On December 17, 2010, the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”). In addition to extending the so-called “Bush” income tax cuts for two years, the Act made several significant changes to estate, gift and generation-skipping transfer taxes. This article is the first of a series summarizing various provisions of the Act.

The Act extended for 2010 and 2011 the ability of taxpayers who are at least 70½ years of age to transfer $100,000 per year from their IRA to charity. If you missed this opportunity in 2010 and may want to give more than $100,000 during 2011, you can do so if you act by January 31, 2011. There is a special provision that allows you to use the amount you didn’t use in 2010 during January 31 of 2011. Assume, for example, that you made a Charitable IRA Rollover of $20,000 on December 28, 2010. You can give as much as $180,000 in 2011. However, at least $80,000 of the 2011 Rollover must occur on or before January 31, 2011. You would then be able to give the other $100,000 any time during the year.

If the most that you would give in 2011 is $100,000, then you do not need to worry about the January 31 deadline. If you might give more than $100,000 this year, then you should roll over part of the gift before the end of January. For example, if you might give $150,000 this year, you should give at least $50,000 by January 31.

Before making a Charitable IRA Rollover, you should investigate making a Synthetic Charitable IRA Gift. The Synthetic Gift technique also helps those who do not qualify for a Charitable IRA Rollover or do not like some of the restrictions imposed with respect to Charitable IRA Rollovers.

One of the sad things about my profession is that my clients eventually die. Some deaths are sudden and unexpected, but most deaths occur after an accident or illness that makes death imminent within a few days or perhaps a few weeks. Though I am sensitive to the feelings of grief and stress that my clients and their families are experiencing, I have the unpleasant task of explaining to my clients and their families the heavy penalties they will pay to the federal and Tennessee governments if they decline to take advantage of “last minute” tax reduction opportunities.

I am currently working with one of my clients who has been given a life expectancy of 2 months or less. Because my client is likely to die in 2010, some of the planning issues are unique. However, some of the planning opportunities are the same as they would be for a death in a different year. Some of the major issues we have considered:

  1. Make sure all assets are owned by the Revocable Trust so that probate can be avoided. My client has done an excellent job of funding her revocable trust. However, she recently loaned some money to a friend and the Note is payable to her rather than her trust. We are doing a simple assignment of the Note to make sure that it is owned by her trust.
  2. Make annual exclusion gifts of $13,000. My client is making gifts of $13,000 to all of her children and grandchildren, as well as to spouses of her children. At a minimum, this will reduce Tennesse inheritance taxes. If federal estate taxes are reinstated with an effective date prior to the date of my client’s death, or, if she survives until 2011, the gifts will also reduce federal estate taxes.
  3. My client is converting her IRA to a Roth IRA.
  4. My client’s revocable trust makes charitable bequests totaling $500,000. My client trusts her children to make these gifts. Therefore, she is amending her trust to give the money to her children. The children will pay Tennessee inheritance taxes on this bequest at the rate of 9.5%. However, they will receive charitable income tax deductions which will reduce their federal income taxes by approximately 35%. Furthermore, two of the children live in states with state income taxes. The charitable bequests will also reduce state income taxes. This plan will backfire if federal estate taxes are reinstated retroactively. If this were to happen, federal estate taxes would be higher than the income tax savings. In order to account for this possibility, the revocable trust will provide that if the children disclaim the bequest, then the bequest will go to the charities. This will allow the children to see what happens over the next nine months before they must decide whether to disclaim.
  5. Should appreciated assets be sold to avoid losing the benefit of a capital loss carryover? Fortunately, no sales are necessary, because the carryover basis law that applies for decedents dying in 2010 allows the unused capital loss carryover to be added to the $1.3 million basis increase. My client’s executor will have more flexibility to avoid future capital gains if the capital loss carryover is preserved.
  6. Finally, my client is researching her records regarding her income tax basis for several assets. She can find this information much more easily than her Executor.

Estate planning when death is imminent can reduce taxes and other problems. Even though the circumstances are unpleasant, the potential benefits are substantial. I have been told by some of my former clients and/or their families that they took comfort in their final days from the knowledge that financial matters were in good shape.

Charitable remainder trusts (CRTs”) are a popular technique for obtaining income tax benefits and providing money to charity. Due to a law passed in 2001 as part of the Act that repealed estate taxes for this year, there is a significant gift tax risk associated with CRTs established this year.

Many CRTs make payments to the grantor of the trust for lifetime or for a period of years. The unintended effect of the law is to treat the Grantor’s retained interest in a CRT as a taxable gift. The "phantom" taxable gift will cause unnecessary gift taxes to be paid and/or increase estate taxes payable upon the Grantor’s death.

Several groups have written letters to the IRS requesting relief from the gift tax problem. Treasury officials have informally advised certain attorneys that guidance concerning this issue will be forthcoming in the near future. It is not certain what the guidance will say. Therefore, you should not create a CRT until the guidance is issued.

For the last four years, IRA owners who are over age 70.5 have been able to make charitable gifts from their IRA of up to $100,000 per year. This law has been extended before and Congress is currently working on another extension for 2010. Congress’ willingness to continue extending this law is attributable to the popularity of this technique.

Even if Congress extends the law, there may be a better way to make a gift to charity. Here’s how it works: Step 1: Determine how much you want to give to charity from your IRA. Step 2: Make the gift to charity from your non-IRA assets. For example, you could give highly appreciated securities or real estate. Step 3: Convert the same amount of your IRA to a Roth IRA.

The income from the Roth conversion will be offset by the charitable income tax deduction so that the net effect on your income taxes is neutral. Income tax neutrality is consistent with a direct gift to charity from your IRA. However, the synthetic gift has the additional effect of converting appreciated securities from your taxable portfolio into a Roth IRA where you will never pay taxes on the appreciation or the earnings of the securities.

There are 3 other benefits of the synthetic gift technique. You are not limited to a charitable gift of $100,000 per year. You can make a gift to your private foundation or donor advised fund. This is not possible with a direct gift from the IRA.  Finally, if you have not yet attained age 70.5, you are not eligible to make a direct gift from your IRA.  The synthetic gift technique has no age limit.

There is a potential pitfall with this technique. There are complicated income tax rules that affect the timing and amount of your charitable income tax deductions. Make sure your CPA examines the consequences before you make a synthetic charitable IRA gift™.

A synthetic charitable IRA gift™ may be a better choice for you than a charitable IRA rollover because it provides money to charity and allows you to convert a portion of your taxable portfolio to a Roth IRA. 

This is the eighth and final article of a series dealing with the topic of converting your traditional IRA to a Roth IRA. For prior articles, see:

Part 1 – Reasons to Consider the Roth Conversion
Part 2 – The Recharacterization Option
Part 3 – The Impact of Income Tax Rates
Part 4 – How Long Can You Stretch?
Part 5 – The Impact of Investment Returns During the First 21 Months
Part 6 – The Impact of Estate Taxes
Part 7 – Ramifications of Charitable Giving

Roth IRAs  are tremendous assets to own because they grow tax-free, allow tax-free withdrawals, and do not require you or your spouse to make withdrawals.

Determining whether the cost of a Roth IRA is a good investment depends on numerous factors, including income tax rates that will apply to you and your family now and in the future, whether you and your family can pay the conversion tax and meet your spending needs from other sources, whether you will be subject to estate taxes, and how much you plan to give to charity during your lifetime and at death.

Wealthy families are the most likely candidates to benefit from a Roth IRA conversion because they are likely to be in a high income tax bracket in the future, they can pay the conversion tax and meet spending needs from other sources, they will be subject to estate taxes, and they are able to make additional charitable gifts to offset the income tax generated by the conversion. 

The recharacterization option is a valuable tool which allows you to make a conversion and then change your mind as long as 21 months later. During this 21-month period, you will see tax law changes that have occurred and how your investments have performed. When you make a conversion, you should create several Roth IRA accounts, with each account holding different asset classes, in order to maximize the flexibility afforded by the recharacterization option.

Most wealthy individuals should make a conversion and follow the steps outlined in the following timeline.


2 Year Timeline for Roth IRA Conversions


February 2010 Convert now by creating several Roth IRA accounts that hold different assets.
December 2, 2010 Recharacterize Roth IRA accounts that have decreased in value.
December 15, 2010 Determine whether you want to make additional charitable contributions to offset income from conversion.
January 2, 2011 Reconvert accounts that were recharacterized on December 2, 2010 by creating several Roth IRA accounts.
April 15, 2011 Determine the maximum amount of the 2010 conversion that you might not recharacterize (i.e., leave as a Roth) and whether you might treat the income as taxable for 2010 (instead of deferring 50% to 2011 and 50% to 2012). If you might tax the income in 2010, file an extension for filing your 2010 federal income tax return and pay estimated taxes based on the maximum amount that you might treat as income in 2010.
October 15, 2011 Final day for recharacterizing 2010 conversions. If you extended the filing date for your 2010 federal income tax return, you must file your return and elect whether to recognize the income from 2010 conversions in 2010, or in 2011 (50%) and 2012 (50%).
December 2, 2011 Recharacterize 2011 Roth IRA conversions, if any, that have decreased in value.
December 15, 2011 Determine whether you want to make additional charitable contributions to offset income from 2011 conversions and 2010 conversions that were deferred.


This is the seventh article in a series of eight articles dealing with the topic of converting your traditional IRA to a Roth IRA. For other articles, see:

Part 1 – Reasons to Consider the Roth Conversion
Part 2 – The Recharacterization Option
Part 3 – The Impact of Income Tax Rates
Part 4 – How Long Can You Stretch?
Part 5 – The Impact of Investment Returns During the First 21 Months
Part 6 – The Impact of Estate Taxes
Part 8 – Putting It All Together

Individuals who make significant charitable gifts have additional considerations when evaluating whether to convert a traditional IRA to a Roth IRA. A lot of my clients plan to give at least a portion of their traditional IRA to charity upon their death. In addition to wanting to make charitable gifts, these clients realize that the bequest to charity will avoid income taxes and estate taxes. Individual beneficiaries would have to pay income taxes if they received the IRA. Furthermore, if the IRA owner’s estate is larger than the allowable estate tax exemptions, there will also be estate taxes imposed upon the portion of the IRA that is paid to children.

Individuals who plan to give their IRA to charity have less to gain by making a conversion. If you are planning to leave a portion of your IRA to charity, a conversion will cause you to pay income taxes now that you might not otherwise be paying later. In certain circumstances, you can still justify making the Roth IRA conversion. Nevertheless, I have discouraged my clients who plan to leave their entire IRA to charity from making the Roth conversion.

Some IRA owners intend to leave only a portion of their IRA to charity. Assume that Mrs. Brown has a $500,000 IRA and the beneficiaries are designated as follows: $100,000 to XYZ Church, $100,000 to XYZ University, and the balance to children.

Mrs. Brown can convert a portion of the IRA to a Roth IRA. Ideally, she will not convert beyond the amount which will allow there to be at least $200,000 in her traditional IRA upon her death. Some guesswork will be required to determine how much to leave in the traditional IRA so that there is at least $200,000 at the time of her death because there will be earnings and required minimum distributions during her remaining lifetime.

Assume that Mrs. Brown expects to live to age 90 and her investment advisors recommend that she leave at least $300,000 in her traditional IRA so that there will be at least $200,000 left when she dies. She should convert the entire $500,000 and place $100,000 in five separate accounts. No later than October 15 of the year following the conversion, she will recharacterize three of the accounts, or perhaps more if investments have performed poorly. This technique allows her to make the conversion with the best performing accounts while leaving sufficient funds in the traditional IRA to make the charitable bequests at the time of her death.

Your lifetime charitable giving is also relevant to the Roth conversion analysis. You will recognize income in the year of the conversion. For conversions in the year 2010, you can elect to recognize 50% of the income in the year 2011 and 50% in the year 2012. If you know that you will be making large charitable gifts in the future, you may choose to accelerate those gifts into the year of the conversion (or into 2011 and 2012 for conversions in the year 2010).

If you need a charitable deduction now, but do not want the charities to receive the funds until later, your charitable donation can be “escrowed” in a donor advised fund or a private foundation. Both of these structures allow you to identify the charitable recipients and make the actual charitable gifts in a later year.

In summary, you should consider accelerating charitable gifts to reduce income taxes attributable to a conversion of your traditional IRA to a Roth IRA. You should not convert the portion of your traditional IRA that you intend to leave to charity upon your death.

When my clients want to make a charitable gift that will be given to charity in future years, there are two primary vehicles for managing the funds. One choice is a donor advised fund, which can be established at the Community Foundation of Middle Tennessee, the Jewish Federation of Nashville, or various other organizations. The advantages of a donor advised fund are summarized at the bottom of the attached link to the website of the Community Foundation of Middle Tennessee.

The potential benefits of a private foundation are discussed in the attached paper from the Foundation Source.

I have worked with numerous donor advised funds and private foundations and they both serve a useful purpose. Whether a private foundation or donor advised fund is right for you depends upon a number of factors. As a general rule, I encourage clients who are setting aside less than $1 million to use a donor advised fund.

I am currently working with a client who plans to make $2 million of bequests to his favorite charities upon his death. His estate will receive an estate tax deduction for these bequests; however his estate will not receive an income tax deduction for these bequests.

I told him about a different method for making the payments that will require the cooperation of his wife. The plan works as follows:

1. His Will makes a $2 million cash bequest to his wife.
2. The Will makes a non-binding request for his wife to consider making gifts to his favorite charities.
3. After my client dies, his wife will receive $2 million and will make charitable gifts of $2 million.

The revised plan will have the following tax consequences: My client’s estate will receive a $2 million marital deduction for estate tax purposes. This replaces the $2 million charitable estate tax deduction that he would have otherwise received. His wife will get a $2 million income tax deduction. Since his wife will be in the highest income tax bracket (currently 35%), she will save $700,000 on her income taxes. Her income will not be large enough to receive the entire deduction in the first year. Rather, it will take about four years. Nevertheless, she will receive substantial income tax savings that would not have been realized if her husband had given the money directly to charity.

The risk for my client is that his wife will not make the charitable gifts. Legally, she can keep the money. My client trusts his wife to honor his wishes, especially since his wife likes most of his favorite charities.

Do you have a clear vision of your foundation’s future? Do you know the charities you want your foundation to support? How long do you want your foundation to last? Who will make decisions regarding grants from your foundation after your death or incapacity?

I have been surprised that these questions have not yet been answered by a lot of my clients who have already funded a family foundation and/or plan to make substantial contributions to their foundation upon their death. As to lifespan, a recent study by the Foundation Center concluded that 63% of family foundations plan to last into perpetuity, 12% plan to have a limited lifespan, and 25% are undecided about their lifespan. It has been my experience that the undecided group is higher than 25%.

Setting up and funding your foundation is the most difficult step. Establishing rules for the management of your foundation should be the easy part. You owe it to yourself, your family, and your favorite charities to make sure that there are definitive guidelines for the management of your charitable legacy. 

Link to Perpetuity or Limited Lifespan: How Do Family Foundations Decide?




Several of my clients are concerned about passing on too much money to their children. They fear that a large inheritance will inhibit their children from reaching their full potential.

One of my clients noticed a positive change in her children after informing them that her Will leaves all of her considerable fortune to charity. Her children now understand the need to become productive citizens if they intend to enjoy a comfortable lifestyle.

A handful of my clients have taken this approach of giving everything to charity, and nothing to their children. Others put a cap on the amount of the inheritance, for example $4 million per child.

Another approach is to leave the child’s inheritance in a trust that makes matching distributions to the beneficiary based upon a percentage of the beneficiary’s earned income. This type of trust is sometimes referred to as an Incentive Trust.

You will have to decide for yourself whether you might be doing harm to your child by leaving them a large inheritance. In my experience, a person’s “work ethic” has been fairly well determined by the time he or she attains age 30. If they already have a good work ethic when they receive their inheritance, they do not become lazy or irresponsible.

On the other hand, attempts to motivate lazy children through a meager inheritance or a restrictive trust have generally been unsuccessful. I have concluded that a person’s work ethic is more heavily influenced by their upbringing, especially the example set by their parents, than it is by the amount or structure of their inheritance.