You are 71 years old, married, still working and earning an income that puts your taxable income at $150,000, which is a 25% marginal tax bracket for 2016. You have been a diligent saver and accumulated $1,000,000 in your traditional IRA account as well as other investments that will easily supply your needed income if after your salary ends. That is the good news. The bad news is the IRS wants their due, so you are required to make distributions (called RMD for Required Minimum Distributions) from the IRA even though you do not need the income. Your RMD for 2016 will be, in round numbers, $43,500; moving you from a 25% marginal tax bracket to 28%, so you get to pay $12,180 of federal income taxes, plus your state income taxes, on income you do not need.
In 2015, the government renewed and made permanent the right to contribute, after you have attained age 70 ½, up to $100,000 of your IRA per year to charity. The benefit to you is contributing an amount equal to, or greater than your RMD satisfies the RMD requirement and does not add to your taxable income, thus saving you that $12,180 although you do not get a charitable deduction, which if you itemize deductions, but there are limits on how much you can deduct. You can benefit the charities of your choice and avoid income taxes. However, our legislators are going one better, and currently working on a bill that creates what they are calling a Legacy IRA. It is the same concept, but adds a couple of twists. You can start at age 65 and the amount is increased to a combined $400,000 per year. Combined means a portion can go directly to a charity, and a portion into a charitable gift annuity, a charitable annuity trust or a charitable unitrust. Without getting into the specifics of what each of these are, let me explain why someone might consider this strategy.
Let me first state that everything I present here is for illustration only. You should discuss these ideas with your tax and financial advisors before taking any action. This assumption is not accurate, but I’ll use it to keep the explanation understandable and relatively simple, so I will assume the $43,500 RMD is the same every year and you will live another 20 years. I will also assume your IRA does NOT grow. You will distribute $870,000, leaving a $130,000 balance in your IRA, which you designate in your will goes to charity; and will have paid $243,600 in federal income taxes, netting you $626,400 to put in your pocket.
Using the Legacy IRA, you contribute $200,000 per year for five years into a Charitable Remainder Unit Trust (CRUT) that will pay you 5% a year. I’ll also assume the CRUT can earn 5% so there is no depletion in the principle. The first year you receive $10,000, the second year $20,000, then $30,000, then $40,000 and finally $50,000 per year for the remaining 16 years. That is a total of $900,000 on which you pay $252,000 of federal income taxes and net $648,000.
If you would like to find out more about investing, business planning, business and family progression planning, inter-generational wealth transfer, legacy creation, family coaching, family office services, and all the ways you and your children can give, and how effective philanthropy can positively impact your family, you can email me at email@example.com or visit our website at www.familywealthleadership.comm. Telephone: 949-468-2000
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