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- [00:00]
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Foreign.
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B
Hello and welcome back to another episode of the Practical Planner Podcast. I'm your co host, Thomas Coleman. Here with me, Dave Haughton. Dave, good to see you, man.
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A
Good to see you.
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B
I'm excited about today's episode. So we're really, you know, going to talk a lot here just about charity and estate planning. And obviously, you know, you've been an estate planner, so you've worked with financial advisors. So when we just think about charity and estate planning in general, where does your mind go first?
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A
You know, I think that they go hand in hand. Charitable giving, estate planning, because, you know, that's ultimately what your estate plan is, is where are you going to leave your assets when you're done with them, essentially. And for charity, you're making a completed gift. And oftentimes, you know, more when people are thinking about their estate plan, they're thinking in terms of, you know, you could slide a piece of paper over to the person and say, lcg, where do you want the property to go when you pass away? You know, L being love, C being charity, G being government. Most people aren't going to say government. They want to protect from the government.
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B
For sure every day.
- [01:16]
A
Right. But most of them are going to circle that C. Right. Most of the clients are going to say, you know, to some extent, I would like my property to pass to charity. And, you know, they try and instill these values in their children to be charitable. And so it's really an important part of estate planning. And, you know, I think when we talk about, you know, what tools are available to give to charity through your estate plan, you know, there are a number of them, I think, you know, top of mind in. One of the really popular things right now would be donor advised funds because they're a really flexible way to give. You know, with a donor advised fund, you put the money in and then it's a completed gift to charity, but you still retain a level of control to be able to distribute out to charitable individual charities either over time or in lump sum. You know, you could put it on a schedule. So there's a lot of flexibility there. And, you know, when it comes to making your estate plan documents, you don't always like to be set in stone. And so if you're not sure what charitable organizations you want to give to, the donor advised fund is a great option to put it in the donor advised fund. You can either set up with the donor advised fund, you know, where you want that property to go when you pass away. You can actually set that up directly with the donor advised fund rather than having it in the trust or the will. Because the account is what's going to get distributed out. So when you pass away, the money will flow into that account and you don't need to change the estate plan document if you want to change where those charities are going to where that donor advised fund is going to go into who, which charities it goes to. The other thing that I think is really great about donor advised funds is it's a way to get the children involved in the charitable giving process. Because if you are giving to individual charities, let's say you give to the Red Cross or any great organization, you're, you're giving that money away and it's kind of out of your control. If you put it into a donor advised fund, you might be able to allow the children to have some level of control in deciding what charities get what so that they can get into the charitable giving process without any chance that they can benefit from that property. Because once it goes into the donor advice fund, it's already completed gifted charity, you get the tax deduction, it's out of the estate. Then if you pass away, there's money left over. You can appoint children to be the grant advisors on the donor advice fund. And it's kind of like a little makeshift foundation for the children to be able to make decisions just like a trustee would. As far as deciding when to give money and how much and to whom.
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B
That's really interesting. Do you feel like the reason why a person would not give pre passing away and do the donor advised fund is simply because they're trying to say, hey, this is an important value I have. I want my kids to be allocators to charities. I'm a little worried if I give it to them in their own name, that's not going to be the use of it. And this is kind of a guaranteed way to say I'm passing on values to my kids. They can't take this money out. They don't have access. The only thing they can actually do is allocate this to places that you're forcing them into the, like having that value. Maybe I said the last line in a bad way, but you know, I, I mean it in a good way.
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A
Yeah, absolutely. I mean, I mean they, they can't take it back, they can't benefit from it personally. So they're going to have to be involved in the charitable giving process in some way, shape or form to decide what organizations this money is going to benefit. And you know, it, it can be fun too, you know, for the kids because I'm sure, you know, if, if they don't have the funds to be able to make an impact to charity yet because they haven't really grown their assets. It's, it's this pot of money to be able to support the organizations that they think deserve it or they think will benefit society. So it's going to kind of prompt them to need to get into the charitable planning mindset to, to think about, okay, what organizations are important to me and where can I make the most impact. And those are some great values that I think a parent would want to bestow on their children.
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B
And my assumption would be with, you know, people aging and living longer that, you know, obviously the average inheritance I think comes at like 60 is, is the age now. Right. So it's actually probably even a better way to say, hey, you know, hopefully my kids are giving by now and have the income and the wealth to do it. This is actually a good way to help set it up for my kids, Kids. Right. My grandkids to be a part of it and say, hey, we did this with you. We've always wanted to pick charities with you. Maybe when you're a kid through our donor advised fund or a different tool, we said, hey, what are causes you care about? And we're helping support those things now we want you to do that with your kids. Right. Especially for a lot of people that have a lot of wealth. I think people worry about their kids and their grandkids are like, hey, you grow up with a lot of wealth. You, how do you view the world? You know, are you a caring person? And obviously, you know, wealth can change anybody in any direction. But this is a way to like put some good core values into them and say, you know, giving is a part of who we are. That started with my parents and we're continuing this on through the generations.
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A
Absolutely. Yeah. And you know, there's obviously the giving aspect is what's most important and the impact of it. But there are also benefits to advisors which when it comes to donor advised funds and leaving a legacy in this account for the children, we know with this great wealth transfer, about 90% of assets leave an advisor's control at an intergenerational transfer. If clients are doing things like setting up donor advised funds, that involves getting the children involved in the investment process and in the giving process. It's, it's also a way for the advisor to form a relationship with that next generation so that, you know, maybe they can continue the relationship even after, you know, their primary client passes away.
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B
Yeah. And this is something we talk about with estate planning too, right? Like, okay, hey, you, you're old, you're older. We won't call anybody old, you're older, you have a lot of wealth. Maybe you want to use an in person attorney for document creation and things. But as an advisor, a, a really great way for me to bring in my client's kids is say, hey, we have this, we have access to wealth. We can cover for your kids to get their estate plan done. Right. They're having their first kid or they're full adults. Like we need them to have a will in place or we need them to have revocable trust. Bring them into the meeting, we can kind of talk through some things, educate them. And I want to make sure that your kids are taken care of because we care about you. Right. And then now you have an intro, you have a way to talk to them. And this doesn't have to lead to their business right away. It can just be, I work with your parents, I want to help you out. And now you're kind of planting seeds, you're getting touches. Right. And like the way that I view my business is I didn't get anybody because of one touch. I got people because I educated and helped them without asking for anything for a really long time. And so whether it's the donor advised fund, whether it's helping on estate planning, you know, maybe it's helping let them know they need right. Life insurance and you can connect them to the right places. You're just adding these free areas of let me give to you and let me help you. And ultimately one day when you need my help, I'm here, but I don't expect it. Right. And that's what's going to end up keeping those assets inside of, you know, this one advisor with families and you know, not that we need to be transactional, but everybody's goal is that they continue to help those same families.
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A
Right, Right.
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B
Okay, let's talk about some of the other tools and I think two that come to mind and you know, let's go one by one would be charitable remainder trusts. Right. So, so talk about what a charitable remainder trust is, you know, the value it has.
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A
Yeah. So a charitable remainder trust is a unique tool that was created under the trust code to where you can give assets into a trust and get some unique income tax benefits while still getting, retaining control of the assets, essentially because you're going to have a right to Distributions. So basically what happens is you put assets into a charitable remainder TR and there's a term set. It either could be over your lifetime, over multiple lifetimes. It could be a term of years. And during that time period, the grantor usually or a family member is going to have a right to distributions from the charitable remainder trust during their lifetime. Then at the end of the term or when they pass away, whatever's left in that charitable remainder trust is going to go out to charitable beneficiaries.
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B
Yep.
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A
And so you know the way that these are structured, you have to be really careful with them and you have to have a professional help you set it up because there's some really specific calculations as far as how much is supposed to reach the end charity based on how you originally calculate the charitable MATA Trust. But it's a powerful tool. It's a charitable giving tool. But, but it is also an income tax planning tool because if you are about to sell a business or you have a concentrated position with a low basis, you can actually contribute this property to the don, the charitable remainder Trust, and then sell it from the charitable Remainder Trust after you donate it. And now, because the charitable remainder trust is a tax exempt entity, there's going to be no taxable event at that time. So there's going to be no tax due right away. Now, as distributions come out to the grantor, now those are going to have tax embedded in them, but you're going to be stretching it out over a lifetime or over a period of years. So if you have a really large capital gain, let's say a million dollar capital gain that normally you would have to pay all in one year when you sell it using a charitable or mater trust, you might be able to spread that out over tens of years.
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B
Yep, yep, really good points. And I think you know that the business owner is actually where this starts to make sense. And I think the key thing to talk about here, right. Donor advised funds are really about, I get that out, I don't need anything from it. You get a higher deduction against your income. Right. You're getting that 100% deduction of that fair market value. When you use some tools like a charitable remainder trust, you're not getting that hundred percent deduction on your income. It depends on how focused you are on distributions. Right. The more income you want from the tool, the less the deduction is going to be. The less income that you want from the tool, the more that that deduction is going to be. And in another, a different episode I talked about how we learned with donor advised funds that you have to have this liquidity event in a window. And then one thing I learned when going through this with a client is that with a charitable remainder trust, you actually don't need that. So this weird thing, if you have a high value company that might never have a liquidity event, it can be a tool that you can use it to offset income while that valuation is really high. But again, for most people, they're doing this because they're like, huge event is happening this year. I can do this, spread that out now the income to come back to me over a number of years. But it's for the people who are like, I don't know if I have enough to do to just give it up. Right. I need income back down the line to ensure that I can fund my life.
- [12:38]
A
Yeah. And you know the other thing with a charitable remainder trust, when you're talking about donor advised funds, it's an analysis because you are going to be locking up this money in this charitable remainder trust. You're going to have a right to distributions from it. But that's going to take come over a long period of time. There's going to be complexity, there's going to be tax returns that need to be filed, there's going to be costs. So sometimes when looking at all of that, you might just decide, you know what? I'm going to look at what my tax deduction would have been if I had done a charitable or made a trust and I'm just going to donate a lump sum to a donor advised fund of that amount and then just keep the rest. And that way I don't have to wait for distributions. I can, I can just have full access to those now. So powerful tool, income tax planning tool, charitable major trust. The other way that it can be a powerful tool is if someone passes away and they have a retirement account. You'll remember a few years back, it used to be that if someone passed away, the beneficiary could stretch distributions from the IRA over their lifetime so they could really spread out that income tax liability for when they're taking distributions from the Iraq. The Secure act changed that. They made it so it all has to come out within 10 years. So if there are individuals who either want to spread out the tax liability or if there's a scenario where they don't want the beneficiary to have full access to the IRA to distribute to themselves, you could set up a testamentary charitable remainder trust and leave the Iraq to the charitable charitable Remainder trust as a mouthful, charitable remainder trust. You can, you could leave it to the charitable remainder trust and then spread out those distributions over the beneficiary's lifetime. And you're actually kind of simulating that old stretch that you were able to do pre secure act because now as distributions come out, they're only taxed based on the annuity amount that came out. The entire balance doesn't have to come out in 10 years. It could maybe be stretched out over 20, 30 years. So the tax liability is probably in the end going to be a lot less. But you have to remember that it's a complex tool. It's going to be costs and administrative costs. And in the end there's some risk that more is going to go to charity than maybe you intended if that beneficiary were to pass away prematurely. So that's a good thing, it's going to charity. But you just have to know that that's a risk. It's depending on what your legacy plans were.
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B
Yeah. And you can actually pair CRTs and donor advised funds together. Right. Correct me I'm wrong. You can set it up for at the end of that when it's going to go to a charity, then it can actually go to a donor advised fund and then you can choose how you want to allocate it from there over time.
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A
Absolutely, yeah. And you know, donor advised funds, they're charities under the tax law for most circumstances. In almost all it's just like any other charity. So you could name a donor advised fund is the end beneficiary of a charitable remainder trust. Really the only area, and I might be missing some, but the major area where you have to remember that a donor advised fund is treated differently is you can't do qualified charitable distributions to a donor advised fund. So $100,000 per year you can give away tax free after your RMD or after your 70 and a half. Can't do that to a donor advised fund, only to an individual charity. But other than that, in almost every circumstance donor advised funds are the same as a charity.
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B
Yeah, no, that's a really good point. Okay, well let's go to the next one and let's go into charitable lead trust.
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Sure. Yeah. So. So charitable lead trust is essentially the opposite. Right. Of a charitable remainder trust. Charitable remainder trust, you're taking distributions over your lifetime. Whatever's left over goes to charity. With a charitable lead trust, the distributions during lifetime are going to charity and then whatever's left over is going to be distributed out to family and the idea behind a charitable lead trust is for estate tax purposes. It's not for income tax planning purposes. Charitable lead trust is really a way to get assets out of the estate, freeze the value so that they grow over time, they benefit the charity up until the point of death. And then it goes, all that appreciation goes out to the beneficiaries and you get a lot of estate tax savings. So it's a really powerful tool. It's probably not utilized all that often nowadays, but it's kind of an, an arrow, you know, that in the quiver that you should know that you have.
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B
Yeah, yeah. I don't think we probably need to hit on too much there. I think maybe kind of the last thing you talk about. So you already hit on qualified charitable distributions. Right. So I don't think we need too much there, but I think what we can think about is like, okay, so besides the idea of I'm going to pass away and give to a donor advised fund, you know, as people prepare for their estate, you know, estate planning towards their end of their life, you know, there are ways to really optimize how you give and where you give. So as you think about charity, how do you really think about, you know, how, what are the best assets or accounts or things like that to give to charity, to basically structure and make sure your, your heirs get the most and you pay the least in taxes?
- [18:05]
A
Yeah, I talk about this a lot, that a lot of people have this kind of one big pot mindset when it comes to estate planning. So I have this big pot of money that is comprised of all my different assets and I'm going to split it up equally amongst the kids, you know, one third each, whatever the case may be. And the same goes for items you're going to give to charity. You're going to, you're going to form a trust and you're going to put the provisions in the trust that the charity says gets, you know, 10% of the estate or gets a hundred thousand dollars, whatever the case may be. Well, you know, those, any assets that are going to charity, they're going tax free. Right. So the charity is not going to have to pay taxes on them. And it's also going to be an estate tax deduction. So really important to think about, okay, what am I leaving from my estate and who could ultimately have to pay taxes on it. So the biggest thing to think about are retirement accounts. So if you have a retirement account and you are also giving to charity, there's very limited circumstances where it doesn't make sense to give as much of the pre tax retirement account to charity as possible because otherwise the beneficiaries are going to be paying income taxes on that ira. So if you have an estate income years too. Exactly. Yeah, yeah. Like you know, if they're inheriting at, at 60 years old or you know, 50s, you know, they're, they're probably at the height of their tax bracket and so you're just adding more income onto it unnecessarily, really. Because if you're giving 10% of your estate to charity and let's say that your IRA makes up 15% of your estate, you could potentially just give the the entire IRA to charity. Get that off the board. All that income tax is off the board and everything else is going to the kids with minimal taxes. Right. Most of it will probably get a step up in basis. Depends on what the assets are. But to the extent that you can satisfy your estate plan distributions to charity from iras, it's almost a no brainer.
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B
Yeah, I mean if you look at a perfect example, right, we have seven and a half million, we got two and a half in Roth, two and a half in pre tax and two and a half in taxable. And you said, hey, I want to give a third to charity. Let me make it super simple, right? The average person does do a third from each one. It's like, why are you giving a third of a Roth of Roth accounts to a charity, right? That's already tax advantage. It's already tax free. Your kids can pull it out, it not count as income. You have taxable, you know, as long as we don't have any state taxes, which we don't in this situation, then they're all getting the step up in cost basis. They can liquidate everything the day that they get it if they really wanted to and avoid taxes. And then you have this pre tax account, they're going to get it and it's going to shoot up their income. They got 10 years. If they're in high income earning years, they're already, you know, let's say they're in 32. It might be pulling into 35 or 37. But in general you don't really want them to lose all of those in assets, right? So if you said I want a third and now that IRA goes to charity, right? No tax there. Now they inherit Roth and taxable. You set them up in a really good situation. You can even take it a step further and say, okay, well you know, maybe it's not all of that maybe we are going to still have some pre tax assets left over. Okay, which of my children are in the lowest brackets, right? Or is there one of them that's retired already? Great. That person can get this pre tax account. Hey, the kid who has a doctor and a lawyer, they should go get more Roth assets because you know, you're going to have to offset it a little bit to make it equal, but because you don't want them to lose 50% if they're in the state of California. But I think good tax and estate planning is how do we minimize taxes over not our generation, but the next. Right. And I think again, going back to this, this is how advisors can bring in the generations and say we need to know their situations, bring them in, we can talk about it and we can help make sure that of this seven and a half million dollars you have, you guys keep the most and pay the least amount in taxes and also get to give the most. And I think that's really how you end up winning as an advisor.
- [22:17]
A
Absolutely. And you know, when I bring up this concept like you were just describing, of, of income tax rates of the beneficiaries, you know, one of the criticisms that comes up is, well, you're never going to get it perfect, right. Because life, you know, circumstances change, life changes. If you're setting up beneficiary designations, you know, and you know, one kid loses their job, loses their job, gets a divorce, whatever the case may be, then it's not going to work out perfectly. But I don't think, you know, the idea is not that it's going to work out perfectly. We know that it's not going to end. End, exactly right. But you're going to be in a better position than if you didn't do it that way. So I don't think it's a, it's a, the best argument to say because it's not going to end up perfectly. Even you shouldn't even try to do it. Because if you look at just splitting it up evenly like it was, you know, one big pot of money to be split up evenly. When you look at, at the end of the day, if they have really disparate income tax situations, whether they, you know, one lives in a high income tax state, the other doesn't, one, you know, is a teacher, another is, is a doctor, you know, if you look at the after tax inheritance, it's not going to be equal at all. So at least trying to think holistically and even if, even if you don't elect to take that approach, at least knowing when to spot it when there's really glaring differences between the kids or, you know, when you see there's a big proportion of the estate going to charity and there's a lot of IRA money. Just being able to issue spot is when you can really bring a lot of value.
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B
Yeah, yeah. No, I mean, I totally agree. I think if you want it perfect, you got to go permanent life insurance. If you want everybody to get the exact same amount and you're under taxable threshold, then that's pretty much your one way to do it. And that's okay. I mean, you can pair that with other things, but in general, it's not going to work out perfect with different taxable assets, but perfect. I think that was everything that I wanted to hit on. Anything that we didn't talk about as it relates to change, charity and estate planning?
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A
I don't think so. No. I think we hit on basically everything.
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B
All right, perfect. Super good episode, everybody. Again, we appreciate you listening. If you have any questions, any topics that you want us to talk about, please don't forget to let us know. And if you've learned a lot from this rate, subscribe and share it with some other advisors that you think need to learn more about estate planning and just financial planning in general. So until the next episode. See you guys later.
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A
Sam.