Category: Estate Planning

How a Qualified Charitable Distribution Saves You on Taxes

John Morton

Senior Wealth Manager

For those of us who are charitably inclined, we will give to our favorite charities because of the good that it does and how it makes us feel. But for many folks, there are often tax strategies available that would help save us money on our tax bills while giving generously. The problem is that many people are not aware of how to best utilize the tax law and apply it to their situation. The Qualified Charitable Distribution (QCD) strategy is one such technique that we help a lot of our retired clients implement.

What is a Qualified Charitable Distribution (QCD)?

Available to taxpayers over the age of 70.5, this piece of the tax code allows IRA holders to make a tax-free distribution from their retirement accounts directly to qualified charities. Normally, IRA accounts consist of pre-tax money that is then taxed when distributed, so the tax-free nature of these distributions is a huge benefit to retirees who are looking to make the best use of their pre-tax savings and benefit their favorite charities.

What are the rules for a QCD?

To be eligible to make a QCD from an IRA account, the account holder must be age 70.5 at the time of the distribution. Notably, the rules do not allow the distribution to qualify as tax-free unless that age threshold has been met – it is not just the year in which someone would turn age 70.5. Additionally, the money must come from an IRA account. For folks with pre-tax money in other types of retirement accounts, such as a 401(k), they’d have to roll over (transfer) the money into an IRA.

When making donations, the money must go directly to a qualified charity. The government doesn’t allow taxpayers to game the system by making donations out to a donor-advised fund, private foundation, etc. and we’d advise making sure that the charity would have a qualified status prior to making the gift.

Eligible taxpayers could make multiple donations to various charities. In aggregate, the IRS allows up to $105,000 of QCDs to be tax-free in 2024 (per person limit). The Secure Act 2.0 stipulates that this limit will index with inflation, so expect that amount to keep going up annually.

Two major pitfalls to look out for!

Pitfall #1:

As mentioned above, the money must go directly to charity to count as a QCD. A common misconception is that someone could take money out of their IRA and then pass it on to a charity. That’s not the case. A distribution to anyone other than a qualified charity will result in the full taxation of that distribution. But if made directly to a charity, the distribution could qualify as tax-free.

For example: if someone took $10,000 from his IRA and then wrote a check from his bank account for $1,000 to a charity, all $10,000 would be taxable income. This person could potentially recoup some tax benefit by putting the $1,000 donation as an itemized deduction, but this is suboptimal – more on that below!

Working with an advisor like Boardwalk ensures that 1) your donations meet all the criteria to be tax-free and 2) it is done in an easy manner. We set up our clients with a dedicated checkbook to donate directly from their IRA account, manage the cash in the account to meet donations as needed and keep the rest of the balance growing, and keep track of donations for you.

Pitfall #2:

When distributions are made from an IRA account, the custodian (think: Schwab, Fidelity, etc.) will report the total on a 1099-R for that tax year. However, IRA custodians will NOT report whether any/all of the distributions qualified as QCDs. Without keeping track of this, the benefits of making QCDs are lost.

Here’s an example: This year, a 72-year-old taxpayer took $50,000 out of her IRA for spending and gave an additional $10,000 check directly from the custodian to her favorite charity. She’s met all the rules for that $10,000 donation to be excluded from her income BUT the custodian still reports $60,000 of taxable income on her 1099-R for 2024. Unless she specifies on her tax return that $10,000 of her 1099-R taxable income is actually a QCD, she will get taxed on all $60,000. Tax preparers will not know whether distributions were QCD (all or in part) unless told and, even then, they still must report it accurately on the return.

Working with an advisor like Boardwalk ensures that 1) you have someone to communicate with your CPA and 2) your tax return is double-checked for accuracy. No point going through all this hassle only to not get a tax benefit!

Why would a QCD be better than writing a check?

Here’s where the true benefits of a QCD get recognized. Especially if a taxpayer is already itemizing their deductions, the benefit of going through the hoops to make a QCD might not be evident. However, in nearly every case we’ve come across, the QCD strategy should be strongly considered in someone’s giving strategies if they are over age 70.5 and have pre-tax assets. Here’s why.

Itemized deductions might not always be in play, especially after the TCJA raised the standard deduction. Unless a taxpayer already has enough deductions through mortgage interest, property taxes, etc. to eclipse the standard deduction threshold (for age 65+: $16,150 if filing single and $32,300 if filing joint), then there is little or no benefit to itemizing charitable donations. For example: a married couple with $20,000 of mortgage interest and property taxes would be well below the standard deduction. If they gave to charity, the first $12,300 of donations would not provide any tax benefit and only donations above that amount would start to save them on taxes.

Conversely, a QCD is totally excluded from taxable income to begin with. Continuing with the previous example of a couple that had $20,000 of non-charitable itemized deductions: if they decided to give $10,000 to charity via QCDs, they would lower their income by $10,000 AND still get to take the full standard deduction of $32,300. It’s potentially thousands of dollars in tax savings that would otherwise be missed.

There are also a slew of other potential tax benefits from having lower income (not just lower taxable income). Here are some that might apply to you:

1. QCDs could lower how much of your Social Security income is taxable.

2. QCDs could allow more of your itemized medical expenses to be deducted.

3. QCDs lower your income for calculating your Medicare Part B and D premiums. Missing an IRMAA tier by even one dollar results in higher premiums, so even a small donation via QCD could result in thousands of dollars in saved premiums.

4. QCDs could make you eligible for various income-based tax credits.

5. QCDs could impact your Net Investment Income tax, saving you 3.8% in taxes on your investment income on top of your marginal tax rate.

A final benefit and potential pitfall: QCDs count towards a Required Minimum Distribution (RMD)

Taxpayers over the age of 70.5 used to be subject to required minimum distributions (RMDs). After the Secure Act was passed in 2020, that age has been pushed back: if you’re not already taking RMDs, then you will be at either 1) age 73 if born before 12/31/1959 or 2) age 75 if born in or after 1960. RMDs are calculated from someone’s pre-tax savings and age. The amount that must be taken varies, but one thing is certain: it’s taxable income!

A qualified charitable distribution (QCD) can count towards someone’s RMD. This is great news because it allows for some tax planning for clients that are charitably inclined. So for someone with a $50,000 RMD in 2024: if $10,000 was given as a QCD and then the remaining $40,000 was distributed to that person’s bank account, that person would only have $40,000 of taxable income despite having satisfied the government’s requirement to take $50,000 of pre-tax money out of his or her IRA account.

The pitfall? The QCD must occur prior to the balance of the RMD being distributed. If someone takes their RMD first, they won’t have the opportunity to lower their taxable income. However, the QCD is still excluded from income and so it remains one of the best ways to give to charity even if someone needs to take his or her full RMD for living expenses.

Working with an advisor at Boardwalk means that we carefully review your tax situation each year and consider how your tax situation will change in the future. Our recommendations don’t stop at utilizing QCDs – if we identify an opportunity to slide under an IRMAA tier, drop a tax bracket, or lower the taxability of Social Security by increasing your QCDs by a specific amount or pulling forward your donations from a future tax year into the current one, we’ll show you how it could save you a lot in taxes. (And follow through to make sure your CPA reflects it properly on your tax return!)

Please don’t hesitate to reach out to us with any questions on how to save money through your generous donations.

Do I Need a Life Insurance Trust?

John Morton

Senior Wealth Manager

Do I need a Life Insurance Trust?

For higher-net worth individuals and families, life insurance and estate planning are important to consider together. To explain why, let’s revisit another personal finance topic: taxes! Life insurance is usually income tax free. However, life insurance is counted as part of a decedent’s estate and estate taxes are assessed on a decedent’s personal wealth (estate) at the federal level and in many states. Thus, life insurance is potentially subject to estate taxes, assuming someone’s estate exceeds the exemption amounts – unless advance planning is done. An irrevocable life insurance trust (ILIT) is a tool to help protect life insurance proceeds from estate taxes. At the end of this article is an example of how our recent work with an Illinois client could save over $1.0 million in estate taxes.

How does an ILIT work?

As the name would suggest, an attorney creates a trust for someone that holds the life insurance policies. The ILIT can either purchase new policies or receive existing ones (by sale or gift). Both the owner and beneficiary of the policies is the trust, though the insured person remains the same.

The insured person is the grantor of the trust and funds the annual premiums with gifts made to the ILIT. As long as gifted premiums do not exceed the annual exclusion gift amount ($18,000 per beneficiary in 2024), no gift tax return needs to be filed. Because life insurance proceeds are income tax free, the trust doesn’t pay income taxes when it receives the death benefit . And because of the irrevocable nature of the trust, the policy and death benefit proceeds are also excluded from the grantor’s estate. Very complex tax and legal concepts were just summarized in four sentences, but this is an established method of getting life insurance proceeds “outside” of someone’s estate and we’ve utilized it for many clients.

What are the pitfalls?

Aside from added complexity and cost, you should be aware of these two pitfalls when considering this planning technique to reduce or eliminate potential estate taxes.

First, while it is best practice to purchase life insurance directly through the ILIT, it’s often the case that an ILIT is implemented years after someone initially bought some life insurance policies. Whether there’s been a health change or not, it usually makes sense to keep older policies since premiums increase with an insured’s age. Two options are available to get the policies “into” the ILIT: a gift or a sale.

- A gift is much easier to process, but the insured needs to survive a three-year lookback period – otherwise the IRS deems the death benefit to be included in the decedent’s estate. This is in place to avoid abuse via last-minute ILIT strategies.

- A sale by the owner/insured to the ILIT is a much more complicated process, but there isn’t a survivorship requirement.

Second, everything must be set up properly for the ILIT to pay premiums, including an annual notice to the trust’s beneficiaries. This notice is called a “Crummey Notice” after the strategy’s creator successfully defended its legality in the 1960’s.

- Each part of the annual gift, notice, and payment process must be followed to a T and properly documented for the IRS to honor the exclusion of life insurance proceeds from the insured’s estate.

There’s upfront leg work to implement this strategy and annual “maintenance” to successfully keep the life insurance proceeds outside of someone’s estate. To determine whether it’s worth that hassle, we consider our clients’ current wealth, potential life insurance proceeds, and their financial trajectory to see if it’s important to plan around estate taxes.

How much money does someone need for estate taxes to apply?

There are exemption amounts at both the federal and state level before estate taxes apply. In 2024, someone could pass away with $13.61 million without any federal estate taxes (this amount doubles for a married couple). But wealth over that amount is subject to a top tax rate of 40%! Per the 2017 Tax Cuts and Jobs Act (TCJA), the exemption amount is slated to cut in half starting January 1, 2026.

Most states don’t have any estate tax (including Wisconsin). For those that do, both the exemption amount and tax rate vary. Illinois has a $4,000,000 exemption per individual and a top rate of 16% that would apply to wealth above that amount.

Proper estate planning can easily save 6- or 7-figure amounts for high-net worth families. Instead of going to taxes, that wealth passes to the next generation or other beneficiaries.

What’s an example of an ILIT helping reduce taxes?

As previously stated, life insurance is income tax free but increases the beneficiary’s estate, so there could be estate tax repercussions. Let’s look at an example that’s similar to an Illinois client we recently helped…

Using round numbers, the husband and wife currently have $6,000,000. This is split amongst their retirement accounts, cash, home, etc. – $4.0 million in the husband’s name and $2.0 million in the wife’s name. They both have strong incomes and bright careers ahead of them, so they both have life insurance policies to support the surviving spouse & their three kids, pay for college, pay off the mortgage, sustain the family’s lifestyle, and have funds set aside for retirement. The husband has $3,000,000 in life insurance and the wife is insured for $2,000,000.

	Husband	Wife
Current Wealth	$4,000,000	$2,000,000
Life Insurance	$3,000,000	$2,000,000
Gross Estate (no ILIT)	$7,000,000	$4,000,000

If the husband passed away, his estate would have $7.0 million. That’s a far cry from the current federal estate tax exemption amount of $13.61 million (though it would be very close to the post-TJCA exemption of ~$7M that will kick into effect in 2026). However, it is above Illinois’ flat $4.0 million exemption (which doesn’t adjust with inflation). An Illinois tax bill on the excess $3,000,000 would be $565k, but this tax bill is kicked down the road by utilizing a martial deduction.

The wife would now have $7.0 million PLUS her own $4.0 million if she passed away shortly after ($11.0 million in total). The problem with this though, is now there is an (even bigger) $1.058 million Illinois tax bill upon the wife’s passing since Illinois doesn’t recognize portability. Confused? You’re not alone! We suggest getting professionals involved in situations like these.

An ILIT would help to mitigate the risk of estate taxes, so we helped transfer just the husband’s policies into an ILIT and now the situation would play out as follows. The $3.0 million of insurance money ends up “outside” his estate.

	Husband	Wife
Current Wealth	$4,000,000	$2,000,000
Life Insurance (in ILIT)	$3,000,000 (excluded)	$2,000,000
Gross Estate	$4,000,000	$4,000,000

A good estate plan would utilize the full $4.0 million Illinois exemption upon the husband’s passing (as explained above) and then again on the wife’s passing.

Combined with an Irrevocable Life Insurance Trust (ILIT), no federal or Illinois estate taxes are owed, and the full $11.0 million of wealth & insurance proceeds all go to the couple’s beneficiaries.

The ILIT component would save Illinois estate taxes of $565k (on $3.0 million) and the combined effect of good planning would save over $1.0 million!

We love helping our clients save both income and potential estate taxes through great financial planning.

Of course, this situation doesn’t apply to all high-net worth clients. But even for folks that seem far away from crossing over federal or estate tax exemption amounts, a robust financial trajectory and/or life insurance proceeds may surprise them down the road. As their wealth continues to grow, the value of their estates will become much larger than currently anticipated. We take a proactive approach to insurance and estate planning to help minimize taxes and transfer as much of our clients’ hard-earned savings to their beneficiaries.

Financial Planning

Ten Tips on Trusts

John Morton

Senior Wealth Manager

What is a trust?

A trust is a legal instrument to hold and control assets. Anyone with assets – not just the wealthy – should consider creating a trust to use during life, known as an “inter vivos” or revocable living trust. This trust would hold assets during someone’s life for his or her use, and then direct who inherits the assets too. Alternatively, someone could consider including a provision in their will to create a trust after death, known as a testamentary trust. There are other types of trusts as well, all with unique purposes, but all trusts are useful for determining how and when beneficiaries receive or have access to assets.

What is a trustee?

A trustee holds the legal title of and administers the affairs of a trust. If a living trust is created, the trustee and the grantor (trust creator) are the same person. The trust creator has simply placed their assets inside a trust for benefits such as privacy, outlining beneficiaries, and estate tax minimization, among other reasons. He or she can amend or revoke the trust while alive. If someone is incapacitated, has passed away, or set up an irrevocable trust, the trustee is a separate person or organization that holds a fiduciary responsibility to carry out the trust creator’s wishes and directing trust income or trust assets to the beneficiaries of the trust. When a trust is created, these trustees are identified.

Tip #1: Always have successor (back-up) trustees in your trust document. Additionally, know that organizations such as banks can serve as corporate trustees, but having a friend or family member as a successor trustee(s) will help reduce costs and retain more assets for the beneficiaries.

What are some benefits to having a trust?

As stated previously, a frequent attraction is having control over assets after death. For example, a trust could hold assets for a beneficiary until they are a certain age. As another example, a trust could place restrictions on distributions (like for a second marriage or a spendthrift child).

Tip #2: Another estate planning document, a “last will and testament” (usually referred to as “a will”), directs who receives assets but does not allow any control over those assets.

Trusts can also help protect an heir’s inheritance against creditors or divorce. Most states, like our neighbor Illinois, are common law states and in the event of a divorce, the assets are split equitably (not necessarily equally). Wisconsin is a community property state, where marital assets are considered to be jointed owned and thus split equally. In both cases, inherited assets are typically excluded if proper steps are followed.

Tip #3: Passing along assets to children in a properly structured trust makes it more likely that those assets are safeguarded in the event of a later divorce.

For larger estates, an estate plan with the right pieces can help pass more wealth onto the next generation. There is a 40% federal top tax rate on estates above the exemption amount (currently about $26M for a married couple but that is scheduled to cut in half starting January 1, 2026). Each state is different – Wisconsin does not have an estate tax but Illinois imposes a tax on an individuals’ estate above $4M.

Tip #4: You can’t avoid the tax man. But there are legals rules and structures that can allow for greater wealth transfer to future generations. We’ve helped clients structure their estate plan with an attorney to help reduce their expected estate taxes by six- and seven-digit figures.

Minors cannot receive assets as a beneficiary of a will, retirement account, or insurance policy, so setting up a trust to hold assets until a child can legally access the funds is the best route to avoid a probate court getting involved.

Tip #5: A trust should be used when minors are the estate’s beneficiaries.

Wait, what’s probate?

When someone dies, a court reviews that deceased person’s assets and estate planning documentation, like a will, to determine who inherits those assets. With attorneys and courts involved, this process will take time and can be very expensive. At a minimum, it’s likely to cost $5,000-10,000 but complexities could easily multiply that cost several times over.

Tip #6: While a comprehensive estate plan, including trust documents, can cost more than $3,000 there are many benefits for the family, including saving on legal fees during probate!

How can probate be avoided?

If done correctly, a revocable trust and proper estate plan can reduce or eliminate an estate’s interactions with probate court. A major downside to just having a will, even if a testamentary trust is written into the document, is that pesky court proceeding called probate still must occur. Eventually, the probate court would fund the trust with a deceased person’s assets, but that can be a lengthy and expensive process as mentioned earlier.

Tip #7: It usually makes sense to invest in setting up a living trust along with a will. Having a will (even with a testamentary trust) does not avoid probate.

Along with a revocable living trust document, there are several other “areas” to button up in order to have assets pass to the desired heirs and avoid the costly probate process. Here a list to consider:

Beneficiaries on life insurance and retirement plans
Pay-on-death (POD) beneficiaries
Transfer-on-death (TOD) beneficiaries
Jointly owned property
Power-of-attorney documents

Regarding these beneficiaries, titling, and documents, here are two other tips:

Tip #8: The first four items transcend a trust or will document. That’s right: that hastily filled out beneficiary form for your first job’s retirement plan would dictate who receives those assets if the money was left there. If you’ve made changes to your will and trust beneficiaries, don’t forget to update everything else too.

Tip #9: If you’re incapacitated, a trust document isn’t helpful for assets not owned or governed by the trust. In the event of incapacity, a power-of-attorney document would outline who is responsible for making financial decisions for non-trust assets. Without that document, the next of kin and courts would determine who carries that responsibility.

Boardwalk Financial Strategies is highly involved in all aspects of our clients’ financial situations. A comprehensive estate plan and proper implementation gives our clients peace of mind and helps align their values, goals, and wealth. We help with our clients work with an estate planning attorney to create the right instruments and periodically review them.

Tip #10: Having an estate plan isn’t enough. It must be properly implemented. We help our clients “button up” their insurance policies, retirement accounts, bank accounts, investment accounts, real estate, privately owned businesses, and other assets so that their wishes are followed, the right beneficiaries receive assets, and their family saves money by reducing or avoiding probate.

At Boardwalk Financial Strategies, we are a team of advisors with strong estate planning backgrounds. This allows us to build comprehensive financial plans for our clients that serve them beyond their own lives. If you would like to learn more about our comprehensive wealth management services, please contact us today.