Charitable IRA Gifts

Dear Garden State Trust:

I’ve heard of something called a “charitable IRA rollover.” What is that?

—Generous But Prudent

Dear Generous:

Those who are older than 70½ are permitted to arrange for a tax-free transfer of up to $100,000 per year from their IRA to the charity of their choice. This is the technique you are referring to, although strictly speaking it isn’t a “rollover.”

The other thing that those of that age must do is take required minimum distributions (RMDs) each year from their IRAs. These two things can go together. A direct transfer to a charity from an IRA counts toward the RMD for that year. Some retirees simply direct their IRA custodian to send the RMD to a charity, without worrying too much about the amount.

There’s no tax deduction when one does this, because there is also no inclusion of the distribution in taxable income, which would be the usual case with an RMD. Avoiding income inclusion is more valuable than getting a tax deduction. For example, it may avoid additional income taxes on Social Security benefits that otherwise could be triggered by an RMD.

This year many fewer taxpayers will be itemizing, thanks to the doubled standard deduction. For these taxpayers, arranging for a transfer to charity from an IRA will have better tax results than simply making a gift of cash in the same amount.

Do you have a question concerning wealth management or trusts? Send your inquiry to contact@gstrustco.com

(November 2018)
© 2018 M.A. Co. All rights reserved.

Sudden Wealth

Lotteries have grown in popularity in recent years, as jackpots have grown in size.

In October, the multistate Mega Millions jackpot grew to more than $1.5 billion if taken as annuity payments, and the largest jackpot on record won with a single ticket.

Lotteries are seen by some as the shortcut to financial security, even though the odds of winning are so low (1 in 302,575,350 for the recent Mega Millions jackpot). Ironically, some studies show that as many as 70% of lottery winners end up broke or filing for bankruptcy. In fact, 44% of winners have spent the entire jackpot within five years!

Some people earn very high compensation for a very short period of time, playing professional football is one example. According to a 2015 study, the median career earn­ings of an NFL player, expressed in inflation-adjusted dollars, were $3.2 million. That is far above the median lifetime career earnings of most Americans. Yet after 12 years of retirement, 15.7% of the players had filed for bankruptcy, a rate that is roughly three times greater than that of the rest of the male population of comparable age. The study did not try to pinpoint the causes.

Similarly, many notable actors and celebrities (For example, Johnny Depp) found themselves in a financial crises despite their large earnings.

Did they have a plan for their financial windfalls?

The phrase “sudden wealth” may be associated with lot­tery winners, but life provides many other opportunities for a sudden increase in net worth. Lump sum distribution of retirement benefits, insurance settlements, inheritance, or the sale of a business or investment real estate can create large sums of money for talented people who, like most lottery winners, do not have experience with wealth management.

Taxes are the first concern when sudden money is com­ing into one’s life. Taxes simply need to be assessed and addressed as part of the process. For lottery winners, for example, there isn’t much tax planning to do. The tax rules for retirement distributions are pretty straightforward as well. Planning a liquidity event, such as the sale of a business, can get more complicated. A legal consultation is likely advisable.

The harder talk is about the friends who may show up, looking for a loan or offering an “investment oppor­tunity.” Most difficult of all is broaching the idea that one’s family might not act honorably.

Garden State Trust Company has experience with wealth man­agement. We know all about financial transitions and attendant emotional adjustments. When you come into significant sums, call upon us for:

  • personal investment accounts, with asset allocation planning, unbiased investment advice and fees linked to account value (not transactions);
  • revocable living trusts, for an added measure of finan­cial flexibility, including protection in the case of disabil­ity and probate avoidance;
  • rollover IRAs to extend the tax-deferral benefits for your retirement money.

If you be will creating sudden wealth for someone else

If your estate plan includes a substantial legacy for a younger family member who lacks full financial maturity, consider using a trust for the bequest. Your trust will be a gift of more than financial resources. You will be includ­ing our investment and financial management expertise as well. A gift or bequest in trust can provide for a lifetime of financial security.

We look forward to being of service.