Charity Driven Retiree
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Transforming Heartache into a Blessing with a Charitable Tax Strategy
Linda, a 67-year-old retired nurse, has always had a love for animals. After she adopted her Corgi from the Humane Society, she became an enthusiastic volunteer. When her beloved pet suddenly passed, she felt compelled to do something great in his honor. With a pension of $120,000 per year and substantial assets, she was eager to find the best way to support the Humane Society without hindering her own financial stability.
Linda wanted to make the most of her wealth to benefit the charity but was unsure how to leverage tax laws to maximize her donations. As a single taxpayer with a large pension, she was already paying high taxes and was worried about how her future Required Minimum Distributions (RMDs) would affect her tax situation. She also feared that giving too much could be perilous to her finances if emergencies were to arise.
Linda's financial situation had several planning issues that needed to be addressed. She was projected to pay income taxes that could potentially be multiple seven figures throughout her lifetime. The factors leading to this included annual Required Minimum Distribution amounts that could range from $50,000-$100,000 starting at age 73, as well as IRMAA Medicare Surcharges that could result in six figures of additional taxes. Furthermore, our projections estimated her estate could be subject to over $500,000 of Il Estate Tax at her death.
After reviewing Linda's situation, our team proposed several planning strategies to address her concerns. We recommended optimizing her investment account allocation to align with her risk tolerance. We also advised her to seek an attorney to draft several estate planning documents, including Powers of Attorney documents, in case of her incapacitation. Furthermore, we counseled on planned wealth transfer and gifting strategies, including utilizing qualified charitable distributions starting at age 70.5.
This strategy satisfied her desire to give to the Humane Society while also significantly lowering her lifetime tax liability. At death, the charitable causes that are important to her are now named as beneficiaries on her IRA accounts and her new estate planning documents. They will receive their specified payouts without any income tax liability.
There are many strategies we could have explored, such as a Donor Advised Fund (DAF) or a charitable remainder annuity trust (CRAT). A DAF would irrevocably remove assets from our client's estate and make those funds inaccessible for any of her living expenses in the event of an emergency or unexpected major healthcare expenses. Of course, establishing a CRAT could make annual payments of a fixed amount of the trust’s assets to her for a term of years (not to exceed 20) or lifetime(s), with the remainder passing to the charitable beneficiaries. However, through our strategic planning, we are showing significant tax savings without the expense of establishing or maintaining a trust while allowing Linda to retain control of her assets to allow her the most flexibility.
For Linda, our planning is a path to honor her beloved Corgi in the best way possible while ensuring her own financial stability. Through tax planning, we are able to show a positive annual cash flow while giving substantial lifetime gifts to her favorite charitable cause through Qualified Charitable Distributions. Finally, while retaining control of her assets, her final legacy upon passing could potentially be over $4M in tax-free funds for the charity! Our team is inspired by Linda and her desire to turn her heartache into a blessing for countless animals and the families that would welcome them.
This hypothetical case study is provided by McBeath Financial Group ("MFG") for illustrative purposes only. It is intended to demonstrate the benefits that MFG's customized approach can offer. Please note that actual client experiences may vary, and there is no assurance that MFG will be able to achieve the same type of results referenced in the case study.
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