Videos Archives - Cook CPA Group

Not What You Wanted?

90 90 90 Rule

This is the final series with Ed Cotney as he concludes with an in-depth discussion of the IRA rules to consider other approaches to address required minimum distributions.

If you have an IRA or 401k and live to be age 90, and if all you do is take the required minimum distributions out once you turn 72, chances are you’re still going to have 90% of your IRA intact. So if you have a million-dollar IRA today and you’re 72 years old, chances are when you die, about $900,000 will still be in your IRA. Hence the 90 90 90 rule.

2020 Inherited IRA Distribution Rules and Risks of the 10-year rule

Giving It All At Once

Proceeds will be distributed all at once when you die. This will go on top of your children’s earned income resulting in a higher tax bracket.

10 Year Rule

The kids can let the money stay in the IRA for up to 10 years, and they just have to fully take out the inherited IRA after you die within ten years. There’s some risk exposure with this. The Kids have the right to take out their portion at any given time within the ten years after you die, and they will need to file a 1099r form.

If we do this ten-year rule, while the money is in the 10-year stretch rule; you need to ensure your kids don’t get enough bankruptcy or judgment. If one child does, they could lose the inherited IRA and could even pay a tax bill. You can check the Clark V. Ramaker Case as an example.

A Story Of How Converting IRA To CRUT Helps A Widowed Spouse

Tim and Susan want to transfer their wealth when they’re dying, their children free from tax, safe from lawsuits, and safe from creditors and predators. Tim passed away, and Susan’s age now is 80.

They have four kids, Susan has a house worth four hundred thousand dollars, and they have cash of $400,000, and Susan and Tim’s combined IRAs are $800,000.

The 1st kid, Mike, is a successful doctor and has a wonderful job. The 2nd daughter, Mary, didn’t marry very well. In fact, after Tim dies, his husband says, “I can’t wait for your mom to croak. This way, we can go buy a new truck and a bass boat”.

The 3rd son, Ed, is in a rocky third marriage, but he’s good with money. He’s good-looking too. The last son, Dan, is not good with money, is divorced, and looking for work.

Susan’s concerned that Dan will just waste his inheritance money and have to borrow from his siblings.

Taxes Issues Upon Death Of Susan

House – No tax, because of Step up in basis
Cash – No tax, because of Step up in basis
IRA/401K – Will have an Ordinary Income Tax

How The Charitable Trust Come In-Play

Calculating the total value of the asset, we got $1,600,000. We know that the non-ira assets, the house, and the cash will go to the children with zero tax, and the estate plan says that when Tim and Susan die, the $800,000 IRA goes in four equal distributions to the kids.

When Susan dies, the $800,000 will go to a charitable trust. This trust is designed to be a 20-year income payout to the four children using a very conservative number of 5.3%. We’re going to distribute $42,000 divided by four, so each child will get about $10,000 to $11,000 for the next 20 years. In total, we’re going to distribute out $896,000 of taxable income to the kids.

Now, here’s what’s cool about this strategy. This $800,000 has a high degree of asset protection from judgment, creditors, and predators. So, for example, in year 4, after Susan dies, Brother Dan gets into a divorce. He is receiving an income stream from the charitable trust but can’t take any money from it—that way, protecting himself.

And for Mike, the doctor, this is a smart deal too. It’s not a question of will Mike be in a lawsuit as a doctor. It’s a question of how many lawsuits he will be in during the rest of his life. So the last thing he needs to get is something that doesn’t have some form of creditor protection.

The last benefit from this is at the end of 20 years, after this charitable trust has paid out nearly $900,000 to the kids, almost $900,000 will go to her designated church.

Takeaway

This is not a multi-million dollar Warren Buffett strategy. This strategy works for anybody with at least $500,000 in qualified money, like a traditional IRA or 401k. This is a strategy where using a charitable trust provides a beautiful income stream to the kids and a beautiful gift to your designated charity.

There’s nothing severely advanced or complex here. You may have to spend a little bit of money for the lawyers to draft this, but this blows the doors of leaving an inherited IRA to a child so that they can take the money out over ten years at some point. By using charitable trust, we are making money off the IRS.

Charitable Tax Harvesting

The next video is part two of advanced tax planning options as this topic covers how to use charitable deductions to minimize capital gains. Please feel free to watch the video or read the transcript.

The Government Confiscatory Tax System

We all know that we live in a confiscatory tax system. We make money from income capital gains, and we know that we get the keep a part of it and that we get to be mandatory donors to the IRS and franchise tax board charities.

We live in a philanthropic confiscatory tax system where depending on how much money you make, you may pay more or less, but a portion of whatever you’re doing will support the IRS.

What We Don’t Know

60% of our income tax is optional
100% of long-term capital gains tax can be optional
100% of estate tax is optional

How Do You Pay Less Tax?

No tool makes it work for everybody and everything. But generally, the three main things that can help you pay less tax are insurance, business or trust, and a charity. Effective tax planning usually involves these three different things working together to create optimized opportunities.

Question: What is the maximum amount of money or assets a person can donate to a charity each year?

Answer: No Limit!

Maximum Charitable Adjusted Gross Income Deduction Rules

Schedule A, Line 11 – Cash= 60% (Can be 100% as of 2022 because of the Secure Act)

Schedule A, Line 12 – Appreciated Assets(Eg. Stocks and Real Estate) = 30%

If your adjusted income this year is $100,000, the most you can claim as a charitable deduction for cash under most circumstances usually is sixty percent or sixty thousand dollars.

If you give up to 60,000 to charity and claim it as a gift, you have reduced your adjusted gross income from 100,000 down to a 40,000 tax event. In doing so, you have probably not only reduced your taxable AGI, but you may have a lower tax rate. You can drop down one or two thresholds to get you into a more favorable income tax deduction

Example of using charity for people in 50% tax Bracket

If you have a $1,000,000 AGI, normally, you will be in a 50% tax bracket and have to pay 50% tax to the IRS. That means $500,000 goes to your tax, and you take home $500,000. But if you decide to gift $50,000 in cash to your IRS-approved charity, you can save $25,000.

This is how it works. Now that you gift $50,000 to a charity, you can include that in your Schedule A, Line 11. By doing so, you can get a $25,000 tax deduction. Your current AGI now becomes $950,000; you only have to pay $475,000 of your tax and used the $25,000 tax deduction.

Income and Captain Gains Tax Rescue Play

Now, let’s make this more interesting. What if five years ago, you had $40,000 burning a hole in your pocket. You went out to your financial planner to buy four positions for $10,000 a piece. That will be your basis, after-tax money.

Two of those positions did really well, and we call them racehorses. One of these positions started out pretty good, and then about two years down the road becomes flatlined. It grew to $50,000 in value, but for the last three years, it’s been doing nothing. Technically, you have lost an opportunity cost in this case. We call that one a donkey. The last position that you bought is hanging on for his dear life. It’s still worth $10,000, but you lost on opportunity cost.

What if you gave the $50,000 donkey to a charity? If you tried to sell the $50,000 stock and gain $40,000, you’re going to pay tax. Well, let’s think a little bit differently. So if you give the $50,000 as a block of stock that has a basis of $10,000 to a charity, technically, the charity’s going to turn it around and sell it. The charity has the same net effect.

If your charity doesn’t have a brokerage account, tell them to open up one. They’re not making it easy for donors to donate by not having one. So you better ask them to have one.

So you tell your financial planner to give the $50,000 value of the stock to the charity. The Charity converted that stock into cash. You get rid of the donkeys that are going to cost you money if you sell them, and you get $15,000 of money off the IRS. You may be confused, but let’s check out the image below.

On the left side, it shows you gave $50,000 of cash and bought you $25,000 off the tax statement. On the right side, you gave a charity $50,000 of stock that had a basis of $10,000. Now you’re in a 50% tax bracket on the tax form.

On the tax form, it’s the same. It’s the same deduction on the tax form except for one thing. Notice the basis here. In this case, $10,000 of basis bought you $25,000 of tax savings. Now, that’s $15,000 money you made off the IRS.

Conclusion

Overall, first, determine if you have highly appreciated poorly performing assets. You may want to consider making money off the IRS while still accomplishing your philanthropic objective.

At an early age, most of us were taught just to give cash to charity, and that’s all we’ve ever been doing. If you like making money off the IRS and still want to help your chosen charity, you may want to look at this concept.

Charitable Trust Tax Planning

building and operating business tax exit play

This is part one of a video series discussing various advanced tax planning concepts. The majority of this discussion covers charitable remainder trusts. Feel feel to watch the video or read the transcript.

John And Mary Smith likes to sell their 11 million dollar business. The total value of the assets (Business and Commercial Building) is around 11 Million Dollars. If they do nothing, their tax with the business will cost them around $1,650,000.000 and $2,000,000 for the commercial building. They go home with 7.35 Million, and the IRS goes home with 3.65 Million.

Using Charitable Trust

A charitable trust is an irrevocable trust. A charitable trust is a tool that has two jobs. One, to give you an income stream normally for life, and when you and your spouse die, whatever is left in that trust goes to the charitable structures you like. This could be Red Cross, Salvation Army, or whatever charity comes to mind.

We put the building in this charitable trust. This charitable trust is a tax-exempt irrevocable trust. By doing this, we bypass all the capital gains and recapture tax. So, in this case, if they put a 5.5 million dollar highly appreciated building into a charitable trust, there’s no tax. Another benefit is that the IRS is going to give them a charitable income tax deduction, in this case, 1.65 Million Dollars.

So if they sell the business and donate that building into the charitable trust, they’re almost going to be zero tax. It may take them a couple of years as far as tax returns to enjoy all these benefits, but it boils down to higher annual income.

Now you may say, that their kids aren’t getting the value of that building when they die. Then, let’s just use some money to buy a life insurance policy to replace that value. In effect, the IRS just paid for the life insurance policy.

This strategy is not new. It’s just new to some people or even you. So when you hear people talking about charitable tax planning, those are the people who have figured out that there’s a way that we can do more good for everybody involved and put a lot of money in the hands of a charitable organization.

We’ve done several strategies now on the death of John and Mary. We’ve done seven million dollars going to charity. We replace the value going to the charity using life insurance. The life insurance all goes tax-free, assuming the law doesn’t change in respect to step up in basis rules. We’ve increased the income to 159,000 a year for the rest of their life.