While many same-sex couples have done some estate planning, few have truly created an estate plan as a couple. For example, most people name a beneficiary on their retirement accounts or insurance policies, but fail to name a back up or contingent beneficiary. As I tell my clients, it is important to have a back up just in case it’s a tie!
When same-sex couples select secondary beneficiaries, they typically select a sibling, parent, niece, or nephew to receive the bulk of their assets. In many cases, however, parents and siblings are already financially stable. As for nieces and nephews, an attorney I know said it best: do you really want to make someone else’s children rich? Probably not.
The other danger is that you and your partner might not tie. If you pass away first, will your partner continue to pass all of his/her assets on to siblings, parents, nieces, and nephews? If so, then your assets will go to his/her family rather than your own. I suggest that you and your partner take some time to decide how you would like to leave your legacy.
If helping others is one of your financial goals, consider tools and strategies that may help you maximize your ability to donate both today and after you have passed away. These strategies not only provide a benefit to your charity of choice, but they also can provide a benefit to you and your estate.
How can my charity and I both benefit from my gift? One popular estate-planning technique is planned giving. You could receive an immediate income tax deduction with some gifting strategies. With a properly structured gift, you could realign your investment portfolio without paying capital gains tax on appreciated property. Another strategy may allow you to pass your estate on to your heirs while avoiding both probate and estate taxes.
Cash donations – When helping to support a charity, most people choose to donate cash. Donations to charities registered with the IRS are usually tax deductible for those who itemize their deductions. The reason this method is so popular is because it is the easiest way to donate, but this option might not be the most economical way for you to support your favorite charity.
Your deduction for an outright gift will typically equal the value of your gift up to certain limits. You can carry forward any gift amount that exceeds these limits for up to five years.
Cash donations could be suitable for:
• Small, medium, or large donations
• Monthly donations
• Immediate gifts to a charity
• Donating appreciated assets
In addition to cash contributions, you could consider donating appreciated assets- including securities if you have owned them for at least a year. The donated asset is assessed at full fair market value. You can take a tax deduction and avoid payment of capital gains taxes on the security.
For example, let’s assume that you own a share of stock that you purchased for $40 and it is currently worth $100. If you sold that stock for income purposes or to rebalance your portfolio, you would have to pay capital gains tax on the $60 of growth you received. If you held the stock for over a year, then you could have to pay up to 20% of your total gain in capital gains taxes (other taxes on the sale may apply).
If you wanted to gift $1,000 to your favorite charity, you could give cash, or, in the above example, save $120 in capital gains taxes by gifting that charity ten shares of stock. A donation of stock could be tax deductible and might help you reduce taxes from capital gains.
Appreciated-asset donations could be suitable for:
• Medium to large donations
• Immediate gifts to a charity
• Someone who has owned an investment for at least a year and 1) Has a high income who is looking to maximize tax savings, 2) Who is looking to reallocate their investment portfolio, 3) Who has highly-appreciated investments and can replace the gifted investments by adding more cash to their portfolio, and/or 4) Who normally sells investments in a non-retirement account for income.
Donor-advised funds – Another way to give is through a donor-advised fund. Here’s how it works: You irrevocably contribute cash, stocks, or certain other assets, which are in turn invested in one or more investment options. The investment company manages the investment options to potentially increase the value of the initial contribution and to produce an income stream for you. You can recommend eligible charities for grants from the fund over a period of time while taking an immediate tax deduction.
Donor-Advised Funds could be suitable for:
• Medium to large donations
• Gifts to charity over a period of time
• Someone looking for a lower-cost, turnkey option to a charitable trust
• Someone who can part with cash or an investment in return for an immediate tax deduction and income over time.
• Someone potentially looking to reduce their taxable estate.
Estate Gifts – For someone who doesn’t have heirs and/or who is charitably inclined, gifting to a charity through your estate is another method by which you can donate.
You can name your favorite charity as a beneficiary in your will or trust for your investment account(s), bank account(s), retirement plan(s), and/or life insurance. One great part of naming a charity as a beneficiary is that you retain the asset for your personal use and you’re easily able to change any of your beneficiaries in the future.
If you’re giving to people and to a charity as part of your estate plan, you may want to consider leaving the most highly taxed investments (such as traditional IRAs, 401ks, TSPs, annuities, etc.) to a charity and the more tax-friendly investments (such as Roth IRAs, checking, savings, money markets, and individual investment accounts) to individual heirs. This could maximize the value of the estate to your family and friends as they could see less of your estate lost due to taxes. Because charities don’t pay income tax, this arrangement should have little impact on your charity of choice. Of course, you can name a combination of people and organizations as beneficiaries on any of your investments.
A CPA and attorney can provide specific guidance regarding the pros and cons of naming a charity as your beneficiary.
Charities may have special verbiage for estate donations, so you may want to reach out to them before listing them in your will, trust, or as a beneficiary. Also, while you can always change your beneficiaries, it’s often a good idea to let your charity of choice know that you’ve included them in your estate plan. Charities may have estate-planning resources, special events, or other ways to support those who are giving via their estate. Keep in mind that you won’t have to disclose the amount of your gift.
Estate gifts could be suitable for:
• Small, medium, or large donations
• Future gifts to a charity
• Someone who wants to give a charitable gift as part of their estate
• Someone potentially looking to reduce their taxable estate
Advanced strategies – Trusts may also play a role in a giving plan. They could help charities while benefiting you now and your heirs later. One popular option is a charitable remainder trust (CRT). By using a charitable remainder trust, the trustee can sell highly appreciated gifted investments and reinvest the proceeds to generate income without paying capital gains tax. Thus, a properly planned gift could enable you to realign your investment portfolio without incurring any current income taxes. That could allow you to diversify your holdings and even increase your cash flow.
A CRT can be funded with a variety of assets, including stocks, bonds, mutual funds and real estate. The trust provides you with income for a specified time period, after which assets are transferred to the charity of your choosing. You will receive a tax deduction based on the amount the charity is estimated to receive after expenses. Often trustees will replace the asset’s value with a life insurance policy to provide the same estate value to their heirs while enjoying immediate tax benefits and income over time.
Another possibility is a charitable lead trust (CLT). It provides a stream of income to a charity for a specific period. Upon dissolution of the trust, your heirs would potentially receive the remaining assets free of estate taxes.
The only thing you can’t do is take back your gift. You can’t start selling assets and then pocket the money. But depending on the strategy you select, you might be able to change the charity that will eventually receive your gift.
Charitable trusts could be suitable for:
• Large donations
• Future gifts (CRT) or income over a period of time (CLT) to your charity of choice
Someone with highly appreciated assets who can part with those assets now, wants an immediate tax deduction, and who is either looking for income over time (CRT) or a way to pass assets to heirs in the future (CLT).
Someone looking to potentially reduce their taxable estate – Making a donation to a qualified organization provides some very attractive benefits. There are other ways to leverage your assets to benefit others while helping you pursue your financial objectives. Discuss your options with your financial advisor, your estate planning attorney, and tax professional.
Whatever gifting strategy you choose, planned giving can be very rewarding. It’s wonderful to see your gift at work while receiving tax benefits on your donation.
- Throughout my nearly 20 years as a Financial Advisor, I have seen some of the best and worst markets in our history. That experience allows me to approach my clients with the knowledge of how the markets fit into their greater financial picture. At Partnership Wealth Management we help everyday people who have accumulated wealth make sense of what they have and work with them to maximize their financial opportunities in a relaxed, comfortable, and professional environment. While we help people from all walks of life, many of our clients are same-sex couples searching for a knowledgeable, LGBT-friendly financial advisor to help them with their unique financial planning needs. I am a CERTIFIED FINANCIAL PLANNER™ professional and have the Accredited Domestic Partnership Advisor(sm) designation. As a Registered Investment Advisor, we are not tied to any company’s investment products allowing us to provide unbiased advice by offering a wide array of investments and other products to our clients. Since 2001, I have been writing articles on financial planning for several regional newspapers and have been a guest speaker on LGBT financial issues for various local and national organizations. Additionally, I have conducted financial planning workshops for large corporations and government agencies. Non-Profit Work I believe that it is important to give back to the community and currently serve as the treasurer for FreeState Justice and as a co-founder/president of Paws for a Cause. I’m a current member of several LBGT, environmental, and local community groups. Personal My wife, Heidi and I enjoy camping, hiking, and traveling with our daughter, Elise, and our dogs, Fenway & Roxy. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.