More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
Despite new 2010 Roth IRA conversion rules that lift income limits and allow clients to smooth tax payments over two years, few investors are biting. A survey from Putman Investments released last week found only 14% of respondents were considering converting some or all of their traditional IRA assets to a Roth IRA either this year or next, with a majority (56%) saying they definitely would not convert.
But a Roth conversion provides numerous benefits for the appropriate client; one of which, says Andrew Hastings, vice president of business development National Philanthropic Trust, is in building a charitable legacy.
"If your client converts and pays the taxes over the next two years, the account obviously then grows tax-free," Hastings says. "If he makes a charitable contribution, it can offset the taxes he'll pay. If he is charitably inclined, it's a win-win.
The giving vehicle the Roth is then linked to depends on the amount bequeathed. According to Hastings, three options immediately present themselves; a checkbook, a donor-advised fund or a family foundation.
"What are your client's objectives?" he asks. "If it's a relatively small amount, cut a check directly to the charity, get the gift receipt and itemize it on his taxes.
Donor-advised funds, he notes, are usually seeded with a minimum of $25,000.The fund will grow tax-free and the donor can stipulate to whom the donation is made. It takes philanthropy out of the checkbook and grants more control and empowerment to the client. Upon death, the remainder can be distributed to beneficiaries, or the client's heirs can take control and continue the charitable legacy.
If the donor-advised fund is like a charitable bank account then the third vehicle, the family foundation, is the bank itself. Hastings says it usually works best for high-dollar contributions with sophisticated philanthropists.
"It's essentially setting up a charitable business," he explains. "It requires bylaws, approval from the IRS, legal counsel, a board of directors, etc. If the client has a Roth IRA, chances are the amount will fall into the range where a donor advised fund, rather than a family foundation, will work best."
Sarah Libbey, president of Fidelity Charitable Gift Fund, notes the increasing popularity of the donor advised fund, combined with the current Roth conversion rules, "is a perfect confluence of events for the charitable inclined."
She added that a recent Fidelity survey found that 40% of investors who work with advisors are eligible for the conversion.
"Yes, it will be a bigger tax hit than there probably used to," Libbey says. "But they can take it over the two years and they can take the deduction to have it offset. The contribution is made now; the taxes are paid now, in order to give far into the future. For advisors, it plays a major role as part of an integrated strategy they can offer clients."