed’s actions may be one of the less-significant factors involved: “Lots of deposits (saving) and a dearth of demand for investment (borrowing) drives (real) interest rates down, and there is not a whole lot the Fed can do about that. Except to see the parade going by, grab a flag, jump in front and pretend to be in charge.”

What Should You Do?  

Whenever you’re wondering how best to respond to a shifting landscape such as that wrought by rising (or falling) interest rates and any related repercussions, begin by asking yourself: What can I do about it?

Unless you are Fed chair Jerome Powell, there is probably nothing you can do to personally influence what the Feds are going to decide about ongoing interest rates, or how the global markets are going to respond to the news. But there is plenty you can do to help or harm your own wealth interests.

First, if you already have a solid financial plan in place, we do not recommend abandoning it in rash reaction to unfolding news. If, on the other hand, you do not yet have a well-built plan and portfolio to guide the way, what are you waiting for? Personalized financial planning is a good idea in all environments.

Next, recognize that rising or falling interest rates can impact many facets of your wealth: saving, investing, spending and debt. A conversation with a wealth manager is one way you can position yourself to make the most of multi-factored influences in unfolding economic news.

Together and through varied interest rate climates, we can help put these and many other worldwide events into the context they deserve, so you can make informed judgments about what they mean to your own interests. The goal is to establish practical ways to manage your debt; wise ways to save and invest; and sensible ways to spend, before and in retirement.

These are the factors that matter the most in your life, and over which you can exercise the most control – for better or for worse. Give us a call today if we can help make things better for you.

September 25, 2017

Divorce Division of Assets: QDRO Part 1

Written by Jason Hiley

One of the toughest realities to prepare for after a divorce—and especially after a difficult one—is the division of financial assets. Wealth accumulated throughout a life’s hard work could be severely and negatively impacted in a matter of months, creating problems that could continue for years if the proper details are not attended to during the divorce proceedings. That is why today we will be discussing one of the most important acronyms to pay attention to during a divorce settlement: QDRO.

What Is a QDRO?

A qualified domestic relations order (QDRO) is a court order, judgment, or decree that allows a qualified retirement plan, such as a 401(k), 403(b), or pension, to pay benefits to the former spouse (or other dependent individual) in addition to the individual who controls and contributes to the plan. Without a QDRO, the alternate payee (the person assigned to share these types of benefits) is not entitled to receive any monies the plan will pay out. A QDRO agreement does not extend to include outside workplace retirement accounts such as savings/checking accounts, houses, etc.

Steps to Acquire a QDRO

Approval of a QDRO, which is finalized when the divorce itself is finalized, is generally granted before the divorce judgment is handed down. Any competent divorce attorney will know the steps needed to obtain a QDRO during the negotiation phase of a divorce.

But let’s say that a QDRO was not drafted for approval by your spouse, the retirement plan itself, or the judge during the proceedings for your divorce. This does not mean that you are out of luck. There is still a chance that you can obtain a QDRO and receive a fair portion of your now-ex-spouse’s retirement account. Here is what you need to do in order to make that happen:

  1. Sit down with an attorney who specializes in QDROs. Generally speaking, negotiating a QDRO during the divorce proceedings makes the division of assets easier. Once that time has passed, however, meeting with a lawyer to discuss how to obtain a QDRO will still ensure that you have the best chance to receive a post-decree settlement. The American Academy of Matrimonial Lawyers is one resource you could consider using to locate an attorney who specializes in family law which includes QDROs. It is important to lay out a clear legal plan before the proceedings.
  2. Send the resulting QDRO draft to the retirement/pension plan administrator. This is the most important step in the QDRO process. If the retirement/pension plan rejects your draft, you’ve wasted valuable time, which could prove costly. Oftentimes, the plan will return a copy of the draft with suggestions for changes based on the plan’s own rules and regulations. Consulting with an attorney with expertise in the QDRO process might enable you to circumvent some of these issues.
  3. Get the needed signatures from a judge and all affected parties. Once the retirement/pension plan has given its approval, it is important to obtain signatures from a divorce judge and all interested parties. The sooner this step is completed, the closer you will be to receiving your share of the benefits.
  4. Send a copy to the pension/retirement plan. Send the pension/retirement plan administrator a copy of the QDRO for approval. This will ensure that the benefits are paid out.

The steps listed above might take only a few months to complete, if everything happens quickly. Any delay, however, will mean more time before you receive the benefits, assuming all is in order. If your former spouse remarries or dies, it will become almost impossible to get any portion of the retirement account from the employer.

Divorce is one of the most difficult events a person may have to go through in life, and the aftermath of a divorce can be harder to handle if the marital assets were not divided well. A QDRO could be one of the most important financial documents obtained during this emotionally charged period of time. Seeking advice from a team of legal and financial experts will do wonders for your financial well-being and give you peace of mind.

August 1, 2017

A Trust Primer

Written by Jason Hiley

Many of us may perceive trusts as a complex subject better left to our attorney. However, a trust is simply a contract initiated by a grantor who agrees to transfer assets to a beneficiary, who then receives the assets as stipulated in the trust contract. A trustee, who may also be the grantor, manages the trust assets and ensures the stipulated terms of the trust are faithfully executed.

A trust is designed to help individuals manage a variety of family and tax-related estate planning concerns. Here are a few ways in which trusts can be used:

Revocable Living Trust. A revocable living trust is an estate planning trust that deeds property to an heir but allows the grantor to retain control over the property during his or her lifetime. Upon the grantor’s death, the property passes to the beneficiary, avoiding probate, which is the judicial process wherein a court appoints an executor to carry out the provisions of a will. While the revocable living trust does not provide tax savings for the grantor during his or her lifetime, the trust becomes ‘irrevocable’ upon death, and the beneficiary is then entitled to tax advantages.

Irrevocable Living Trust. An irrevocable living trust is an estate planning trust wherein the grantor does not retain control of assets or property. Through the transfer of assets or property into the trust, the grantor may be eligible for certain tax savings. An irrevocable living trust may also be used to avoid probate.

Irrevocable Life Insurance Trust (ILIT). An irrevocable life insurance trust is designed to provide tax savings through the ownership of a life insurance policy. Assets in the trust are generally not considered part of the grantor’s estate. ILITs may be funded or unfunded. With a funded ILIT, income-generating assets are transferred into the trust, and the generated income is then used to pay the premiums on the life insurance policy. With an unfunded ILIT, the grantor makes yearly gifts to the trust, and this money is then used to pay the premiums on the life insurance policy.

Credit Shelter Trust: A credit shelter trust, also called a bypass trust, is an estate planning tool used to protect assets from successive estate taxes. While current law permits an unlimited amount of assets and property to pass to a surviving spouse without being subject to Federal estate taxes, children and other beneficiaries must pay taxes for inheritances valued in excess of the applicable estate tax exclusion amount, which is $5.49 million per individual in 2017. If a married couple wishes to take advantage of a credit shelter trust, they generally arrange for certain assets to pass into the trust for the benefit of the surviving spouse, rather than passing all assets directly to the spouse. This trust, which would not be considered part of the surviving spouse’s estate—and generally does not exceed the applicable exclusion amount—may pay the surviving spouse income for life and then, upon his or her death, may pass to a beneficiary, such as a child, free of estate taxes if under the exclusion limit. In addition, the gross estate of the surviving spouse upon his or her death could pass to the same beneficiary, and up to $5.49 million in 2017 would be free of estate taxes.

Charitable Remainder Trust (CRT): A charitable remainder trust is an arrangement in which assets are donated to a charity but the grantor continues to use the property and/or receives income from it. A CRT may allow the grantor to avoid capital gains taxes on highly appreciated assets; receive an income stream based on the full, fair market value (FMV) of those assets; receive an immediate charitable deduction; and ultimately, benefit the charity of his or her choice.

Dynasty Trust: This trust is often used by individuals to pass wealth to their grandchildren free of generation-skipping transfer taxes.

A trust can be an effective way to accomplish your long-term estate planning goals, but often involve complicated tax laws. Consult with your tax and legal professionals about your particular situation and how a trust may enable you to share your wealth with family, friends, or charities.

July 24, 2017

Half of a Whole: When You Lose a Spouse

Written by Andrew Hunt



Whether it’s sudden and unexpected or after an already lengthy ordeal, there’s nothing that can prepare you for losing your spouse. Grief and mourning affect each of us uniquely, but all widows and widowers share a painful dilemma: On the one hand, the world seems to demand rapid response to a barrage of critical questions – financial and otherwise. On the other hand, it’s usually a terrible time to be making big decisions, especially if they really can wait.

Here are some helpful handholds to hang onto if you have been recently widowed (or you know someone who has), plus preemptive steps to take if you’re reading this in happier times.

If you’ve just been widowed …

Don’t decide anything you don’t have to – especially about your finances.

This may seem like odd advice from a financial advisor. Our usual role is to help people make sound money decisions and get on with their lives. The thing is, when you’re experiencing grief, it’s not just an emotion. It’s a biological process affecting your ability to make rational decisions regarding your financial interests. Even small choices can feel overwhelming, let alone the big ones. That’s why our advice at this time is to put off anything that can wait.

By the way, most financial decisions are NOT as urgent as they might seem.

This brings us to our next point. Remember, service providers, friends and family (who may also be grieving) may mean well. But their sense of urgency – and your own – may be off-kilter. Basically, unless all heck is about to break loose if you fail to act, give yourself a break and assume most financial decisions can wait.

Create the space to focus on matters that actually are urgent.

Putting long-term plans on hold also helps create space to take care of the essentials, such as making funeral arrangements, managing immediate expenses, and simply taking care of yourself and your dependents. Do make sure you’ve got enough cash flow available to make daily purchases and pay your bills, so these don’t become a source of added stress. Gather imminently critical paperwork such as any pre-planned funeral arrangements, and multiple copies of the death certificate. It’s also best to ensure your and your children’s healthcare coverage remains in place. Let everything else slide for a little while, and/or …

Lean on others, even if you don’t usually.

You don’t have to go it alone. For practical and emotional support, turn to friends, family, clergy and similar relationships. For financial and legal paperwork, contact professionals such as your financial advisor, CPA and insurance agent. Focus on relationships that help relieve your burden and avoid those that burn up your limited energy. Be cautious about forming brand new relationships at this time; unfortunately, seemingly sympathetic con artists prey on those whose defenses are down.

Take some time to learn more about the types of clients we serve and our process for partnering with women in transition from the loss of a spouse.

After a little time has passed …

Assess where you’re at.

Once you feel ready to take on some of the mid- and long-range logistics, slow and steady remain the ways to go. It can be helpful and cleansing to start by gathering up your scattered resources. Wills and trusts, insurance policies, financial statements, personal identification, mortgages, retirement benefits, safety deposit box contents, business paperwork, military service records, club memberships … Whether on paper or online, take stock of what you’ve got.

Reach out.

Continue reaching out to others to address your evolving needs. Turn to your financial advisor for assistance in organizing your investment accounts, shifting ownerships as needed, closing or consolidating unnecessary ones, and sorting through your spouse’s retirement and work benefits. Contact your spouse’s employers to learn more. Work with a lawyer for settling the estate. Meet with an insurance specialist to revisit your healthcare coverage. Speak with your accountant about the necessary tax filings. Contact creditors about resolving any outstanding debts. Firm up your ongoing banking and bill-payment routines.

Shift your focus outward.

When it comes to lifetime transitions, each of us is on our own schedule. But eventually, the time will come when you’re ready to circle back to those larger decisions you put on hold. Again, don’t go it alone. Your financial advisor can help you take a fresh look at your finances – your earning, saving, investing and spending plans. You also may start to look at your larger wealth interests, such as your will, trusts, overall insurance coverage and more. Whether you determine everything is fine or adjustments are warranted, wait until you’re at a place in which you can make these sorts of decisions deliberately instead of in haste.

Pre-planning is an act of love …

If you’re reading this piece during happier times, we can’t emphasize enough how important it is to pre-plan for when one or both of you pass away. Pre-planning can simplify or even eliminate some of the most agonizing decisions surviving family members must face during one of the worst times in their lives. As such, your wills, trusts, powers of attorney, living wills (advance directives) and pre-planned funeral arrangements may be among the most loving gifts you can give one another as a couple, especially if you have dependent children. If these key estate planning materials are not yet in place, there’s no better day than today to give each other the gift

How else can we help? When you’re ready to talk, please know we will be here to listen.

July 12, 2017

Donor-Advised Funds

Written by Jason Hiley

Americans donate billions to charity annually. If you give to charity, you need to know about one of the best tools to facilitate generosity: Donor-Advised Funds (DAFs).

DAFs date from the 1930s but did not become popular until the 1990s. DAFs act as vehicles for receiving gifts, often of appreciated stock, and then distributing cash grants to charities selected by the one making the donation. DAFs make the process of transferring appreciated stock and designating checks as simple as a bank’s bill-paying system.

All DAF donors receive a tax deduction on the date of transfer. You can also transfer stock during one calendar year and receive a deduction even if the DAF completes distribution of grant money to a charity in a subsequent year. According to Internal Revenue Service rules, you calculate the value of your donation and the resulting fixed deduction based on the average of the high and the low market price on the day of transfer. (You are responsible for computing
this value.)

After receipt, the stock you gifted is sold and the DAF, itself a charity, pays no tax on any capital gain realized. The proceeds may remain in cash or you may direct the DAF to invest those assets for potential further appreciation (usually in a professionally managed separate account). Any subsequent change in the value of the account does not change the amount you can deduct on
your taxes.

As the donor, you direct to which charities the DAF distributes assets. Officially, the DAF owns the assets and is not legally bound to use them as you direct, but it is exceedingly rare for a DAF to not follow the donor’s advice.

Most DAFs also maintain a database of 501(c)(3)  tax-exempt charities (based on those organizations’ IRS 990 filing) from which you chose. After you suggest an amount to gift and a charity to receive the gift, the DAF vets and processes your suggestion to ensure the organization qualifies as a public charity under the IRS code. DAFs also handle all record keeping and due diligence and can protect your identity if you want to give anonymously.

Donor-advised funds are the fastest growing charitable giving vehicle in the United States, with more than 269,000 donor-advised accounts holding over $78 billion in assets. To put that in perspective, the Bill and Melinda Gates Foundation has about $39.6 billion in assets.

Besides consider a DAF, here are other ways to make your charitable giving more significant:

Focus your effort. Passionate giving is more sustainable than spreading donations to every good cause or everyone who asks. Consider focusing your donations to just a few charities. Think through why you are giving and what you feel passionate about.

Find bang for the buck. Fund programs that produce the greatest effect for the least money and focus on long-term positive outcomes.

Include the next generation. You can include your children in the giving process or even help them gift some of their own money.

Talk to Your Financial Advisor. If you’re considering a DAF or want to learn more, give Hiley Hunt Wealth Management a call so that we can walk through the process together.

June 8, 2015

Plan Your Giving

Written by Jason Hiley

There are numerous complex tax rules regarding charitable contributions, so it is advisable to seek professional guidance to help you evaluate your own personal situation. Generally speaking, if you itemize your deductions on your tax return, gifts to qualified charities are deductible in the year they are made.

Most people simply write a check or donate cash for their charitable contributions; however you may be missing out on an additional tax savings that could help stretch your charitable dollars farther.

Rather than donating cash, a gift of long-term (held more than 12 months) appreciated stock or mutual funds will result in two tax benefits.  You will be able to deduct the fair value of the stock as an itemized deduction, and you will also avoid the realized gains that would be associated with the sale of the appreciated shares.

For example, let’s say you plan to donate $20,000 to your favorite charity.   To do this you plan to sell stock worth $20,000 you purchased several years ago for $10,000.  After the sale of the stock, you would owe federal capital gains tax of 15% on the gain (state tax may also apply), resulting in a tax bill of $1,500.

If however you donate the $20,000 in stock to the charity, the charity will avoid paying taxes on the sale of the stock.  You enjoy the additional benefit of never having to pay taxes on the stocks appreciated value resulting in a tax savings of $1,500!

Accelerate Charitable Contributions for Larger Impact

Consider giving more in years where you are subject to higher income tax rates for maximum benefit.   If your income fluctuates from year to year, or you have a significant event that spikes your income for a single year, accelerating your giving may produce bigger tax savings.   If you like the idea of accelerating your contributions from a tax perspective, but dislike the idea of uneven contributions from year to year, consider opening a Charitable Checkbook® at the Omaha Community Foundation (

When you donate cash or appreciated securities to a Charitable Checkbook®, you are eligible for a tax deduction in the year the donation is made.  You are then able to decide on the timing of your grants to charity – there is no requirement to direct a grant from your account in a given year.  You can take the deduction in one year, and spread the gift to the actual charities out over several years.

With a little reflection and financial planning, you can become a more proactive philanthropist.  Like Bill and Jane, you may find this approach more rewarding in a personal and financial sense.

June 5, 2015

Five Things NOT to Do Following the Death of Your Spouse

Written by jasonhiley

If you’ve read “Five Things to Do Following the Death of Your Spouse,” you know some of the things you should be doing.  In this post I will cover five things NOT to do following the death of your spouse to help you avoid further complicating your situation:

  1. Do not make any irrevocable financial decisions. The overriding theme of this list is to do no harm.  If you are not sure, and deferring a decision to a later date has no material consequence, just wait.
  2. Do not sell your home. Recognize that you are not selling just a piece of property but also a home with a lifetime of memories.  You may ultimately decide that selling your home is best for you, but don’t make that decision while in the fog of grief.  Try to give it at least one year.
  3. Do not loan or give money to friends or relatives. As a general rule, you should always proceed with extreme caution whenever you are dealing with family, friends, and money.  During this time, it’s best to not proceed at all.  The loss of a spouse can have all sorts of financial consequences, many of which may not yet be readily apparent.  Wait until you have a clearer picture of your own financial situation before you go down this road.
  4. Do not invest life insurance proceeds or make material changes to your financial plan unless absolutely necessary. For most people, proceeds from a life insurance policy will be the biggest single inflow of cash they will ever have.  You will have no shortage of people clamoring to give you advice on what to do with it.  It’s important to remember that this money, as well as your decisions on how you handle it, will have a profound impact on the rest of your life.  Be sure to work with a trusted professional to do a thorough review of your situation so that you can make an informed decision.

Do not give gifts to charity. You may be approached by your church or favorite charity about making a gift in the name of your spouse.  This may even be something that you and your spouse talked about.  Just remember that this can wait, and it can be addressed at a future date when you are in a better place.

May 11, 2015

The Right Beneficiary

Written by jasonhiley

Over the years, one of the most common mistakes we have seen related to people’s financial affairs has been the incorrect naming of beneficiaries. Sometimes this is due to a lack of understanding around how a beneficiary designation works, or other times it may simply be due to an oversight. Whatever the reason, this can be a very costly mistake that is easily avoided.

Financial assets such as IRAs, life insurance policies, variable annuities, and 401k or other company retirement accounts are all payable based on the beneficiary designation. Many people do not realize that beneficiary designations supersede bequests made in a will or living trust. We often talk to people who believe they have all of their affairs in order because they recently created wills or trusts. Upon further review of their beneficiary designations, people sometimes find that those designations do not match up with the intentions laid out in their estate planning documents.

The most common reasons for these issues are due to people not updating their beneficiary designations after life changing events. Perhaps a sibling was named the beneficiary of life insurance policy prior to the insured’s marriage, or the contingent beneficiary of an IRA is missing the youngest child because they were not born when the account was opened. Whatever the reason, the best way to avoid these mistakes is to check your beneficiary designations on all relevant accounts on a regular basis.

When discussing beneficiary designations the focus is often on “who” gets what, but equally important may be “how” they get it. For parents with younger children, this aspect can be extremely important. We often like to ask new clients who have younger children whether or not they would be comfortable with their children receiving $1 million dollars when they turn 21 years of age. Generally the answer is a resounding NO!  However, these same parents often name their children as the contingent beneficiaries of their life insurance and retirement accounts. Should both parents be in a fatal accident, the contingency we just discussed would quickly become a reality. This reality can be prevented with proper planning. For many parents, going through the estate planning process can be the solution to these issues. A common strategy for this situation is the creation of a trust upon the death of both parents. The trust is then named as the beneficiary of any policies or accounts that utilize a beneficiary designation. This then allows for the parents to both provide for and protect their children as they grow and mature into adults capable of handling their own affairs.

Another important reason for naming a beneficiary of an IRA or retirement account is it gives your beneficiaries the ability to “stretch” the distributions of those accounts over their own life expectancy. If your beneficiary is your spouse, he or she has the option of treating your IRA as his or her own which would postpone required distributions until the age of 70 ½. If your beneficiary is a non-spouse, regardless of age, he or she will need to begin taking distributions from that account no later than December 31st of the year after your death. However, if you have set things up correctly, your beneficiaries will be able to take those distributions over their own life expectancies which can dramatically enhance the value of the account due to continued tax deferred growth.

To accomplish this, you must have a “Designated” beneficiary on file. This means that you specifically name that person on the institution’s beneficiary paperwork. If you fail to name a beneficiary, someone will inherit your account assets but it may not be the person you would have wanted. Furthermore, not naming a beneficiary will likely result in not being able to utilize the stretch provision. The rules around inheriting an IRA are very complex and tricky. I would suggest you talk to us when dealing with this situation. With more and more people accumulating wealth in investment vehicles such as IRAs and 401ks, proper beneficiary planning has become a critical, yet often overlooked, component of a financial plan. Take time to talk with your advisor about this issue to ensure that your hard earned wealth is protected. You owe your beneficiaries that much.