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8 Ways CPAs Can Leave a Lasting Legacy

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Most people want to leave a lasting legacy, and CPAs are no exception. In this article, Joseph Graziano, vice president and wealth management partner at FFP Wealth Management, offers eight strategies CPAs can use for themselves as well as clients. Whether you use a donor advised fund or a charitable remainder trust, leaving a legacy will make a lasting impact on those around you.

Mar 30th 2022
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As a CPA, you’ve likely helped many clients create their own lasting legacy. You’ve helped clients save money on their taxes, increase their wealth and grow their businesses. However, have you taken the time to think about your own lasting legacy?

Your lasting legacy can go beyond a succession plan.

Instead, you can implement strategies to utilize the fruits of your labor to create wealth, preserve wealth and better the world with your wealth.

Consider how the following strategies can help you create a lasting legacy and how they may apply to your clients as well.

1. Give Direct Gifts

During your lifetime, you can give direct gifts to others to share your wealth. The IRS provides a gift tax exemption, too. The limit of these gifts is adjusted each year, and in 2022, the main figures to know are:

  • Lifetime gift tax exemptions are $12,060,000
  • Direct personal gifts are exempt at a rate of $16,000 per year, per recipient
  • Under current law, exemptions are set to shrink to $6 million by 2026

States also have their own exemptions on gift taxes to consider. Keep in mind that direct gifts to charities, an educational institution or a medical facility on someone’s behalf are all tax-exempt.

2. Appreciated Company Stock

With appreciated company stock, you’ll eventually find yourself paying taxes on the stock holdings over time. In order to decrease your tax burden, you should be aware of a tax strategy known as net unrealized appreciation (NUA). This strategy allows you to pay lower capital gains tax rates, rather than ordinary income tax rates, on the tax-deferred assets.

How does this strategy work?

In simple terms, when you distribute company stock or cash it out of your 401(k), you can either:

  • Roll it into another IRA or 401(k) plan, or
  • Distribute the company stock into a taxable account and roll the remaining assets into an IRA or 401(k).

When considering the options above, the second option may be more effective from a tax savings standpoint.

Typically, when you transfer assets from a 401(k) plan to a taxable account, you pay income tax on their fair market value. However, with company stock, you only pay income tax on the stock’s cost basis.

Later on, when you sell your shares, you’ll be required to pay long-term capital gains tax on the stock’s NUA. Your potential tax savings can be large considering the current capital gains tax rate is 20 percent compared to a top income tax rate of 37 percent.

3. Make Charities a Beneficiary on IRAs

The SECURE Act requires most IRA beneficiaries to withdraw the entirety of the funds within 10 years of the account holder’s death. As individuals make withdrawals, they’re burdened with the inevitable: paying income taxes on the withdrawals.

If you’re inclined to give to charity as part of your legacy, you can make the charity a beneficiary of your IRA. Charities are considered tax-exempt and won’t have to pay income tax on these withdrawals. Furthermore, amounts left to charity at death will lead to an estate tax deduction.

4. Charitable Remainder Trusts

Do you want to leave money behind to benefit a charity and an individual? Consider naming a charitable remainder trust (CRT) as the beneficiary of your IRA. In this case, the CRT will receive funds at your death and not pay any income taxes at that time, as CRTs are tax-exempt entities. As funds are distributed to the individual identified in the CRT, they will pay income taxes on the amount received at that time. When the CRT terminates, the remaining funds are dispersed to the designated charitable beneficiaries.

CRTs are complex. For example, a certain percentage of the CRT’s beginning balance must go to the charities named in the trust. The annuity from the trust must be between 5 percent and 50 percent of the trust’s assets. The list goes on, so be sure you’re working alongside professionals to help set up and optimize the construction of the trust.

5. Charitable Lead Trusts

Another trust to consider is a charitable lead trust. These trusts are designed to lower the tax burden for the beneficiary. The way these trusts work is that a portion of the payments from the trust is donated to charity for a set period of time.

Beneficiaries benefit from:

  • Charitable donation deductions
  • Estate and gift tax savings
  • A reduction in the amount of taxes owed once they inherit the remaining balance

These trusts are the opposite of a CRT because payments are made to charity for a specific period of time before the non-charitable beneficiary receives the remainder of the trust’s balance.

6. Donor Advised Funds

Donor-advised funds (“DAFs”) are another great option for creating a lasting legacy. DAFs are a giving account established at a public charity. Donors can then put assets into the account and take an immediate tax deduction in most cases.

Annually, donors can deduct up to 30 percent of their adjusted gross income (AGI) for contributions of non-cash assets held for more than one year and 60 percent of their AGI for cash contributions. If you donate more than these limits, the excess amounts can be carried forward for up to five tax years.

As a donor, you can contribute to the fund as often as you like and then make grant recommendations to an IRS-qualified charity.

7. Private Family Foundations

Another option to consider is to create (or donate to) a private family foundation. A private family foundation’s main purpose is to make grants to charities.

Donors benefit through:

  • How contributions are invested and grants to charities are made
  • An immediate income tax deduction on contributions (subject to limitations) and reduction in taxable estates
  • Avoiding capital gains tax on contributions of appreciated property

While there are a lot of benefits, there are also some disadvantages. Private foundations must disperse 5 percent or more of their assets annually and have rigorous reporting requirements, just to name a few. Be sure to consult with a professional before deciding if a private family foundation is right for you.

8. Donate Stock

Donating assets is one of the best ways to leave a legacy behind, especially when it comes to donating company stock to charity. Donating stock is beneficial for the donor, too. When you donate stock, you benefit from:

  • Avoiding capital gains tax
  • Deducting stock donations from taxable income
  • Maximize philanthropic impact

Donating stock makes logical sense. When you donate the stock to a charity, they receive 100 percent of the stock’s value, while you reap the tax benefits. It’s a win-win for everyone involved.

You worked hard to build your firm and deserve to leave a legacy that lasts far beyond your firm and your lifetime. The decisions you make today can do just that. The eight techniques outlined above can contribute to creating an everlasting legacy that not only creates wealth but preserves wealth and gives back.