The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation.
Now we’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our first of six installments on charitable giving.
In my estate plan, I’m planning to leave some of my assets to charity. What should I be mindful of with the passage of the SECURE Act?
Perhaps the largest consideration is which assets the charitable donation should be made from. While IRAs and other traditional retirement accounts have always been a good choice, the SECURE Act increases the value of using these accounts for charitable giving.
For an individual with traditional retirement accounts, Roth accounts, and taxable assets outside a retirement account wanting to give to charity from their estate, the preference would be:
Traditional IRA: Make charitable donations from here. Even if only part of the account is gifted to charity, the decreased remaining balance will reduce the taxable income the beneficiary realizes each year.
Roth IRA: Leave these to individuals instead of charities. Even though Roth IRAs still have annual RMD, the income removed from a Roth account will not be taxable for the beneficiary.
Taxable Accounts: Individuals should be preferred over charities. There is no requirement to take income in a given year, and the beneficiary likely received a step-up in cost basis, minimizing the tax impact when used.
If your goal is to both leave money to charity and create an annual stream of income for a beneficiary that lasts longer than the 10-year rule for new inherited IRAs, a charitable remainder trust may accomplish these goals.
As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.
Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.
By reporting QCD’s correctly on your tax return, you rightfully receive the benefit of income exclusion.
Form 1099-R is issued around tax time to report distributions you withdrew during the previous year from a retirement account. A few of the things this form tells you and the IRS are: how much was withdrawn in total, how much of the distribution was taxable and whether there were any withholdings for federal and state income taxes.
If you gave part or all of your required minimum distribution directly to charity through making a QCD (qualified charitable distribution), this amount is still included in the taxable portion of your total distribution on form 1099-R. As you’ll see, the QCD is included in your gross distribution (box 1) and taxable amount (box 2a). However, the box for “taxable amount not determined” (box 2b) will be checked. Whether you work with a professional tax preparer, use software like TurboTax or prepare your own taxes by hand, it can be easy to forget that the QCD portion of your distribution should not be included on your tax return as taxable income. It’s important to keep a record of every QCD made during the year, and hold on to any correspondence that you receive from the charities that confirms the receipt of funds.
Below is a blank version of the 1099-R available on the IRS website.
This is a copy of a 1099-R issued by TD Ameritrade.
In this first example, the individual had a $70,000.00 gross (line 1) and taxable distribution (line 2a). The box next to “taxable amount not determined” (line 2b) is checked. Federal income tax of $8,000.00 was withheld (line 4). The distribution was considered a “normal distribution” because the distribution code 7 was used (line 7). What this 1099-R doesn’t tell you is that $20,000 of this individual’s RMD was a QCD, while the remaining $50,000 of the withdrawal was taxable.
As shown below, you should put the information from the 1099-R on the first page of your tax return (Form 1040) on line 4a and 4b. Here the individual had a total IRA distribution of $70,000. Of this distribution, $20,000 was a QCD. This means that the QCD won’t be included in the taxable income. If there is the option to do so, write “QCD” to the left of box 4b on your tax return. Here you would need to add the $8,000 federal income tax withheld from this IRA distribution to any other federal withholdings from W-2s and/or 1099s for the year on line 17 (page 2) of your tax return.
Remember to file IRS Form 8606 Nondeductible IRAs if you had basis (after-tax contributions) in the Traditional IRA from which you made the QCD, and took a regular distribution. You must also file this form if you made a QCD from your Roth IRA. However, we would not suggest making a QCD from a Roth IRA since the account is after-tax versus pre-tax.
The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. The specific example provided is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a tax professional to ensure all their tax paperwork is accurately filed.
Estate planning is near the top of the list of things we know we need to do but often put off. We dread thinking about the end of our lives. Regardless of how unpleasant it is, the end could come at any time, without warning. Therefore, it’s important to have all basic estate planning documents in place, like a will, medical directive and durable power of attorney. These basics are necessary, but it’s extremely helpful to your loved ones if you take it a step further and give them specific instructions that aren’t contained in your legal documents. (more…)
When someone passes away, their executor – usually their surviving spouse or child – must make funeral arrangements. This includes decisions around transporting the body, choosing a funeral home, arranging for a casket or cremation, and choosing a burial site. Importantly, they need to pay for each of these services along the way. This can be time consuming and stressful – all at a point when loved ones are already overwhelmed with grief.
Prepaid funerals, if purchased correctly, can help mitigate this burden. You pay up front, either in a lump sum or through a payment plan. Upon your passing, your family can contact the funeral company, who will take care of next steps.
Not all prepaid funeral arrangements are the same. Some options that seem to be good end up being bad decisions. Here are some questions to consider when evaluating prepaid funeral options. (more…)
After you meet with an attorney and have your estate planning documents prepared, you must decide where to store them so that your wishes are executed properly upon your passing.
Original Will vs. Holographic Will
The original will is the legal document that you signed; a holographic will is simply a handwritten will or a copy of the will that isn’t the original. Handwritten wills are only allowed in a few states, so it’s important to have the proper document.
If there’s a chance that family or friends might contest your will, then ensuring that the original will is accessible to the court is very important. While a copy of the will carries weight in court and can reinforce a claim, an original document is more likely to prevail if someone challenges your estate.
Where Should the Documents Be Stored?
Because the original will is such an important document, especially in the case of a contested estate, storing it in a safe place is paramount. There are a number of options for storage, each with its own benefits and drawbacks. (more…)
As Wealth Advisors, we provide advice on all aspects of your financial situation, and work with a network of carefully selected professionals in taxes, estate planning and insurance to devise appropriate solutions that will help you achieve your goals. This article is a collaboration between Merriman Advisor Geoff Curran and Evan Monez, attorney at Montgomery Purdue Blankinship & Austin PLLC, who is one such member of our professional network team.
Though we try to stave off the inevitable as long as we can, it’s a fact of life that eventually, everyone dies. When this occurs, the deceased person’s family, while still grieving their loss, must deal with the transfer of the decedent’s assets. If you don’t have estate planning documents in place when your time comes, the laws of the state you live in determine how your estate is distributed. This is especially complex if you have children under age 18, children from previous marriages, property in different states or an estate large enough to be subject to federal or state estate taxes.
With some advance planning, you can ensure your assets pass as you intend, with as little trouble as possible for your loved ones. This article discusses Washington State law, and the rules discussed here may differ in other states. Please consult a licensed attorney in your state to understand how your state laws apply to the concepts in this article. (more…)