Estate Planning
DRC Can Assist You in Developing a Plan
Through DRC's dedicated financial planning specialists, it is able to help its clients create a personalized financial outline of a comprehensive plan. By utilizing the strengths of DRC's Comprehensive Planning along with that of a Certified Estate Planner, DRC can help the client develop a financial plan that is geared towards the client's specific goals. The plan that DRC develops is based on ten factors which will allow the client to have a complete understanding of its future commitment and goals.
Funding Your Retirement
When the clients provides DRC with basic, confidential questionnaire information such as his/her projected retirement age, his/her lifestyle goals and their tolerance for risk, DRC can create an analysis for the client that covers key areas of planning. The personalized report that will be generated will include the following analyses:
- Projection of the growth of liquid assets and savings between now and retirement.
- Illustration of how well the client projected retirement assets will provide desired retirements income based on expected retirement age, retirement income goals and anticipated sources of income at retirement.
- Discussion of distribution options including Required Minimum Distribution, IRA rollover, and early distributions.
DRC Comprehensive Planning
Professionals and business people assistance in planning and strategy for the future. Estate planning can provide a means of transition and continuity when passing on the clients assets after the client's death. Estate planning also deals with current issues such as healthcare directives and durable powers of attorney. There are several basic estate documents that the client should consider. As part of DRC Comprehensive Planning, the client's DRC Financial Advisor and DRC Certified Estate Planner can work with the client and the client's advisors to review the client's estate planning needs.
Revocable Trust
It is important to have a revocable living trust, because it allows the assets held in trust to pass directly to beneficiaries without going through probate, reducing the time and costs involved and keeping the transfer of property private. Because the client keeps complete control over the trust and its assets — the property held in the trust is included in the client's gross estate. As a client, your biggest concern will be naming a successor trustee to provide for a smooth transition and continuity in management of assets at the client's passing, making sure that the client's investment philosophy continues after the client's death. Naming a family member who knows the client's Financial Advisor or using one of DRC's Trust Groups will help ensure the continuity of the trust.
Estate Planning Analysis
- Comparison of tax savings by utilizing a credit shelter trust versus a life insurance trust as part of an estate plan.
- Discussion of other effective estate planning techniques.
Financial Planning is an Ongoing Process
To reach his/her financial goals, the client needs a plan. DRC's Comprehensive Planning process is designed to ensure that the client develops a plan that encourages a client to set goals. Through periodic reviews with the client's DRC Certified Estate Planner, the client will ensure that his/her plan is still appropriate given the client's changing life circumstances.
Private Foundations
A Private Foundation is a charitable entity that is exempt from income tax under IRC S 501 (c)(3). By establishing such a foundation, an individual (or family) will be able to create a charitable legacy that could last for many generations.Why a Private Foundation?
Private Foundations also offer an opportunity to introduce and/or involve family members in charitable activities. The founder of such an organization is able to educate younger generations as to the value of charitable giving and provide the means by which a family's charitable visions can grow.
Members of the family can serve on the board of directors of the foundation, thus helping to determine what programs the foundation will establish or which grants the foundation will make. It also allows the opportunity to oversee a younger generation's development of its own charitable traditions as the family grows and evolves.
When the founder is satisfied with the judgment and activities of the younger generation, he or she can pass control of the board to those individuals. Until that time, the founder can retain control.
By establishing a Private Foundation, the founder retains greater control over the contributed assets, and the charitable purposes to which they are applied, than if the assets were contributed to a public charity. For example, the Mandy A. Craft Foundation was establish programs within the community for education, scholarships, after school programs, the arts, etc., rather than merely making contributions to other charitable organizations. This retained control also allows for considerable flexibility. Specifically, unless restrictions are placed within the original organizational documents, a Private Foundation can change the focus of its charitable activities as times change. Thus, if in the future the family decides that its charitable activities should focus upon a different area (e.g., medical research as opposed to the arts) the board of the Private Foundation can vote upon and approve such a change.
An added benefit of a Private Foundation is that the assets in the foundation grow free of income tax since such foundations enjoy tax-exempt status (although, as noted below, an excise tax is imposed on certain investment income). This allows an even greater opportunity for charitable giving.
The Rules
While offering the above-described benefits, Private Foundations are subject to strict rules by the IRS. Following "the rules" is very important to the continuing tax-exempt status and integrity of a Private Foundation, but the benefits can far outweigh any burdens.
The following is a list of some of the more important rules imposed by the IRS, although this list is not meant to be exhaustive:
- Prohibition on Self-Dealing: No transactions can take place between the foundation and "disqualified persons" (the founder, family members, or entities in which the founder or family members own an interest, certain government officials, directors and officers of the foundation, etc.) even if such transactions ultimately benefit the foundation. Thus, for example, a disqualified person could not lease a building to his foundation even if the lease payments were equal to or even less than the fair market value. This rule is very easy to follow.
- Ownership: of Private Business: a foundation can own no more than 20% of any active business (regardless of the form of the business). In calculating this 20%, all interests held by disqualified persons are considered to be held by the foundation. This rule is also very easy to follow since most Private Foundations are not in the business of owning active businesses.
- Jeopardizing Investments: The foundation's investment of assets is limited so that no speculative investments may be made. Prudent investment should be an important goal for a Private Foundation, in any event, so this rule should not be difficult to follow.
- Minimum Distribution Requirements: A Private Foundation must distribute at least 5% of its asset value in the form of "qualifying distributions" each year. This prevents Private Foundations from holding their assets indefinitely, without fulfilling their charitable purpose.
- Certain Expenditures Prohibited: No funds of the Private Foundation can be distributed for anything other than charitable purposes and the Private Foundation may not participate at all in any political campaigning or lobbying.
- Tax on Investment Income: A Private Foundation is subjected to a 1 % or 2% tax on its net investment income (depending upon the particular situation).
- Unrelated Business Taxable Income: Income earned by activities not related to the foundations charitable purpose are not exempt from tax. Specifically exempted from the definition of unrelated business taxable income are items such as interest, dividends certain rents, royalties, and capital gains. Generally, a Private Foundation will not be engaging in activitie's not related to their charitable purpose.
- Private Inurnment: The founder and family members may not receive any benefit from the foundation other than reasonable compensation for services performed (e.g., services performed as a member of the board of directors).
As you can see, while the IRS has many rules governing the activities of a Private Foundation, they are generally not difficult to follow. Also, although a Private Foundation is tax exempt, informational tax returns and forms must still be filed each year. In addition, the foundation's application for tax exempt status as well as its annual informational returns must be available to the public for review upon reasonable request.
The Charitable Deduction
Deductions for contributions of cash to a Private Foundation are limited to a maximum of 30% of the donor's "contribution base." A taxpayer's "contribution base" is defined as adjusted gross income, computed without regard to any net operating loss carry back to the taxable year.
Contributions to a Private Foundation of assets other than cash are limited to a maximum of 20% of the donor's contribution base and the deductible amount, in most instances, will be limited to the donor's cost basis (as opposed to the fair market value of the property contributed). An exception to this rule, however, allows a deduction for the full fair market value of "qualified appreciated stock." In general, "qualified appreciated stock" is long-term capital stock of a publicly-traded company of which the donor (and family members) has not contributed more than 10% (cumulatively) of the value of the company to private foundations.
If the donor is not able to use the entire amount of his or her charitable deduction, it may be carried over for five years.
While contributions of cash to public charities are deductible to the extent of 50% of the donor's contribution base (contributions of other assets may be limited to 30% of the contribution base), the donor retains no control over the contributed assets.
Distribution and Estate Planning for Retirement Benefits
Estate Taxation: Estate tax laws formerly provided a complete exclusion of certain retirement benefits from a participant's gross estate. Unfortunately, Congress whittled away at these laws over the years. Now, the value of the participant's interest in his or her retirement benefits is included in the gross estate (with exceptions for participants who were in pay status prior to some of the law changes). Retirement benefits included in a descendant's gross estate are subject to estate taxation, unless either:
- They are deducted from the gross estate. A deduction is usually accomplished for married taxpayers through the unlimited marital deduction that allows an unlimited amount of property to pass from the deceased spouse to the surviving spouse without estate taxation at the first death. Property must be transferred to the surviving spouse either outright or in a special trust (qualified terminable interest property, or QTIP).
- OR:
- They are covered by the $600,000 exemption equivalent that allows a total of $600,000 of property to be transferred during the decedent's life and at death without gift or estate taxation. If more than $600,000 of property passes to beneficiaries other than the surviving spouse, it is generally subject to estate taxation.
Beneficiary Designation: Keeping the above in mind, you must decide whom to name as the beneficiary(ies) of your retirement benefits. Things become even more complicated with the vagaries of your particular situation. What does my surviving spouse need to live on? Will my new spouse take care of my children from my first marriage? Do I really want my beach bum child to get all those benefits?
Generally, the preferred approach for a married participant is to name the spouse as the primary beneficiary with either the children or a trust as the contingent beneficiary(ies). This approach offers the capability to defer both income and excise taxes and to avoid estate taxes. It also offers flexibility since the surviving spouse can disclaim his or her interest in the retirement plan death benefits, thereby passing those benefits to the children or trust. If you want further details about the pros and cons of any of the approaches, please contact our office.
What To Do: We hope that this article will motivate participants and their advisers to carefully consider the importance of proper income and estate tax planning for retirement plan benefits and for coordinating these benefits with the rest of their planning. Make certain that your income and estate planning team contains competent professionals who are familiar with the complicated rules that govern retirement benefits so you and your heirs will receive as much as possible of your retirement plan benefits.
For More Information download our brochure (PDF), call (800) 735-3576 or email drc@drccompany.com.
Daniel, Russell & Charles Co.
980 9th Street, 16th Floor, Sacramento, California 95814
(916) 444-9036 | (800) 735-3576 toll-free | (916) 444-9146 fax