Background: Sometimes clients aren’t thinking of making charitable gifts, but when “all facets” of their financial picture are reviewed a gift makes way more sense than a non-gift.
Our Case: A new client was referred to our office. When we reviewed their assets and income needs we discovered that the RMD (Required Minimum Distribution) would provide way more money than they needed for their lifestyle and thus they would have to pay taxes on the distribution and then invest them in a taxable investment as well. Projecting this out a few years would see their Schedule B income rise and rise and cause a great deal of future taxation that no one wanted!
The Question: The new clients owned an apartment building that they really didn’t want to own anymore. They also did not want to sell it and owe capital gains taxes. But continued property management and repair was starting to take a toll. The clients’ Will called for significant gifts to charity at their ultimate deaths. Would there be a way to make a charitable gift now while they are alive and simultaneously stop the RMD income?
The Results: We suggested to the clients that they convert a significant portion of their IRA assets to a ROTH IRA; this would allow for no required RMDs and would allow funds to accumulate without taxation for their lives and the lives of their beneficiaries. To offset the taxes due on the conversion we made a gift of the apartment building to a Donor Advised Fund (DAF). The DAF then sold the building and is holding the sales proceeds in an investment account for the clients’ favorite charities. Each year the clients decide which, if any charities are to receive some disbursements. Following the clients’ deaths, their children may continue to provide annually for charities and following the children’s deaths, the clients’ original charities receive the remaining principal.
Bottom Line: The clients were able to reduce their conversion taxes significantly by obtaining a charitable deduction for the gift. Over a twenty- to thirty-year period, the tax savings on lower Schedule B income add significantly to the clients’ children or grandchildren’s inheritance; and, most importantly, if the clients ever do need income they can “tap” the ROTH account for tax-free income.
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC.Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc. Business & Estate Advisers, Inc. and B & E Investment Advisers, Inc. are separate entities
from ValMark Securities.
Trustee’s Fiduciary Duties
