Careful estate planning can defer or eliminate taxes.

I hope the heat of summer has not taken your mind off of planning your future security. Decisions about retirement security are among the most important to be made, and I urge you to consult with your financial advisors soon so that you can chart your own course along life’s highways and byways.

Deferral of Taxes When Spouse Is Beneficiary: The taxes, as described last month, i.e. income taxes that are deferred and/or eliminated and federal estate taxes, are deferred when retirement-plan proceeds pass to a surviving spouse. However, taxes on retirement funds remaining at the death of the surviving spouse can be severe. You can reduce taxes by choosing the right asset for a charitable gift. Retirement-plan funds may be the best choice for funding the charitable gift you intend. Suppose you want to make an estate gift of $100,000. to the Scottish Rite Foundation and you are trying to decide whether to fund the gift with cash, appreciated stock, or retirement-plan funds. Each would generate the same estate-tax charitable deduction, but your choice could make a significant financial difference to your children or other individual beneficiaries of your estate.

Note: If cash or appreciated stock is given to charity and retirement funds to children or other individuals, the retirement funds may be subject to both estate and income taxes. However, if the retirement funds are given to charity, the cash or stock passing to heirs will be income-tax free. In fact, the heirs will receive a stepped-up bases in the stock. When they sell it, they will be taxed only on appreciation beyond the date of death value.

Let’s look at an example: Tom dies with a taxable estate of $1,000,000. This includes $100,000 in qualified retirement-plan funds. He leaves the $100,000 in retirement-plan funds to the Scottish Rite Foundation. The balance of his estate, after taxes, goes to his daughter Cheryl.

If Tom had not made the charitable gift, his estate would have paid a $153,000. federal estate tax. However, because he did make the gift, the tax is only $114,000, a savings of $39,000. This amount would have been saved whether Tom funded the gift with either retirement funds or another estate asset. Because Tom funded it with retirement funds that otherwise would have been taxed to her, Cheryl was saved an additional income-tax payment of approximately $25,000. Thus her total tax savings was about $64,000, and Cheryl received only about $36,000 less than she would have if the charitable gift had not been made.

Planning for Income Needs of Survivors: The estate owner who wants a family member to receive income from retirement funds before they pass to charity should consider a Charitable Remainder Trust. Such a trust makes payments to designated beneficiaries for life or for a specified term of years “not to exceed twenty,” and then the trust assets pass to charity. When a charitable remainder trust is used in conjunction with retirement-plan proceeds, it can act as a “cushion” for the federal income tax on the distribution of the plan proceeds.

Let’s look at another example: Tom directed that the proceeds of his retirement-plan benefits create a charitable remainder unitrust at his death to benefit Cheryl and then pass to the Scottish Rite Foundation. The trust will pay Cheryl six percent of trust assets as revalued annually. Note: Tom could have arranged for Cheryl to receive a fixed amount each year (Charitable Remainder Annuity Trust), but he chose the unitrust because it offered the potential of income growth to keep pace with inflation.

Tom died when Cheryl was 57 years old. At the time, $250,000 remained in the retirement plan. Because the trust does not have to pay income tax on the plan’s proceeds, they remain intact to generate the payments to Cheryl. The initial annual payment will be $15,000 (6% x $250,000), and payments will increase if trust principal grows. Creating the trust also saved a substantial amount of federal estate taxes. Given Tom’s 55 percent estate-tax rate, his estate would have paid $137,500 in estates taxes had he simply given the retirement funds outright to Cheryl. With the trust, his estate is taxed only on the value of Cheryl’s income interest, which is about $168,600. This saves the estate $44,770 in estate taxes. Combined estate and income tax savings are more than $100,000. This means more assets are preserved to generate the payments to Cheryl and, ultimately, support Tom’s favorite charitable purposes at the Scottish Rite Foundation. Which leaves my “ad” for this month to read: Your foresight, planning, and generosity will truly result in an enduring legacy. 

To receive more information on the benefits of giving appreciated assets to the Scottish Rite Foundation, S.J., USA, print this web page, fill out the requested information, and mail to the address below:

For an investment of securities and/or real estate, please run a calculation and send it to me based on an investment of $__________. Assume the cost basis of the asset (what was originally paid, less depreciation) is $__________.

My birth date is _________________; My spouse’s is _________________.

Name ____________________________ Date _______________________

Address _______________________________________________________

City _________________________ State ________ Zip _______________

Send to: Scottish Rite Foundation, c/o Thomas M. Boles, 1761 East Woodcrest Avenue, La Habra, CA 90631-3260

Brethren Benefit From Pooled Income Fund
What is one of the better ways you can benefit yourself and your family and, at the same time, support the Scottish Rite and its Childhood Language Disorders Program? The answer is simple: The Scottish Rite Pooled Income Fund!

The Scottish Rite Pooled Income Fund allows you and, if you wish, your wife and/or other beneficiary(ies) to receive a worry-free lifetime income as well as attractive tax benefits by joining the Fund via a financial gift to The Scottish Rite Foundation, S.J., USA. For more information call, 1-800-486-3331 or fax 202-387-1843.

Grand Commander Kleinknecht will personally respond to your inquiry. If he is not available, please leave your name and number, and the Grand Commander will return your call at his earliest opportunity. Through the Scottish Rite Pooled Income Fund, you can do well for yourself and your family while also doing good for others!