This quarter’s education series is Financial Considerations Upon Retirement. The first two posts addressed cash flow and taxes and healthcare and insurance.

One of the most valuable ways we at Flagstone help our clients achieve their financial goals is by knowing them personally. We endeavor to discover what’s important to them. When we understand their hopes and dreams, we’re able to watch for opportunities to implement strategies that help attain their goals. Long-term planning starts today!

Do you make charitable donations?

There are many opportunities in pre-retirement and retirement phases to reduce your tax burden through charitable giving. One of the first steps in establishing a long-term giving strategy is to identify where you want your assets to go at your death. Another step is to take an inventory of your current assets and accounts you own. There can be some meaningful tax savings by directing specific assets to specific beneficiaries, all in line with your goals. That’s because some assets are more tax efficient for charitable giving. And some are better for passing to individuals. A qualified estate planner, CERTIFIED FINANCIAL PLANNER, and CPA can help you determine and carefully coordinate your giving goals and strategies. Some tools often used in charitable planning include the following:

Qualified Charitable Distributions

Qualified charitable distributions (QCDs) are distributions to a nonprofit organization directly from your traditional IRA. The money goes from your IRA to the nonprofit, so the money is not taxed as ordinary income. (This tax benefit is similar to taking a charitable deduction if one itemizes.) To give through QCDs, the donor must have attained age 70.5 or older at the time of the gift. And the maximum QCD is $100,000. If you take the standard deduction, you’re giving with after-tax money, and you’re over 70.5, it is usually more beneficial from a tax perspective to give directly from your IRA through a QCD. QCDs also count toward satisfying required minimum distributions once the IRA owner reaches 72.

Gifting of Appreciated Securities

Another way to reduce taxes is by gifting appreciated securities. Appreciated securities are those which have increased in value. At the purchase of a security, you establish cost basis, which is the original purchase price of the asset. When the asset increases in value, the value when sold minus cost basis determines your capital gains taxation (short term or long term).

For example, if you buy a stock for $10, your cost basis is $10. If that security is realized (sold) over a year later at $25, you are taxed at your long-term capital gains rate on the $15 difference. Taxable gain on stocks that are held a long time or experience high growth can get so high that the taxation becomes significant. When this happens, you can gift the security directly to a nonprofit organization. The gift gives you a charitable deduction equal to the value of the stock you gave. That way you don’t have to pay tax on the gain.

Donor Advised Funds

Donor advised funds (DAFs) are a third way to potentially lower your tax bill through charitable giving. Often clients contribute appreciated securities to their DAF, so they receive a current year tax deduction. With a DAF, the individual who is donating can give that money to their charity of choice for many years into the future. My colleague, Dan Stous, wrote an article specifically about donor advised funds that you can read here. This strategy tends to work well for giving appreciated securities in years where the taxpayer has a spike in income. The DAF may also be helpful during years prior to retirement when the taxpayer is in a higher tax bracket than during retirement. In the latter situation, taxpayers can essentially prefund charitable contributions during working years to minimize their lifetime of taxes.

Is your estate plan old and possibly outdated?

To ensure an overall well-established estate plan, we recommend talking to an estate planning attorney. An estate planner will recommend documents specific to your situation to meet your goals and objectives. After you sign your estate documents, it is important to review them periodically to address any changes in your life. We recommend reviewing them every 5 years or whenever you have a meaningful change in your life. Such changes include moving to a different state, aging children, birth, divorce, death, etc. These common changes could necessitate an update to your estate plan.

Do you need to review account beneficiaries and titles?

Even if you have a good estate plan drafted by a good estate planning attorney, you are likely not done with your estate planning. It is important to note that the owner of a life insurance policy, retirement account, taxable (nonretirement) account, or annuity is responsible to make beneficiary changes and account titling changes to be consistent with the estate plan. For example, if the owner of the account did not change the beneficiary designation of a spouse after divorce, the ex-spouse could remain the recipient at the account owner’s death, depending on state law. Beneficiary designations and account titling, if applicable, should be reviewed frequently for alignment with your estate plan. At Flagstone, we regularly review beneficiary designations and account titling with our clients to help ensure changes haven’t been missed.

Our goal at Flagstone Financial Management is to add value through the investment and financial planning process. We do that by knowing our clients and their goals. If you have questions about how we might be able to help you, contact us. We’d love to talk!