Nov. 11, 2013
Now is the time to remind your clients age 70½ or older that the IRA charitable rollover is still in effect through the end of 2013.
The American Taxpayer Relief Act, passed in January 2013, extends the opportunity for older Americans to make gifts from individual retirement accounts (IRAs) to qualified charitable organizations through Dec. 31, 2013. The gift must be made from the custodian of an IRA owned by an individual age 70½ or older and be made directly to the charity, with $100,000 the maximum amount that can be given. The gift must be outright and cannot be used to establish an income-producing vehicle such as a charitable gift annuity or charitable remainder trust.
As long as these requirements are followed, the amount transferred from the IRA custodian to charity is not reportable as income but also does not qualify for the federal income tax charitable deduction.
After the Supreme Court struck down the Defense of Marriage Act this past June, the IRS followed up that decision with Revenue Ruling 2013-17, which states that all legally married same-sex couples will receive the same tax treatment as all other married couples under the federal tax laws. This treatment includes income, estate, gift, and generation-skipping transfer taxes, as well as the marriage portability of the estate and gift tax exemption. Even more important, the IRS stated that these federal rules apply regardless of whether the state of residence recognizes gay marriage. This means that any same-sex couples legally married in another state who reside in Texas still receive all the federal tax benefits of married couples, even though Texas law treats them as unmarried.
This creates an interesting dichotomy for the time being between federal and state law in Texas. Same-sex marriages are currently not recognized in Texas (see Tex. Family Code § 6.204(b)), so while same-sex married couples may benefit under the federal tax system, there are still many benefits they do not receive under Texas state law. For example, Texas community property laws do not apply to same-sex married couples, meaning a surviving spouse would not receive the step-up in basis on community property that the surviving spouse in an opposite-sex marriage would. Texas probate law would not recognize a surviving same-sex spouse as the legal heir in cases where a deceased spouse died intestate. Moreover, rights such as powers of attorney, the right to make end-of-life decisions, and many others are still denied to same-sex married couples under Texas state law. Finally, even the right of same-sex married couples to divorce in Texas is in question, as two cases addressing this issue are currently pending before the Texas Supreme Court.
All of this means that while some aspects of tax planning for same-sex married couples may be somewhat streamlined — specifically, the aspects pertaining to federal tax law — the areas of tax, estate, and financial planning affected by Texas state law still require that same-sex couples carefully prepare the necessary documents to protect their relationship and the rights of each spouse.
When it comes to financial and estate planning, women face some very specific challenges, particularly as they age, and the professional advisors working with women clients must understand these challenges and tailor their advice to help address them wherever possible.
Women still lag behind men in accumulating assets during their lifetimes. Despite the progress that has been made to close the gender-based wage gap, salary differentials persist. On average, a woman still makes roughly 80 percent of a man’s salary for the same job. Add in the cost of career interruptions for having children and the differential further increases. Ten years after having children, the wages of low-skilled women are 6 percent lower than their counterparts without children; for high-skilled women, the difference is a staggering 24 percent. Conversely, becoming a parent has no short- or long-term effect on men’s wages.
Women also experience the cost of career interruptions when they serve as the caregiver for other family members. According to AARP, the average caregiver is 49 years old and loses an average of $325,000 in salary, pension, and Social Security benefits due to caregiving (despite continuing to work outside the home). This loss disproportionately affects women, as estimates suggest that the majority of caregivers are female. The percentage of female family or informal caregivers ranges from 59–75 percent, according to the Family Caregiver Alliance. The average caregiver spends 21 hours per week caring for a loved one, but since female caregivers may spend as much as 50 percent more time providing care than male caregivers, this means that more of the burden for caregiving falls on the shoulders of women, and often during their peak earning years.
The financial impact of career interruptions on women begins to take an even greater toll when it comes to saving for retirement. More than half of all working individuals in the U.S. report that the value of their savings and investments that exceed their primary home and defined benefit plans (traditional pensions) is less than $25,000. More than a quarter of all workers also report that they have less than $1,000 in savings. Overall, the average savings gap for retirees is $250,000, which also happens to be about the cost of three years of long-term care.
Why is this $250,000 gap so important? As the U.S. population ages, anywhere from 50–75 percent of people will eventually need some sort of long-term care. The average term of care: three years. Once again, women are disproportionately affected, needing an average of 3.7 years of care compared to 2.2 years for men. The costs of this kind of care can be devastating for an individual’s or family’s finances. In 2010, the annual cost for a private room in a nursing home averaged $83,000; the cost for a shared room in an assisted living facility was $40,000. The costs for in-home care are no better, with an average of $21 per hour for a health aide or $19 per hour for companion care. Even with family members who can provide caregiving help, the total costs for long-term care can rapidly escalate.
Women also face financial challenges as they enter their retirement years alone. For example, the average age at which a woman in the U.S. becomes a widow is 55. Even though widowed women make up only 26 percent of the entire U.S. population over age 65, those widows comprise nearly half (48 percent) of the poor elderly in this country. Another measurement of this disturbing trend shows that 20 percent of widowed women fall below the poverty line, compared to just 4 percent of couples age 65 and older. On average, the income for married women declines after their husbands die; this is not true for married men when their wives die. With life expectancy for women continuing to average five to 10 years longer than for men, this means that more and more women are facing a very uncertain financial future, often by themselves.
Despite the uncertain financial future faced by many women, their generosity continues. Women age 50 and older are still more likely to give a bigger share of their “permanent income” (combination of wealth and current streams of income to measure command over resources) to charity than men. At every income level, women are more likely to make charitable gifts and to give more money than men. In the highest income bracket, women give two times as much as men. When compared to an average gift of $100 given by an older affluent man, women of similar age, income level, and other characteristics give $256 on average.
What does all of this mean for you and your clients? First and foremost, professional advisors need to recognize that the concerns of their female clients may be different from those of male clients or married couples. When providing advice to married couples, it is important to keep in mind that the wife is statistically likely to end up spending a decade or more alone, and plans for retirement and future health care needs should reflect that. Things like long-term care insurance can also play a huge role in preserving a woman’s — or an entire family’s — assets for the remainder of her lifetime. These are not conversations that should wait until your clients near retirement age; the annual costs of long-term care insurance are much lower if someone opens a policy at a younger age. But be aware that several major providers of long-term care insurance have recently announced premium increases as more baby boomers are filing claims.
For philanthropic couples with sufficient assets, charitable giving vehicles can play a role in that planning. Charitable gift annuities and charitable remainder trusts can provide income to surviving spouses. If your clients are not concerned about charitable tax deductions, non-charitable split-interest trusts with income to surviving spouses and charities are also an option and may provide greater flexibility.
For women on their own who wish to support charitable organizations, there are a number of ways to conserve assets and income during a woman’s lifetime and still provide for charity. One of the easiest ways to provide for charity after one’s lifetime is through a beneficiary designation on a retirement plan, life insurance policy, or a bank, brokerage, or investment account. Bequest and trust provisions can also be an excellent way for women to leave assets to the charitable organizations they support while ensuring that the assets are available for use as needed during their lifetime.
However you approach issues of estate and financial planning with your clients, keep in mind that your women clients may experience unique challenges during their lifetimes, and they may face those challenges alone. With good planning, women can enter their retirement and later years with the confidence of knowing that they have taken steps to ensure their financial security.
The Austin Advisors Forum will take place on Friday, April 25, 2014, on the J.J. Pickle Research Campus of The University of Texas at Austin. Once again, this annual conference will be jointly hosted by the Estate Planning & Probate Section of the Austin Bar Association and the Gift and Estate Planning team at The University of Texas at Austin. The event provides a full day of continuing education for attorneys, accountants, financial planners, and other advisors working in the areas of financial, estate, and charitable planning.
Stay tuned for speaker announcements and conference information in the coming months.
If you or your clients have any questions about charitable giving options, the Gift Planning team at The University of Texas at Austin is happy to explore these at no cost or obligation. Please feel free to contact us at:
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