Legacy Planner

Legacy Planner March 2011

Estate Tax Exemption Now $5 Million . . . But You Still Need Estate Planning

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ollowing a one-year repeal in 2010, the federal estate tax was scheduled to revive in 2011 on estates above $1 million, with a top rate of 55%.

Congress now has changed the law, reinstating the estate tax for 2011 and 2012, but limited to estates over $5 million ($10 million can be sheltered by married couples) and with a top tax rate of only 35%. A $5 million exemption also now applies to federal gift tax and generationskipping transfer tax, at a top rate of 35% top as well. All exemptions will be indexed for inflation after 2011.

The new $5 million exemption from estate taxes means that only a few thousand estates per year will be liable for federal estate tax.

But everyone should remember that estate

planning involves much more than federal estate taxes. All Americans need to plan for a thoughtful and wise distribution of their assets at death. Careful planning will yield a reduction of estate expenses such as probate costs, state death taxes and income taxes on retirement accounts—all while leaving a legacy to future generations.

We encourage all of our friends to take this occasion to review their wills, trusts and other estate planning arrangements. The Office of Gift Planning at UMHB is here to assist you in understanding your estate and gift planning options. In the process, we hope you will consider making or augmenting a thoughtful bequest to the University of Mary Hardin-Baylor. Special opportunities also exist for tax-wise gifts from IRAs and other retirement plans, life insurance and financial accounts. Keep in mind that you can make a bequest that also provides for loved ones with lifetime income to a spouse, child or other person. Call us for details!

IRA Gift Opportunity Renewed Through 2011

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ince 2006, many prudent IRA owners have taken advantage of a unique method of fulfilling their charitable gifts. The law permitting persons over age 70½ to arrange direct gifts from their IRAs to qualified charities like the University of Mary Hardin-Baylor has been extended thru 2011. This is a very advantageous method of giving for many retired individuals who want to benefit a favorite charity.

Here are the basic guidelines for making a gift from your IRA: • A Donor must be age 70½ or older and own a traditional or Roth IRA. • Other retirement plans, such as pensions, 401(k) plans and others are not eligible.

• IRA gift transfers may be up to a maximum amount of $100,000.

• It’s vital that the IRA custodian or trustee make the gift transfer directly. If a donor

withdraws funds and then contributes them separately, amounts withdrawn will be included in the donor’s gross income.

• IRA gifts are most advantageous when they count toward the minimum distribution requirements of individuals over age 70½, which reduces their taxable income.

• IRA gifts cannot be used to fund life income arrangements, such as charitable remainder trusts or charitable gift annuities.

• Although no charitable deduction is available, IRA gifts are not considered income to the donor and therefore not subject to income tax.

To make an IRA gift, please call the UMHB Office of Gift Planning at 254-295-4608, and we will ensure proper transfer and receipting of your contribution. We can assist you in obtaining the necessary forms from the custodian or trustee of your account.

Hidden Tax Savings Opportunities Revealed

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he Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act contains tax-saving nuggets for those willing to do a little digging. Consider these gems: • Many IRA owners converted traditional IRAs to Roth IRAs in 2010, the first year when income limits were eliminated. Roth conversions are still available, but there was a tax incentive to make the switch last year.

Taxes owed on a 2010 conversion can be spread out over two years, with half due in 2011 and half due in 2012. But if tax rates had gone up after 2010 as originally scheduled, many IRA owners would be paying tax on their conversion at 36% or 39.6%, instead of a 33% or 35% rate. Now that income tax rates will remain at 2010 levels through 2012, IRA owners generally will be better off to spread out the tax.

• IRA owners who pay the Roth conversion tax in 2011 and 2012, and those making a conversion in 2011, should consider charitable gifts in 2011 or 2012 that generate income tax deductions to offset the extra tax. Gifts that provide donors with lifetime income may be particularly appealing. The UMHB Office of Gift Planning has many other ideas for gifts that provide donors with timely deductions. We’d be happy to explore these with you and your advisers.

• Long-term capital gains and qualified dividends will continue to be taxed at a maximum of 15%, instead of the 20% rate that was to have taken effect after 2010.

(The rate is zero for taxpayers in the 10% and 15% tax brackets.) An increased tax

credit for gifts and generation-skipping transfers – a $5 million opportunity in 2011 and 2012 – creates an opportunity for grandparents to shift assets to family members in lower tax brackets. Although the annual exclusion amount – the amount that can be passed gift tax free to as many recipients as a donor wants – remains at $13,000 for 2011, any excess will be sheltered up to $5 million. Future growth of gift assets generally won’t be subject to gift or estate tax, and future investment income may be taxed at lower tax rates than that of parents. (Note that investment income over $1,900 of children under age 19, or full-time college students under age 24, may be taxed at their parents’ tax rates.) In some cases, family members can sell gift stock at a zero capital gains tax rate. This strategy works well for adult children who provide financial help to elderly parents in low tax brackets.

• Surviving spouses can now “inherit” unused estate tax credits. If a husband, for example, doesn’t use his entire estate tax credit at death – sheltering $5 million through 2012 – his widow can use the balance of his credit, as well as her own, to shelter a total of $10 million from estate tax. In past years, special trusts or other planning was needed.

You may find that the larger credit will allow your estate to pass totally estate tax free. This may make it possible for you to include charitable bequests that will continue the support you have given to UMHB long after your lifetime. If you’d like to discuss how a thoughtful bequest can provide needed financial support for UMHB and our students, please contact our office at 254295-5044.

Charitable Gift Annuities:

Guaranteed Income for Life Now . . .

A Gift for Generations to Come

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f you desire to benefit UMHB, an attractive alternative to Bank CDs at less than 2% is the Charitable Gift Annuity. A charitable gift annuity is a simple contract between you and the University of Mary Hardin-Baylor. In exchange for your irrevocable gift of cash, securities, or other assets, UMHB guarantees to pay you a fixed income each year for life. Income payments are usually made in annual, semiannual, or quarterly installments. In most cases, a portion of each payment is tax-free, increasing your equivalent after-tax yield.

A qualified charitable gift annuity can be established through UMHB with a direct contribution of $5,000 or more. The annual income percentage is fixed at the time you establish your gift annuity and provides guaranteed income for life. Additionally, a charitable tax-deduction ranging from 10%-60% of the gift annuity value is available to you as a deduction on your income taxes.

To receive a personalized example showing the income and benefits of a qualified charitable gift annuity, you may return the enclosed card or call Dr. Gene Kimes at 254-295-4608.

The table below lists the current single life annual income rates for various ages.

Age

Annual Annuity Income %

Taxable Equivalent Yield*

55

4.68 %

5.90 %

60

5.20 %

6.62 %

65

5.50 %

7.20 %

70

5.80 %

7.86 %

75

6.40 %

8.91 %

80

7.20 %

10.30 %

85

8.10 %

11.97 %

90

9.50 %

14.37 %

*Assuming a 25% IRS tax bracket

Dr. Gene Kimes, Director of Gift Planning 254-295-4608

Brent Davison, Vice President for Development 254-295-5044