Insider Jeff Fleming

Plan for the Long Term

An important financial matter to consider for the future is after-death income taxes. This week, Jeff helps you start planning early.

Dear Jeff:
Can you suggest some tax breaks and strategies that will allow me to have enough money to live on if I get sick or incapacitated? I'm in my 60s--have no living relatives--so am not concerned with preserving principal, just having enough to live on. I'm hesitant to set up a trust in case something happens and I need the money.

Taxes are eating me up. Do you know if I could donate U.S. savings bonds to charity without a taxable event? I've had some for years and can't stand the gains. Thanks, Billie

Jeff Says:
Let me start by summarizing your concerns as I understand them. Most importantly, it would appear, you want to minimize the income tax consequences of taking income or distributions from your portfolio. Specifically, you made reference to your savings bonds. You also want to be sure that you have enough money to take care of yourself if you suffer from a long term illness or become incapacitated.

This is tough stuff...it is also real life! I do not know enough about your current health or financial situation to recommend a specific solution for you, but let me share an idea that seems to be ideal for you based on what I do know.

First, consider purchasing a long term care insurance policy. This will ensure that you have money to pay for a long term illness or incapacity, whether you choose to remain at home or to enter into a medical facility. The premium is nominal compared to the benefit you could receive. You should review my previous article dealing with long term care insurance for more information on this topic.

Now, you are probably asking how you are going to pay for it and what this has to do with minimizing income taxes. The answer to that is the wonderful and creative part to this plan. Consider establishing a "charitable remainder trust" and then transferring your highly appreciated assets, such as your savings bonds, to the trust. You are allowed to take an income from the trust for the rest of your life which you could use to pay for the long term care insurance premium and anything else you may need. There are no restrictions on what you may do with your income.

Yes, you would give up control of the principal in favor of the trust, but look at what you get in return. You get an income tax deduction for the value of the gift to the charity, which can be carried forward for up to five years if you can't use the whole deduction in the first year; the trust can sell all of the appreciated assets it receives without paying any income taxes; you would not have to pay estate taxes on the amount in the trust at your death and; you could receive an income from the trust for the rest of your life. Doesn't this sound incredible? Trust me, it is all perfectly legal.

This plan seems to satisfy all of your concerns and is certainly one you should consider. If you think it has some merit, please consult your attorney and accountant so they may advise you of the details and technical aspects of charitable planning that I omitted from this article.