Assignment 7: Life Insurance, Annuities, Qualified Plan Interests, and Bequests Flashcards
1
Q
Legacy gift statistics
A
Of those with legacy gifts:
- Bequests: 68%
- Retirement plan beneficiary: 29.7%
- Insurance policy beneficiary: 18.5%
- Charitable trust: 18.5%
- DAF: 15.6%
- Charitable gift annuity: 13.8%
2
Q
Comparing Largest Gifts
A
Donor’s largest planned gift by type/mean value of gift/median value of gift
Bequest: 54.3%/$811,535 mean/$225,000 median
Retirement plan: 17.3%/$803,985 mean/$375,000 median
Charitable trust: $12%/$3,126,829 mean/$500,000 median
CGA: 8.9%/$426,250 mean/$100,000 median
Insurance policy: 5.3%/$345,000 mean/$100,000 median
Retained life estate: 2.2%/$820,000 mean/$550,000 median
3
Q
Nonqualified Deferred Annuities
A
- Commercial contract from an insurance company
- Funded with after-tax money (creates basis)
- Funds grow tax-deferred in a fixed account, or in a combination of fixed and variable accounts
- Money withdrawn comes out “worst-first”; all gain is treated as ordinary income
- Surrender charges may apply
- IRS penalities apply to early withdrawals prior to 59 1/2
4
Q
LIfetime Gifts of Deferred Annuities
A
- Annuity purchased post-April 22, 1987
- Taxable gain upon gift is value above basis
- Deduction is for total value
- Net result is a deduction for basis
If purchased BEFORE April 22, 1987, a potential tax trap exists
- Based on a private letter ruling, if the charity surrenders the contract more than one year after the donor’s gift:
- Donor gets deduction for basis in year of gift
- Donor is taxed on full gain in the year the charity surrenders the contract
Not the best asset to give during life
*Deduction is generally limited to basis
*A client or donor is likely to have more appropriate assets to give during their lifetime
Good gift at death
5
Q
“Deathtime” Transfer
A
- A deferred annuity can pass at death to a charity via the beneficiary designation
- Money goes free to income tax and free of any estate tax
- Donor gives up nothing during life
- Can be an attractive substitute for a gift that might otherwise be made by a bequest in a will
6
Q
IRAs and Qualified Plan Interests
A
- Individual Retirement Accounts (IRAs) allow an individual to save money for retirement with tax-free growth or on a tax-deferred basis
- $9.8 trillion in assets as of June 2019 (1/3 of the US retirement market of $30 trillion
- Estimated 46.4M households or 36% own IRAs
7
Q
SECURE ACT
A
Setting Every Community Up for Retirement Enhancement Act 12/20/2019
- Turn 70 1/2 in 2019 or earlier you are unaffected
- Turn 70 1/2 in 2020 or later will not need to take the RMD (required minimum distribution) until they reach 72
- RMDs increase IRA-holder’s total taxable income and can push him/her to a higher tax bracket and limit or eliminate some deductions
8
Q
SECURE ACT - 10 year rule
A
- Before passage of Secure Act, inherited retirement accounts could “stretch” the distributions and tax payments over time
- Under the new law, those who inherit IRAs from original owners who died on or after 1/1/20 must withdraw all assets from inherited IRAS within 10 years following death of original account holder
- Exceptions: Spouse, minor child, disabled or chronically ill beneficiary, beneficiaries fewer than 10 years younger than the original retirement fund holder
9
Q
CARES Act and IRAs
A
Coronovirus Aid, Relief, Economic, and Security Act
- RMDs are suspended for the calendar year 2020, allowing further income tax deferral until 2021
10
Q
Charitable IRA Rollover
A
- Donors that are 70 1/2 or older can donate up to $100,000 per year to qualified charities
- Qualified Charitable Deduction (QCDs) allows donors to fulfill their required minimum distributions (RMDs) through a direct transfer to charity from the IRA administrator
- Amount of the QCD is not included in the donor’s AGI
- Donor does not, however, receive a charitable income tax deduction
11
Q
Must go to a Public Charity
A
- Transfer must be from IRA to a public charity for charitable purposes–not to:
- DAF
- PF
- SO (supporting org)
- Charitable remainder trust
- CGA
- Donor cannot receive any benefit from the transfer–he/she cannot, for example, purchase something at a charity auction, tickets for a charity golf tournament, or use the money for charity gala sponsorship
12
Q
Best for?
A
- Donors who are required to take an RMD but do not need the funds, and who would have higher tax liabilities if they did take the distribution
- Make annual gifts already and prefer to use RMD instead of cash
- Reduce balance in IRA–lower future RMDs
13
Q
IRD–Income in Respect of a Decedent
A
- A person acquiring decedent’s property normally takes a basis in the property equal to the FMV at the date of death (stepped-up basis)
- Exception: INCOME IN RESPECT OF A DECEDENT
- IRD is income that would have been taxable to the decedent, had the individual lived to receive it
- IRD assets are generally subject to income and estate tax
- In illustration–donor has $100,000 CD and $100,000 IRA: which is best to give to charity and which is best to leave heirs? CD to charity–>IRA to heirs ($100,000 received by charity, $100,000 received by heirs with no income tax due) IRA is taxed as IRD; CD not taxed as IRD because tax wouldn’t be due during their life
14
Q
Retirement Accounts
A
- Gain inside an IRA, 401(k), or other qualified plan interest or deferred annuity received by an estate or other beneficiary is taxable as IRD
- income tax on distribution
- estate tax–plan’s value is included in decedent’s taxable estate
15
Q
Life Insurance and IRA
A
- Designate a charity as the beneficiary of the IRA
- Use the income from the IRA to fund life insurance payable to heirs (or a trust)
- Money withdrawn from the IRA is taxable
- At death, the heirs receive tax-free death benefits, and the balance of the qualified plan passes to the charity tax-free as well
16
Q
CRUT and IRA
A
- Create a testamentary CRUT
- Designate the CRUT as the beneficiary of the IRA; CRUT is not subject to tax, income tax generated by IRD is eliminated
- Heirs as income beneficiaries of CRUT–allows children to receive funds beyond the 10-year rule (life or term or years) Similar to a stretch IRA+
17
Q
Life Insurance Basics
A
- Death benefit is income-tax free
- Any cash value grows tax-deferred
- Primary purpose is to protect against loss–the loss of the human life and its earning (and giving) power
- Creates liquidity when needed most–to pay taxes, retire debts, make gifts, or replace gifted assets
18
Q
Factors in Insurance
A
- Premiums
- Expenses (commissions/administration)
- Mortality cost (rise every year/can be managed, in part, through underwriting)
- Investment return (policies can be written to have cash value)
19
Q
Parties to the contract
A
- Insured (or two insureds, with a second-to-die policy)
- Applicant
- Owner
- Premium payer
- Beneficiary or beneficiaries
20
Q
Insurable Interest
A
- Can a mobster buy insurance on a homeless person, who soon turns up dead?
- Insurable interest: exists when a person derives a significant benefit–personal or financial–from the continued existence of an individual or an entity
- Laws in each state regulate what counts as an insurable interest (love–spouse/parent; financial interest–partners in business; bank with debtor, or charities with donors in most states)
21
Q
Extent of Insurable Interest
A
“We don’t want you worth more dead than alive” is the general rule of financial underwriting
- Each company decides how much insurance it is willing to offer
- Each company checks to see how much total insurance is in force on any life they’re considering to insure
- Companies differ on how much insurance they will issue, when a charity applies for a policy of which the charity will be both the owner and the beneficiary
22
Q
Best prospects when soliciting gift of insurance
A
- Tend to be 25-55
- Faithful givers, but not huge givers
- Want to make a big, ultimate gift from relatively small annual premiums (1-4 premiums–or not more than 5)
- Keep the program very simple (honor those who complete their premium schedule–Legacy Society)
