Qualified Charitable Distribution ("QCD") From your IRA RMDs

As individuals invest in their retirement funds, over the years these accounts can become one of the largest assets at the time of retirement.  At age 70 1/2, you must begin to take Required Minimum Distributions ("RMD") from these accounts based on your life expectancy.  These income distributions are taxable and can cause an individual to move into a higher tax bracket or increase their Medicare premium expenses.

A great way to offset some of this taxable income is to use a portion of your IRA RMD to donate to qualified charitable 501(c)(3) organizations ("Qualified Charities"). These donations are called Qualified Charitable Distributions ("QCD").

How To Make A QCD: To make a QCD, the funds must go directly from your IRA to a Qualified Charity.  At your request, your IRA administrator will make a distribution directly to the Qualified Charity to satisfy your RMD. At tax time you will receive a 1099-R from your IRA showing the full amount of your distribution.  Your tax preparer will then enter the amount of the RMD that went to Qualified Charities through a QCD. The QCD will reduce the taxable portion of the 1099-R.

Example:  Lisa is 72 years old, lives on a combination of $25,000/year of Social Security and another $25,000/year of interest income from her portfolio, and has a $3,400 RMD this year. In addition, Lisa donates each week to her church and takes the deduction on her Schedule A to offset the tax consequences of her RMD. She would like to assess the tax savings benefit if she simply did a Qualified Charitable Distribution directly from her IRA to the church to satisfy her RMD obligation.

By allocating Lisa's RMD to a QCD, her AGI would result in $25,000 (ordinary income) + $7,475 (the taxable portion of her Social Security) = $32,475. Since Lisa has only $6,000 of itemized deductions, she instead claims the $7,850 standard deduction (including the additional amount for being over age 65), and also receives a $4,050 personal exemption, which brings her taxable income down to $20,575. Based on the 2016 individual tax tables, this puts Lisa in the 15% tax bracket, with a total tax liability of $2,622.50.

In contrast, if Lisa were to take the $3,400 RMD directly, her income would increase by $3,400. In addition, the higher income would also increase the taxability of her Social Security from $7,475 to $10,365. The subsequent $3,400 donation to her church would produce a $3,400 tax deduction, bringing her total tax deductions to $9,400 (although she already had a $7,850 standard deduction, only the last $1,550 produces any tax savings). Thus, Lisa’s final taxable income is $38,765 – $9,400 – $4,050 = $25,315, which produces a tax liability of $3,333.50.

Benefits: The bottom line for Lisa is the saving in taxes of $711 by simply allocating the deduction straight from the RMD instead of receiving the RMD herself.  Depending on your income, you may also avoid the Medicare high-income surcharge, which increases your Part B and Part D premiums based on your AGI.

Tips for QCDs: To make a QCD, we recommend contacting the charitable organizations first to obtain the correct address and mailing information to make your gift. You will then need to obtain an application from your financial planner or IRA Administrator to make an RMD distribution by checking the QCD box (with no taxes withheld) and provide the information for the charitable organization. The application should have your name and address on it so the charity knows who to send the acknowledgment letter to and state that no goods or services were received for the donation.  Any donations over $250 require a written receipt from the charity. Come tax time, provide the 1099-R along with the QCD information to your tax preparer.

If you have any questions about Qualified Charitable Distributions and other tax planning, please feel free to contact Glick and Trostin, LLC at 312-346-8258. 

Disclaimer: The materials on this website are provided for informational purposes only and do not constitute legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between any attorney and any other person, group or entity. No representations or warranties whatsoever, express or implied are given as to the accuracy or applicability of the information contained herein. No one should rely upon the information contained herein as constituting legal advice. The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances.

When Should I Update My Estate Planning Documents?

You may be part of the 42% of the population that has created an estate plan. However, did you know that it is recommended that estate plans be updated at least every 3-5 years? Since signing your documents, circumstances in your life could have changed, making parts of your plan outdated or obsolete. No, you did not waste your time creating your initial plan--you made your wishes known in legal documents that were ready if you needed them. It is important to remember though, that documents making up an estate plan are affected by changes in the law as well as personal events (i.e. marriage(s), birth, moving, divorce, and death). Significant events can change a person's priorities and relationships with others, leading many to adjust their estate plans as well as retirement and/or life-insurance plans over the course of their life.    

The good news is that once you get past the first step of initially creating your estate planning documents (i.e. Will, Trust, Powers of Attorney, Living Will), it is relatively easy to update your documents as changes occur. The following are the common estate planning documents and a recommendation as to when you should update them:

Basic Will
·  Purpose: Directs the distribution of your assets and appoints a guardian for any minor children after your death.
·  When to update: After a change in your family status such as marriage, births, divorce, and death. As you have more children or your children get older, the guardians that you chose initially may no longer be the right options for your family. After a divorce or remarriage, your Will should be rewritten to remove or correct your spouse's information. If you previously had set up equal inheritances for a group of people (i.e. your children), you may now have reasons to leave more or less to certain people, e.g. one person's lack of financial need for the inheritance. You may also want to consider making changes if you are planning to provide for grandchildren or someone with a disability, if your assets substantially increase or decrease, or if you are no longer in possession of items or funds that you previously designated to be left to specific people.
·  How: Smaller changes can be made to a Will through the use of a Codicil or the entire Will can be rewritten with the necessary changes included. An important note—a Will and Codicils are filed at the time of your death, so any changes made to your will by the use of a Codicil will be visible to the public.

Declaration of Trust
·  Purpose:  Functions similar to a Will with some added benefits such as avoiding the court’s oversight of your estate (probate). A Trust is not made public like a Will is after your death, and assets can be distributed to your beneficiaries over time rather than all at once.
·  When to update: Similar to a Will but also update a Trust if you wish to change your Trustee or add a special needs provision.
·  How: Smaller changes can be made by amending your Trust or the entire document can be updated through a restatement of the Trust.

Powers of Attorney
·  Purpose: Names an agent to manage your financial affairs (Power of Attorney for Property) and an agent to make medical decisions for you (and your minor children) if you are unable to (Power of Attorney for Healthcare).
·  When to update: These documents should be updated every 3-5 years due to changes in personal information (addresses and phone numbers are listed in the documents), your wishes, and relationships with your agents. Additionally, the forms themselves and laws regarding the documents change from time to time. Institutions that require these documents such as banks and hospitals prefer to see more recent documents as they are considered to more accurately reflect the person’s current wishes.
·  How: These documents would be rewritten using updated formatting and information. 

Living Will
·  Purpose: Specifically directs your end-of-life instructions.
·  When to update: Generally not updated unless your wishes change or changes in the law.
·  How: The document would be rewritten with your updated wishes.

There are many factors to consider when creating your estate plan. As you age, people and possessions come into and out of your life and your personal values and preferences may change as well. It is important to remember to update your estate planning documents accordingly. If you would like to have one of our attorneys review your current estate plan or if you have any questions, please feel free to contact Glick and Trostin, LLC at 312-346-8258.

Disclaimer: The materials on this website are provided for informational purposes only and do not constitute legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between any attorney and any other person, group or entity. No representations or warranties whatsoever, express or implied are given as to the accuracy or applicability of the information contained herein. No one should rely upon the information contained herein as constituting legal advice. The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances.