Charitable Planned Giving Strategies

Transcription

1 Charitable Planned Giving Strategies Courtesy of: Yellowstone Boys & Girls Ranch Foundation, Inc. This presentation was prepared for educational purposes only. It must not be used as a basis for tax or legal advice. Parties must always seek out and rely upon the advice of their own legal and tax advisors.

2 Presented By: KURT G. ALME, J.D. is President and General Counsel of Yellowstone Boys and Girls Ranch Foundation, Billings, Montana. Kurt is a Montana native and graduate of Harvard Law School. A partner with the Crowley Law Firm in Billings, Kurt s legal practice developed an emphasis in estate planning and tax law and would eventually lead to his appointment by then Governor Martz as Director of Montana s Department of Revenue. He next served as an Assistant US Attorney for Montana, prosecuting white-collar crime, eventually becoming First Assistant. Kurt Alme worked with Yellowstone Foundation and others largely responsible for the passage of Montana s Qualified Endowment Tax Credit law. He was a Section Leader for the State Bar Committee which revised the Uniform Trust Code for adoption by Montana in 2013.

3 Purpose of Presentation To raise awareness of charitable planning concepts for the client/donor.

4 Benefits of Charitable Planning 1. Avoid or defer capital gains tax and Medicare Surtax. 2. Tax deductions (and credits) to offset other significant income from the sale of appreciated assets. 3. Reduce income tax and payroll tax. 4. Reduce federal estate tax. 5. Provide consistent lifetime payments. 6. Solve business and estate planning issues. 7. Benefit charitable causes you believe in.

5 Charitable Planned Gifts Charitable Remainder Trust Charitable Gift Annuity Charitable Life Estate

6 TAX BENEFITS Significant tax advantages currently exist: State endowment income tax credit (40%) up to $10,000 Federal charitable income tax deduction $413,200 (single) Subject to Pease haircut of 3% of excess of AGI over $250,000 (single) up to 80% of AGI Non-recognition of capital gains tax and Medicare Surtax Federal $413,200 (single) Medicare Surtax $200,000 (single) State 4.9%

7 TAX BENEFITS Significant tax advantages currently exist: Federal payroll taxes (15.3%) 0.9% Medicare $200,000 single Federal charitable gift and estate tax credit equivalents (40% above $5,430,000)

8 Montana Qualified Endowment Tax Credit (and beyond?) Sustaining Montana Charities through Endowment Building SEE: MCA MCA , 162 ARM ,

9 Montana Qualified Endowment Tax Credit Allows an income tax credit of 40% of the present value of the charitable gift portion of a planned gift to a qualified endowment up to $10,000 per year ($20,000 for husband and wife). Credit is not refundable and cannot be carried forward Credit reduces income tax deduction (Compare 6.9% versus 40%) Credit renewed/extended thru 2019 (Senate Bill 108) MCA

10 Tax Credit Business Entities Allows an income tax credit of 20% for an outright gift to a qualified endowment up to $10,000 per year. Entities may also make a planned gift. MCA

11 MONTANA CODE ANNOTATED 2014: (Temporary) Qualified endowments credit -- definitions -- rules. (1) For the purposes of and this section, the following definitions apply: (a) (i) "Permanent, irrevocable fund" means a fund comprising cash, securities, mutual funds, or other investment assets established for a specific charitable, religious, educational, or eleemosynary purpose and managed, invested, and appropriated pursuant to the Uniform Prudent Management of Institutional Funds Act provided for in Title 72, chapter 30. (ii) The term does not include a fund held by or for a tax-exempt organization to accomplish a charitable, religious, educational, or eleemosynary purpose from which contributions are expended directly for constructing, renovating, or purchasing operational assets, such as buildings or equipment. (b) Subject to subsection (3), "planned gift" means an irrevocable contribution to a permanent endowment held by or for a tax-exempt organization when the contribution uses any of the following techniques that are authorized under the Internal Revenue Code: (i) charitable remainder unitrusts, as defined by 26 U.S.C. 664; (ii) charitable remainder annuity trusts, as defined by 26 U.S.C. 664; (iii) pooled income fund trusts, as defined by 26 U.S.C. 642(c)(5); (iv) charitable lead unitrusts qualifying under 26 U.S.C. 170(f)(2)(B); (v) charitable lead annuity trusts qualifying under 26 U.S.C. 170(f)(2)(B); (vi) charitable gift annuities undertaken pursuant to 26 U.S.C. 1011(b); (vii) deferred charitable gift annuities undertaken pursuant to 26 U.S.C. 1011(b); (viii) charitable life estate agreements qualifying under 26 U.S.C. 170(f)(3)(B); (ix) paid-up life insurance policies meeting the requirements of 26 U.S.C (c) "Qualified endowment" means a permanent, irrevocable fund that is held by a Montana incorporated or established organization that: (i) is a tax-exempt organization under 26 U.S.C. 501(c)(3); or (ii) is a bank or trust company, as defined in Title 32, chapter 1, part 1, that is holding the fund on behalf of a tax-exempt organization.

12 MONTANA CODE ANNOTATED 2014: (Temporary) Qualified endowments credit -- definitions -- rules. (2) (a) Terms in a document creating a donor restriction, such as those provided for in subsection (2)(b), intending to qualify a gift for the tax credit referenced in , , , , and this section, require that the gift satisfy the current definition of permanent, irrevocable fund and not any previous definition unless other language in the document demonstrates a different intent. (b) The restrictions referenced in subsection (2)(a) include but are not limited to a requirement that the contribution be held in a "qualified endowment" or "permanent, irrevocable fund" or that the "present value of the fund at the time of the planned gift or outright contribution" not be expendable. (c) Subsections (2)(a) and (2)(b) apply to funds and terms existing on or established on April 26, As applied to permanent, irrevocable funds existing on April 26, 2013, this subsection (2) governs only decisions made or actions taken on or after that date. (3) (a) A contribution using a technique described in subsection (1)(b)(i) or (1)(b)(ii) is not a planned gift unless the trust agreement provides that the trust may not terminate and the beneficiaries' interest in the trust may not be assigned or contributed to the qualified endowment sooner than the earlier of: (i) the date of death of the beneficiaries; or (ii) 5 years from the date of the contribution. (b) A contribution using the technique described in subsection (1)(b)(vii) is not a planned gift unless the first partial or full-year payment of the annuity is required to begin within the life expectancy of the annuitant or of the joint life expectancies of the annuitants, if more than one annuitant, as determined using the actuarial tables adopted by rule by the department in effect on the date of the contribution. (c) A contribution using a technique described in subsection (1)(b)(vi) or (1)(b)(vii) is not a planned gift unless the annuity agreement provides that the interest of the annuitant or annuitants in the gift annuity may not be assigned to the qualified endowment sooner than the earlier of: (i) the date of death of the annuitant or annuitants; or (ii) 5 years after the date of the contribution. (d) A contribution using a technique described in subsection (1)(b)(vi) or (1)(b)(vii) is not a planned gift unless the annuity is a qualified charitable gift annuity as defined in (e) A contribution using a technique described in subsection (1)(b)(vii) is not a planned gift unless the annuity rate to be paid is at least 5%. (4) The department shall adopt rules to prepare life expectancy tables that are derived from the actuarial tables contained in the most recent Publication 1457 by the internal revenue service. (Terminates December 31, secs. 2 through 8 and 11, Ch. 317, L )

13 MONTANA CODE ANNOTATED 2014: (Temporary) Credit for contributions to qualified endowment -- recapture of credit -- deduction included as income. (1) A taxpayer is allowed a tax credit against the taxes imposed by or in an amount equal to 40% of the present value of the aggregate amount of the charitable gift portion of a planned gift made by the taxpayer during the year to any qualified endowment. The maximum credit that may be claimed by a taxpayer for contributions made from all sources in a year is $10,000. The credit allowed under this section may not exceed the taxpayer's income tax liability. (2) The credit allowed under this section may not be claimed by an individual taxpayer if the taxpayer has included the full amount of the contribution upon which the amount of the credit was computed as a deduction under (1) or (2). (3) There is no carryback or carryforward of the credit permitted under this section, and the credit must be applied to the tax year in which the contribution is made. (4) If during any tax year a charitable gift is recovered by the taxpayer, the taxpayer shall: (a) include as income the amount deducted in any prior year that is attributable to the charitable gift to the extent that the deduction reduced the taxpayer's individual income tax or corporation license tax; and (b) increase the amount of tax due under or by the amount of the credit allowed in the tax year in which the credit was taken. (Terminates December 31, secs. 2 through 8, Ch. 317, L )

14 Montana Qualified Endowment Tax Credit 2013 AMENDMENTS: UPMIFA Start date of Deferred Gift Annuities 5% minimum rate for Deferred Gift Annuities

15 Charitable Remainder Trust

16 Charitable Remainder Trust Giftofproperty Donor Unitrust Remainderto Charity Incometaxdeduction Variablepayments HOW IT WORKS: 1. Donor transfers cash, securities, or other property to a trust. 2. Donor receives an income tax deduction and pays no capital gains tax on the transfer to the trust 3. When the trust ends, the remaining principal passes to Charity.

17 5 Types of Charitable Remainder Trusts Annuity (CRAT) Straight (CRUT) Net Income (NICRUT) Net Income with Makeup (NIMCRUT) FLIP (NIMCRUT to Straight)

18 Some Practical Questions Who Drafts the Documents? Who Serves as Trustee? Who Handles the Administration? Who Invests the Trust Assets? MANY ISSUES CLARIFIED IN NEW UNIFORM TRUST CODE

19 Best Property to Fund a CRT Appreciated property, except tangible personal property not used for charitable purposes Land Securities Property subject to self-employment tax Ordinary income property Tangible personal property

20 Meet Mary Randall Mary Randall is a widow, age 74 Mary s three daughters are married and all in their late 40 s Renee Rhonda Rolann

21 Mary s Estate Assets Ranch FMV $2,000,000 Basis $40,000 Lease income 1% TRR Brokerage Account $4,500,000 Other $500,000 mostly liquid assets Total Estate Value $7,000,000

22 Mary s Estate Objectives Take care of my girls Address Ranch capital gains tax issue Reduce Estate Taxes Help a couple of charities

23 Simple Estate Plan Mary s Estate Today is worth $7,000,000 MARY Mary s Estate on Death after taxes and probate $8,545,230 MARY S HEIRS

24 Simple Estate Plan - Impact Assumptions: Assets total $7,000,000 Transfer Tax: top rate 40% Donor s life expectancy = 13 years Total Pre-tax ROR Land = 1% All ordinary income (33%) Total Pre-tax ROR Other = 6% Half ordinary income (33%) Half capital gain (19.2%) Estate Settlement Costs 2.5% Simple Estate Plan: Assets total: $ 7,000,000 Land 1% ROR 13 yrs: $ 228,985 Other 6% ROR 13 yrs: $ 3,788,502 Estate value in 2023: $11,017,487 Estate settlement costs: ( 275,437) Taxable Estate: $10,742,050 Federal Estate Tax: ( 2,124,820) Net Estate to Family: $ 8,617,230

25 Unitrust & Insurance Trust 1 Charitable Unitrust 3 Charity 2 Irrevocable Life Insurance Trust 3 Family

26 Unitrust & Insurance Trust Assumptions: Donor s life expectancy = 13 years Orig. principal $2,000,000 Cost Basis = $40,000 Donor income tax bracket = 33% Capital Gains tax = 19.2% Total Pre-tax ROR = 6% Half ordinary income Half capital gain Funding and Sale in beginning of first year 8% Unitrust Payout Unitrust Unitrust Cash Flow Comparison: After-Tax Year Principal Income 2015 $2,000,000 FLIP SALE ,960,000 $121, ,920, , ,882, , ,844, , ,807, , ,771, , ,736, , ,701, , ,667, , ,634, , ,601,463 98, ,569,433 96, ,538,045 94,951 TOTAL: $1,538,045 $1,397,415* *Income spent on insurance and invested

27 CRT Estate Plan - Impact Assumptions: Non-Trust Asset total $5,000,000 Transfer Tax: top rate 40% Donor s life expectancy = 13 years Use unitrust payments to purchase $2,000,000 life ins. - invest balance 7520 Rate 1.4% Charitable deduction $884,940 Total Pre-tax ROR Other = 6% Half ordinary income (33%) Half capital gain (19.2%) Estate settlement costs = 2.5% CRT Estate Plan: Non-Trust Asset total $5,000,000 Other Assets 6% ROR 13 yrs $3,788,502 Income from CRT in excess of 6% ROR 13 yrs $ 155,814 Income from charitable $ 511,515 deduct at 6% ROR 13 yrs Estate value in 2023 $9,455,831 Estate settlement costs (236,396) Taxable Estate $9,219,435 Federal Estate Tax (1,515,744) Net Estate to Family $7,703,661 Life insurance proceeds $2,000,000 Total Assets to Family $9,703,661

28 CRT Estate Plan Mary s Estate Today is worth $7,000,000 Gift of Real Property to Charitable Trust $2,000,000 8% Unitrust $8,788,502 Passes at Death 13 year Life Expectancy $2,000,000 Life Ins. Policy $155,814 Trust Income Additional Trust Income Tax Savings $511,515 Settlement Costs = $236,346 Estate Taxes = $1,515,774 Increased Benefit vs Simple Plan = $1,086,431 Charity $1,538,045 Family $9,703,661

29 People always live forever when there s an annuity involved. -Jane Austen, Sense and Sensibility, 1811

30 When to Use a Gift Annuity: Typically age 65+ client/donor Consistent payments and no market risk Payments mostly tax-free if funded with cash Spread out capital gain income if funded with appreciated assets Leave a charitable legacy Bonus: Use 40% state credit even without itemizing

31 Charitable Gift Annuity Donors: Ages 79/75 ASSETS $250,000 Federal Income Tax Deduction 2.2% 7520 Rate (39.6% bracket saves $38,618) MT Tax Credit saves up to $20,000 MT Tax Deduction $47,520 (6.9% bracket saves $3, % Charitable Gift Annuity Two Lives Charity Assets to Charity after two lives. Fixed income $13,250/year [$10,163 Tax-Free and $3,087 OI] 10.6% taxable equiv. rate of return for donor in 39.6% tax bracket Total income $198,750 over 15-year remainder life expectancy.

32 GIFT ANNUITY RATES ACGA Suggested Rates effective January, 2012 Age 60 = 4.4% Age 65 = 4.7% Age 70 = 5.1% Age 75 = 5.8% Age 80 = 6.8% Age 85 = 7.8% Age 90 = 9.0%

33 When to Use a Deferred Gift Annuity: Any age client/donor Efficiently use the 40% state credit Payments not needed until later (retirement, children s or grandchildren s college, etc.)

34 The Gift That Costs Little to Give Charitable Deferred Payment Gift Annuity

35 The Gift That Costs Little to Give Charitable Deferred Payment Gift Annuity Mr. & Mrs. I.L. Waite - Ages 44/43 Securities $60,000 [$30,000 Basis] Federal Income Tax Deduction/Savings $55,974/$22,166 MT Tax CREDIT saves up to $20,000 MT Deduction/Savings $5,974/$412 Federal/MT Capital Gains Tax avoided/deferred $7,470 Medicare Surtax avoided/deferred $1,140 Two 5% Deferred Payment Gift Annuity Lives Fixed Annual Income $3,000 commencing 2057 at ages 86/85 Charity Assets available to Charity after two lives

36 The Gift That Costs Little to Give Charitable Deferred Payment Gift Annuity Mr. & Mrs. I.L. Waite - Ages 44/43 $60,000 DPGA commencing 2057 Federal Tax Savings (39.6% x 55,974) $22,166 State Tax Credit (max. $10,000/taxpayer) $20,000 State Tax Deduction (6.9% x $5,974) $ 412 Avoidance of Capital Gain (24.9% x 30,000) $ 7,470 Avoidance of Medicare Surtax (3.8% x 30,000) $ 1,140 TOTAL TAX SAVINGS: $51,188

37 CHARITABLE LIFE ESTATE

38 When to Use a Charitable Life Estate: Client/Donor wants to continue using house or farm, but needs either: Charitable deduction and credit now, and/or Needs additional income (combine Life Estate with Gift Annuity) Generally, a much better income tax result than leaving home or farm to charity in will

39 Charitable Life Estate Donor is entitled to a charitable deduction and MT tax credit for value of remainder interest given to charity Donor retains a life estate Property must be personal residence or farm Amount of deduction increases as Section 7520 decreases

40 Charitable Life Estate Vacation Home $200,000 FMV [$50,000 Basis] Federal Income Tax Deduction $131,436 [2.0% 7520 Rate] Montana Endowment Tax Credit $20,000 and MT Deduction $81,436 Mr. & Mrs. Ira Change- Ages 79/75 Deed to Charity Reserve Life Use $200,000 Two Lives Donors use home for lives Donors responsible for insurance, maintenance, taxes, etc. Charity Property to Charity on death of life tenants without probate or estate taxes

41 Charitable Life Estate Frequent Questions: Control During Life, Rent, Current Mortgage, Future Mortgage, Future Sale, Appraisal, and Gift of Undivided Interest What to do with such a large income tax deduction generally limited to 30% of AGI?

42 Yellowstone Boys & Girls Ranch Foundation Inc Overland Ave, Billings, Montana