Gift planning newsletter from Cornell University Fall 2014 Meeting Year-End Financial Goals

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1 Financial Planner Gift planning newsletter from Cornell University Fall 2014 Meeting Year-End Financial Goals When Winston Churchill said, It is a riddle wrapped in a mystery inside an enigma, he wasn t talking about year-end planning, however much the phrase might seem to fit this annual chore. For many people, the twin objectives of charitable giving and providing for other financial goals present a dilemma. In the pages that follow, we articulate top year-end scenarios that many will face, and we begin to offer ways to make sure that both your financial and philanthropic goals can be met. Knowing what moves to make to address your particular circumstances is the key to solving your year-end dilemma. You can explore more deeply how your charitable goals can work hand-in-hand with your personal financial goals to enhance the outcome of both by requesting your free copy of our guide, Plan Now for the Future: Your Guide to Year-End Planning 5 Steps You Can Take Today. Supporting Cornell and providing for yourself and your family are goals that can be met together. Ask for our guide or contact us today to learn more. We are here to answer your questions and get you started on a plan. gift_planning@cornell.edu (800) alumni.cornell.giftplans.org

2 How do I deal with potential capital-gain taxes? Chances are you have had a good year with your stock investments in 2014 a year that saw major stock indices hit all-time highs. Now you may be wondering if you should sell and protect your capital gain. Of course, cashing in your gain comes with a price tag in the form of capital-gain tax. If you are in the top income-tax bracket, your realized gain could be taxed as high as 20%. Plus you may face an additional 3.8% surtax even if you are not in the top tax bracket. Many charitably minded taxpayers have discovered that they can reduce or even eliminate capitalgain tax by using their appreciated investments to fund their charitable objectives. A well-planned gift of stock may let you generate an income-tax charitable deduction based on the full fair-market value of the stock while allowing you to forego tax on your paper gain. How do I increase my retirement income? Perhaps you dreamed of travel and other activities during retirement, but because of low interest rates on cash investments and modest dividends on your stock portfolio, you have less income than you anticipated. You could make periodic withdrawals of some of your cash, but then you increase the risk of running out of money. You could sell some of your stocks and invest the proceeds in other securities with a greater return potential, but you would be taxed on the capital gain in the stocks you sold. A solution to this dilemma could be a life-income plan with Cornell University. You would transfer some of your stocks or cash and receive payments for life. With one of the plans you receive fixed payments for life; with another your payments fluctuate depending on the total return on the investments held in the plan. In both cases, your payments are likely to be significantly larger than your current cash flow, you will save taxes, and you will be making a future legacy gift to Cornell. GIFT SPOTLIGHT: Consider the case of a husband and wife, ages 75 and 74, with $50,000 worth of long-term appreciated stock for which they paid $25,000. 5% Gift Annuity 5% Charitable Remainder Unitrust Charitable Deduction $18,315 $24,178 Annual Payment $2,500 (fixed)* $2,500 (variable)** *Payments are: part tax-free, part capital-gain, and part ordinary income for 16.8 years (the couple s life expectancy) after which the payments are taxed as all ordinary income. **Payments are taxed according to the nature of the returns earned by the trust in the following order: first ordinary income; second capital gain; third tax-exempt; and fourth return of principal. 2

3 How can I meet the needs of my loved ones in a more tax-effective way? Most of us feel there is nothing more worthy we could do with our resources than help meet the needs of loved ones. The tax code is quite clear, however, that such support does not qualify for a charitable deduction. That means you are using after-tax dollars to provide assistance. So if you give your aging mother $2,000 per month to help with her living expenses and you are in the top federal income-tax bracket of 39.6%, you would have to earn more than $3,300 to net the amount she receives. Creative planning options may allow you to meet the current needs of loved ones and ultimately provide a very meaningful gift to Cornell University all while maintaining or even increasing your current spendable cash flow. GIFT SPOTLIGHT: Consider the case of an individual who is providing additional income for a parent, aged 82, with a gift of $50,000 cash. Charitable Deduction $26, % Gift Annuity Annual Payment $3,600 (fixed)* *Payments are: part tax-free ($2,884) and part ordinary income ($716) for 8.3 years (the parent s life expectancy) after which the payments are taxed as all ordinary income. 3

4 With high estate- and gift-tax exemptions, the charitable gifts in my estate won t produce any tax savings. Is there anything I can do now to change that? Many taxpayers were delighted when the federal estate- and gift-tax exemption was permanently set at $5 million, indexed for inflation. That means that fewer than 1% of Americans are affected by those taxes. (Note: Some states have a state estate tax with a lower exemption, so a person in one of those states could be subject to state estate taxes even if not to federal estate taxes.) But it also means that most estates do not realize any tax savings for charitable gifts that take effect on death. In other words, every dollar directed to charity reduces the amount available for noncharitable beneficiaries dollar for dollar. Creative donors have discovered a way to capture tax savings for their charitable gifts that increases the amount ultimately passing to others: they simply choose to make the gifts during their lifetimes. If you are in a position to consider accelerating your gifts, the income-tax savings you create during your lifetime could mean more net assets for your other beneficiaries. 4

5 With interest rates so low, how can my assets generate more income? Our children and grandchildren may recall these current times as the good old days in the future when they think about mortgage rates below 4%. What they may not recall as clearly are meager interest rates on bank accounts, money market funds, and bonds. Many of us would like to see our money work harder, but the choices are limited or risky. If you sell low-yielding appreciated stock to reinvest the proceeds, you may trigger a taxable capital gain. You can seek higher yields in less than investment-grade bonds but risk loss if the issuing company experiences problems and face a loss of principal if overall interest rates go up. Savvy taxpayers with charitable goals have found they can combine those goals with their objective to increase income. Carefully crafted strategies can increase your cash flow for life or for a specific term and provide important support for Cornell. Act Now to Solve Year-End Tax Dilemmas Request our free planning guide, Plan Now for the Future: Your Guide to Year-End Planning 5 Steps You Can Take Today. 1. Get a copy in the mail by returning the attached reply card. 2. Call us to request it at (800) us to request it at gift_planning@cornell.edu. 4. Visit us at for more information. The information contained herein is offered for general informational and educational purposes. The figures cited in the examples and illustrations are accurate at the time of writing and are based on federal law as well as IRS discount rates that change monthly. State law may affect the results illustrated. You should seek the advice of an attorney for applicability to your own situation. Copyright by Pentera, Inc. All rights reserved. 5

6 Financial Planner Gift planning newsletter from Cornell University Fall 2014 Request the Free Guide Now About How to Solve Your Year-End Tax Dilemmas Get the worksheets and tips you need to learn how to: Pay less tax. Benefit more from your charitable gifts without increasing the amount of your gifts. Reduce the out-of-pocket cost of supporting loved ones. Create additional cash flow. Plan Now for the Future: Your Guide to Year-End Planning 5 Steps You Can Take Today also explains how charitable planning can help reduce your taxes while fulfilling your philanthropic goals. To order the guide, simply return the attached reply card or visit INSIDE THIS ISSUE How do I deal with potential capital-gain taxes?... Page 2 How do I increase my retirement income?... Page 2 How can I meet the needs of my loved ones in a more tax-effective way?... Page 3 With high estate- and gift-tax exemptions, the charitable gifts in my estate won t produce any tax savings. Is there anything I can do now to change that?... Page 4 With interest rates so low, how can my assets generate more income?...page 5 Office of Trusts, Estates, and Gift Planning 130 East Seneca Street, Suite 400 Ithaca, NY Nonprofit Org. U.S. Postage PAID Cornell University