A Gift for All Seasons: Matching Planned Giving Alternatives to Donor Objectives. 41st Annual MPGC Conference November 15-16, 2017

Transcription

1 A Gift for All Seasons: Matching Planned Giving Alternatives to Donor Objectives 41st Annual MPGC Conference November 15-16, 2017 by Sheryl G. Morrison GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A. 500 IDS Center, 80 South 8 th Street Minneapolis, MN Phone: (612) Sheryl.morrison@gpmlaw.com

2 I. Why Planned Gifts? A. All charities prefer current outright gifts. 1. Current gifts meet an organization s immediate need for funds to operate its programs. 2. With an outright gift, the charity generally knows what it has and when it will receive the funds. 3. Charitable organizations have finite resources to devote to fundraising. B. Some donors will prefer planned gifts. 1. Donors who are concerned about tax savings and efficiency appreciate: a. In favorable circumstances, most planned gifts save more tax and therefore cost the donor and family less than an outright gift that has roughly the same benefit for the charity. b. Planned gifts usually provide more types of tax savings than outright gifts. For example, a charitable remainder trust not only generates an income tax deduction in most cases, it is a tax-exempt entity that can sell appreciated assets without tax. c. A donor may defer or avoid tax on the sale of an appreciated asset through use of a charitable gift annuity or charitable remainder trust. d. A donor can take advantage of today s historically low AFR in gift and estate tax planning by establishing a CLAT. 2. Donors who are anxious about financial security may prefer: a. A gift that occurs at death and is revocable until then, including such as a bequest under a will or a revocable trust or an IRA or other retirement account beneficiary designation. b. An irrevocable life income gift such as a CRT or CGA where the donor is the beneficiary or the initial beneficiary. C. Other benefits of planned gifts. 1. Potential for more gifts from the same donor later. 2. If a planned gift that provides especially great tax leverage is suitable for a particular donor, it may be that both the donor and the donee institution come out ahead with the planned gift; if the cost of the planned gift is low 2

3 enough, the donor may be willing to make a larger gift in present value terms than the outright gift he would otherwise consider. II. Basic Bequests and Beneficiary Designations A. Bequests. A bequest is a gift to a charity that is included in the donor s will or revocable trust. During the donor s lifetime, the bequest is revocable; it can be changed at any time. The gift becomes irrevocable at the donor s death. A bequest is a delayed gift and the charity will not receive the assets until after the donor passes away. 1. Structure. a. Dollar amount. i. There is certainty regarding the amount of the gift. i iv. The charity does not share in any gain or loss in the value of the estate after death. A set dollar amount may increase or decrease in value over time due to inflation. The gift will usually be satisfied with cash. b. Percent of the estate. i. The charity shares in any increase or decrease in the value of the estate. i A percentage ensures that the charitable gift portion does not consume other gifts if the value of the estate is less than expected. Can be satisfied with any assets of the estate. c. Specific property. 2. Tax benefits. i. Donor should be sure charity can accept that property. The donor s estate will receive an estate tax charitable deduction for a bequest to a charitable organization. 3

4 3. Legal considerations. A donor should work with his or her legal advisor to include a bequest in his or her will or revocable trust, including the legal name of the organization, the location of the organization s headquarters and the name for any applicable designated funds or programs if the gift will be restricted. 4. Assets funding a bequest. a. Most assets can fund a bequest. b. Donor and charity should discuss gift so that charity knows it can accept the bequest. c. Assets that are income in respect of a decedent ( IRD ) require caution and specialized drafting. B. Beneficiary designations for life insurance and retirement accounts. A beneficiary designation specifies the beneficiary of a retirement account or a life insurance policy. A beneficiary designation is revocable during lifetime but becomes irrevocable at death. A gift specified in a beneficiary designation is delayed and the charity will not receive the assets until after the donor passes away. 1. Structure Can often be completed without much involvement by an attorney, so it is easy for a donor to make a gift. a. Percentage of the death benefit. b. For retirement benefits, a fractional provision is recommended. 2. Implementing the designation. The donor will need the same information about the charity and the program as is needed for a bequest. 3. Life insurance. a. Tax benefits. i. Policy owned by the donor and paid at death via a beneficiary designation will be included in the donor s gross estate for estate tax purposes. 4

5 An estate tax deduction is available for any amounts transferred to charity at death. b. Lifetime gift of a life insurance policy. i. Relatively easy through assignment of ownership forms. i Valued by IRS Form 712 at significantly less than the death benefit. Charity should consider the future costs associated with maintaining the coverage; a donor may be willing to make cash contributions to help cover these costs. 4. Retirement accounts (e.g., 401(k), profit sharing, or IRA). a. Tax benefits. i. Retirement accounts are subject to income tax and may also be subject to estate tax at death. If the donor leaves the retirement account to charity, neither income nor estate tax applies. b. Complex gifts with retirement accounts. Retirement accounts can also be used to fund more complex charitable gifts at death (e.g, charitable remainder trust, charitable QTIP, or a spouse s charitable IRA) via the beneficiary designation. c. IRA Charitable Rollover. A donor can make a lifetime gift of assets in a retirement account through an IRA Charitable Rollover ( Qualified Contribution ). i. $100,000 per year. The donee must be a permissible charitable donee: (a) (b) A public charity, not a typical family private foundation or supporting organization. Can be used to satisfy a pre-existing pledge by the donor. 5

6 (c) May not create or be added to a donor advised fund, a charitable remainder trust or a charitable gift annuity. i iv. The donor must be age 70 ½ or older. The gift must come directly from the donor s IRA. v. Only allowed for an IRA. vi. v Substantiation with a contemporaneous written acknowledgment. Tax consequences. (a) (b) (c) (d) IRA Rollover gift is excluded from the donor s federal gross income. The donor is allowed no income tax charitable deduction. Does not cause the phase-out of other federal tax benefits, e.g., personal exemptions and itemized deductions. The gift counts towards the donor s minimum required distribution (MRD) from the IRA for the year made. 5. POD/TOD designations Pay on death (POD) and transfer on death (TOD) designations can be added to a donor s account or to real estate titles in Minnesota. These assets then operate like beneficiary designations. III. Split Interest Gifts A. Charitable Gift Annuity (CGA). 1. Structure. a. The donor transfers property to charity and charity agrees to pay an annuity to one or more noncharitable beneficiaries ( annuitants ) for life. Payments may begin immediately or may be deferred. b. A CGA is a contract, not a trust, and payments are a general, unsecured obligation of the charity. Thus, CGAs may not be appropriate for charities who are at the forefront of beginning their planned giving programs due to the potential risks. 6

7 c. Older individuals may be able to receive a larger annual income stream than they would have received under a CRT. 2. Tax benefits. a. The donor receives an income tax charitable deduction equal to the value of the property minus the actuarial value of the annuity. b. If the property given is appreciated, the transfer is partially a gift and partially a sale and the donor s basis is allocated to the deemed sale proceeds and donor s bargain sale gain is computed. If the CGA is nonassignable and donor is only annuitant or one of the two annuitants of a two-life annuity, the donor may report capital gain ratably each year over his or her life expectancy. c. The charitable gift portion qualifies for the gift tax charitable deduction. i. In a two-life single and survivor annuity for donor and spouse, donor reserves the right to revoke spouse s survivorship interest by will to prevent lifetime gift. In a two-life joint and survivor annuity for donor and spouse funded with joint property, the gift from each spouse to the other qualifies for gift (and estate) tax marital deductions. d. If the donor is the only annuitant, nothing is included in donor s gross estate. If the annuity is for the donor and spouse, the surviving spouse s interest is included in the donor s gross estate but qualifies for the estate tax marital deduction. e. A portion of each annual payment to the annuitant is return of capital (some of which may be capital gain) and a portion is income. f. Once an annuitant reaches life expectancy and all of the capital has been recovered, the amount of each subsequent annuity payment is treated as income. 3. Assets funding CGA. a. Charity must be careful to assess the impact of unrelated business taxable income (UBTI). b. CGAs can be established for a relatively small gift. 7

8 c. Assets that are hard to value or illiquid are typically not advisable to use in a CGA arrangement because of the obligation of the charity to pay the annuity even if the asset hasn t been sold or is not as valuable as initially expected. B. Charitable Remainder Trust (CRT). 1. Structure. a. A trust that pays noncharitable beneficiaries a defined annual amount for a period of time. At the end of the period, the remaining trust property passes to charitable organizations. b. Trust is irrevocable and not amendable. c. A CRT can be created during life or at the donor s death. d. The term of a CRT can be measured by the lives of one or more named individuals who are trust beneficiaries or by a term of years (not to exceed 20 years). There are some permissible combinations of lives and a term of years. The trust may end upon the occurrence of a specified qualified contingency outside of the donor s control. e. The trustee of a CRT may be an individual (in some cases the donor can be the trustee), or a for-profit corporation (e.g. a bank) or not-for-profit entity (e.g. the charity that will receive the remainder interest). f. A CRUT pays a unitrust amount equal to a fixed percentage of the fair market value of the trust property re-determined annually which must be at least 5% and not more than 50%. There are several types of CRUTs: i. A standard CRUT pays an annual fixed percentage of the trust value, as determined each year. i A net income or net income with makeup CRUT ( NI-CRUT or NIM-CRUT ) directs the payment of the lesser of the trust income or the stated percentage during the first stage of the trust. The makeup provision allows payment of a deficiency (accumulated in years when the income was less than the stated percentage) in a later year to the extent that the trust income exceeds the unitrust amount in that year. A flip CRUT begins as a net income CRUT but converts to a standard CRUT in the year following a predetermined 8

9 triggering event outside the control of the donor or another person. g. A CRAT pays an annuity amount as a fixed dollar amount (at least 5% but not more than 50% of the initial fair market value of the trust assets). h. Recipients of the annual payments i. The annual payments must be made to one or more noncharitable beneficiaries. Individual beneficiaries must be alive and ascertainable when the donor creates the trust, e.g. donor and spouse. (a) (b) If a trust is measured by the life of an individual, the noncharitable beneficiary can be a trust for the benefit of that person as long as that person is financially disabled. No amounts (other than the annual payments) may be paid from the trust to a noncharitable beneficiary. i. Charitable remainder beneficiary. i. At the end of a CRT s term, the trustee distributes the remaining trust property to one or more charitable organizations, including public charities, private foundations, or a combination of the two. Deduction depends on the IRC Code required by the agreement. The donor can retain the right to change the trust s remainder beneficiary. 2. Assets funding the CRT a. A donor can fund a CRT with almost any type of property (e.g., cash, securities, real estate, art work), however, consider the liquidity of the assets and cash flow to meet the CRT s obligation to make annual payments. b. The donor s contribution to the CRT must create a charitable remainder interest equal to at least 10% of the value of the contributed property. c. Subsequent contributions are allowed for a CRUT but not for a CRAT. 9

10 d. The trust should avoid UBTI which is taxable at a rate of 100%. e. Appreciated assets contributed to the CRT will allow deferral, and perhaps avoidance, of the capital gains tax. f. Private foundation rules apply: i. Self-dealing. i iv. Excess business holdings. Jeopardy investments. Taxable expenditures. 3. Tax benefits. a. Income tax. i. The donor is allowed an income tax charitable deduction for the year of the transfer of the property to the trust (with some exception for transfer of personal property), equal to the present value of the charitable remainder, based on the fair market value of the property (unless basis must be used for some types of property). i The CRT is exempt from income tax except for UBTI, which is taxed at 100%. Annual payments to noncharitable beneficiaries carry out trust income in a particular order (often referred to as worst-in-first-out ) depending on the character of the income to the trust. Donor recognizes no gain on gifted property as long as there is no prearranged sale. b. Gift tax. i. The donor will receive a gift tax deduction equal to the amount of the charitable remainder. i If the donor creates a present income interest in the trust for another individual, the donor makes a gift for gift tax purposes. The marital deduction applies to the spouse s interest. If the donor creates a successor income interest for a noncharitable beneficiary, that gift will not qualify for the annual gift tax exclusion. If the donor retains the right to 10

11 c. Estate and GST tax. revoke that interest by will, the gift is rendered incomplete. i. If the donor retains a lifetime income interest, the entire value of the CRT trust is included in the donor s estate at death. i iv. An estate tax charitable deduction is allowed for the value of the remainder interest, valued at the donor s death. Any interest for the donor s spouse will qualify for the estate tax marital deduction if the spouse is the only remaining noncharitable beneficiary. If grandchildren are beneficiaries, distributions to them will be subject to GST tax unless donor allocates GST exemption to the trust. 11

12 a. Illustration. Donor Charitable Remainder Trust (1) Transfer (2) Charitable deduction for remainder interest (3) Annuity or unitrust payments for defined period Donor or Family Beneficiaries (4) Assets in trust distributed tax free at end of period Charity 12

13 C. Charitable Lead Trust (CLT). 1. Structure. a. A trust that pays one or more charitable beneficiaries a defined annual amount for a term of years. At the end of the term, the remaining trust property passes to one or more noncharitable remainder beneficiaries. b. Trust is irrevocable and non-amendable. c. The donor may create the trust during life or at death through the donor s will or revocable trust. d. The CLT makes defined annual payments to charity for a specific period, measured by a person s lifetime or a term of years (there is no limit on the length of the trust term). e. A nongrantor CLT is not considered owned by the donor for income tax purposes and the donor gets no income tax deduction for creating it. The nongrantor CLT receives a charitable income tax deduction for each annual payment to charity. i. The main benefit of a nongrantor CLT is the ability to transfer appreciating assets to family at a low gift tax valuation. f. A grantor CLT is considered owned by the donor for income tax purposes and the donor is allowed an income tax charitable deduction for the present value of the charity s interest in the trust, but the donor recognizes income each year equal to the amount of taxable trust income and does not receive a charitable deduction for the annual payments to charity. g. A charitable lead annuity trust ( CLAT ) provides for a fixed annual payment to the charity which may vary over the term of the trust if the payout schedule is specified at the time of trust creation. h. A charitable lead unitrust ( CLUT ) provides for a payment to charity each year equal to a fixed percentage of the value of the trust property determined annually. i. A CLT has no minimum or maximum payout requirement. j. Recipients of annual payments. i. The charity may be a public charity. 13

14 Naming a private foundation, donor advised fund, or giving the donor the right to change the charity can be problematic and must be approached cautiously. k. Noncharitable remainder interest. i. At the end of the term, the trustee pays the remaining assets of the trust to one or more noncharitable beneficiaries. The most common beneficiaries are the donor s children or other family members. 2. Assets funding the CLT. a. The donor can fund the trust with any type of property, but the CLT must be able to satisfy its annual payment obligation to the charitable lead beneficiary. If the assets in the trust are illiquid, the trust may suffer adverse tax consequences or administrative burdens. b. Private foundation rules apply: i. Self-dealing. i iv. Excess business holding (if charitable interest less than 60%). Jeopardy investments. Taxable expenditures. 3. Tax benefits. a. The gift of the remainder interest in an intervivos CLT to noncharitable beneficiaries is a taxable gift. b. The charity s interest in the trust is the present value of the annuity payments. It is beneficial for a donor to fund the CLT when the interest rates are low so the value of the remainder for family is also lower for gift tax purposes. c. For a CLT created at death, the donor s estate receives an estate tax charitable deduction for the present value of the charitable interest, and the remainder for noncharitable beneficiaries is subject to estate tax. 14

15 d. For a CLT that names grandchildren as the remainder beneficiaries, GST exemption cannot be efficiently allocated to a CLAT but can be efficiently allocated to a CLUT. e. The estate planning benefit of a CLT arises when the assets held by the trust grow at a faster pace than the applicable federal rate used by the IRS to value the remainder interest for the noncharitable beneficiaries. f. A nongrantor CLT is taxed as a complex trust, but is allowed a charitable deduction for the amounts paid to charity under IRS Section 642. For grantor CLT, the donor reports all its income. A CLT that has UBTI will not be allowed an income tax deduction for the portion of the charitable distribution allocable to UBTI, but will be allowed a partial deduction for the portion of the charitable distribution not allocable to UBTI. 15

16 b. Illustration CLT. Donor Charitable Lead Trust (1) Transfer (2) Gift or estate tax deduction for charitable interest (income tax deduction for grantor CLT) (3) Annuity or unitrust payments for defined period Charity (4) Assets in trust distributed gift tax free after period Family Beneficiaries 16

17 D. Gift of Remainder in Personal Residence or Farm Subject to Retained Life Estate 1. A donor who gives a remainder interest in a personal residence or a farm to a charity is allowed income and gift tax charitable deductions or an estate tax charitable deduction, depending on whether the gift is made during life or at death. 2. The donor can retain a life estate or estates for a term of years for himself, give such an estate to someone else, or both. 3. The computation of the present value of the remainder for computing the tax deduction depends on the applicable IRS interest rate and takes into account the fact that any structures are depreciable assets. 4. Only applies to personal residence and farm. E. Self-Dealing. Prohibitions against self-dealing apply to CRTs and CLTs but not to public charities. 1. Disqualified persons. a. The donor of the trust. b. Certain members of the donor s family. c. In the case of a trust created by a corporation, partnership or LLC, an owner of more than 20% of the voting power (corporation) or profit interest (partnership or LLC) in the donor entity. d. A corporation, partnership, trust or estate in which disqualified persons have substantial interests (what counts as substantial depends on the type of entity). 2. Common acts of self-dealing. a. Sales, exchanges or leases of property. b. Loans or other extensions of credit. c. Payment of compensation. d. Redemption of business interests by the entity (corporation, partnership or LLC), unless exception applies: i. Offer at market value. 17

18 i Offer made to all shareholders. Bona fide business purpose may be a requirement? 3. Indirect self-dealing. If a CRT or CLT controls a closely held business (e.g., by owning a majority of the voting stock of a closely held corporation), financial transactions between the corporation and disqualified persons are potentially acts of self-dealing. 4. Estate exception for sales or redemptions from an estate where there is a testamentary gift to a private foundation, CRT, or CLT; detailed exception applies, but it requires special planning and drafting. IV. Matching the Planned Giving Tool to the Donor s Objectives An effective planned giving professional will understand how the various forms of planned gifts can best be used to meet an individual donor s financial needs and charitable goals. To help determine which charitable gift is appropriate, consider the following questions: A. Does the donor need or desire income from the assets during lifetime? 1. Yes: 2. No: a. Bequest. b. Beneficiary designation for retirement accounts. c. CGA. d. CRT. a. Beneficiary designation for life insurance (if not investmentdriven). b. Lifetime gift can be created during the donor s lifetime to benefit individuals other than the donor, then charity: i. CGA for another. CRT for another. c. Life estate/remainder for home or farm (if don t need cash on sale of property). 18

19 d. CLT. B. How does the donor plan to fund the gift? 1. Cash: a. Bequest. b. POD. c. CGA. d. CRT. e. CLT. 2. Publicly Traded Securities: a. Bequest (nonspecific recommended). b. TOD. c. CGA. d. CRT. e. CLT. 3. Closely Held Business Interests: a. Bequest (can charity accept). b. TOD (can charity accept). c. CRT. i. Self-dealing (on redemption or sale to family, see redemption exception above). UBTI. (a) (b) Subchapter S income and gain and is UBTI. Partnership and LLC income may be UBTI. i iv. Excess business holdings. Cash flow issues NI-CRUT, NIM-CRUT, Flip CRUT. v. Subchapter S election terminated. 19

20 d. CLT. i. Self-dealing (on redemption or sale to family, see redemption exception above). UBTI - no deduction for payment to charity. (a) (b) Same Subchapter S issues. Same partnership and LLC issues. i iv. Excess business holdings. Cash flow. v. Subchapter S can be an ESBT but unfavorable because no deduction for charity payments. e. CGA hard to value so probably not suitable. f. Hot Items may cause gain income to donor. 4. Real Estate: a. Bequest (can charity accept). b. TOD (can charity accept). c. CGA will charity accept for CGA? d. CRT. i. Self-dealing. i iv. UBTI excludes cash rent. Cash flow NI-CRUT, NIM-CRUT, Flip CRUT. Environmental issues. e. CLT. v. Expenses. i. Self-dealing. i UBTI excludes cash rent. Cash flow NI-CRUT, NIM-CRUT, Flip CRUT. 20

21 iv. Environmental issues. v. Expenses. f. Life Estate / Remainder. i. Environmental issues. Relative responsibilities of owners. 5. Tangible Personal Property (e.g., Artwork): a. Bequest (will charity accept). b. CGA hard to value so probably not suitable. c. CRT. i. Self-dealing. i iv. No income tax deduction until sold; deduction at basis. Cash flow. Expenses. d. CLT. i. Self-dealing. i Expenses. Cash flow. 6. Retirement Assets: a. Bequest. i. Better to have beneficiary directly named. b. Beneficiary designation. c. CRT. i. At death. V. Case Studies and Small Group Discussion VI. Questions? 21

22 Donor wants/needs income/asset Donor doesn t want or need income/asset Cash Bequest X Beneficiary Designation Life Insurance X if not investmentdriven X or ownership transfer Beneficiary Designation Retirement Account POD/ TOD CGA CRT CLT X X X for self X for self X IRA Rollover X for another X for another X X X X X X Life Estate Remainder X Publicly Traded Securities Closely Held Business Real Estate Tangible Personal Property Retirement Assets Easy for Donor to Implement Easy to Administer X X X X X X if charity can accept X if charity can accept X if charity can accept X or Rollover during life X if charity can accept X if charity can accept Probably Not X if charity can accept X if charity can accept Depends on factors Depends on factors X if charity can accept X at death Depends on factors Depends on factors X if charity can accept X home/farm if charity can accept X X X X X X X X X X X X

23 Gray Plant Mooty Mooty & Bennett, P.A. All rights reserved. This material is based on the federal tax law in effect on the date it was completed: February 15, It is only a summary of the subject matter it addresses, and it is intended to provide information of a general nature only. It should not be construed as a comprehensive treatment or as legal advice or legal opinion on any specified facts or circumstances. Readers are urged to consult with an attorney concerning their own situations and any specific legal questions they may have. GP: v1