Charitable Trusts David Nunheimer The Small Business & Estate Planning Law Group 26 George Ryder Road West Chatham, MA

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1 Maximizing Wealth While Minimizing Taxes Charitable Trusts David Nunheimer The Small Business & Estate Planning Law Group 26 George Ryder Road West Chatham, MA

2 Charitable Planning Is the Client Philanthropic? 2

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4 Split Interest Gift Trust 4 TRUST AGREEMENT ONE PARTY GETS CASH PAYMENTS OR ENJOYMENT OF PROPERTY FOR A DEFINED PERIOD THIRD PARTY GETS ASSETS AFTER EXPIRATION OF PERIOD

5 Traditional Financial Planning Reposition assets without paying capital gains taxes, allowing diversification, additional income, etc. Create additional cash flow through generation of charitable income tax deductions for gifts to CRT No capital gain Asset diversification and risk reduction 5

6 Traditional Estate Planning Eliminate asset value from taxable estate of client Control assets after death of primary earner Provide for post mortem planning 6

7 The Operation 7 Joseph and Mary give stock worth $3m to the CRT. The stock has $100, basis Stock has dividend Joseph and Mary also get an income tax deduction Asset removed from estate CRT sells Stock NO CAPITAL GAIN tax Pay Joseph and Mary annually

8 The Future Winners Joseph and Mary use payment to buy life insurance policy in an ILIT Family received $$2M additional dollars 8 On Joseph and Mary s death charity receives its money

9 Advantages of Philanthropic Financial Planning for the Client Allows client to actualize the philanthropic interests he or she has Maximizes income potential of all client s assets to client and heirs Provides for retention of tax dollars in the working assets of the client s estate for longer than other approaches to planning Allows client to direct and manage personal assets that are allocated to the common good 9

10 How The Charitable Remainder Trust Works Trustmaker s Property Contribute Charitable Remainder Trust: Charitable income tax deduction Trust sells property without incurring capital gains Assets accumulate without incurring taxes Assets are out of estate - no federal estate tax 10

11 Income Tax Deduction Current income tax deduction for all gifts to CRTs Creates cash flow through reduction in taxable income for years in which gifts are made May reduce effective income tax rate on unusual income in any given year Deduction cash flow may be instrumental in providing for other pieces (e.g., insurance) necessary in making the CRT option acceptable to the client 11

12 Capital Gains Benefits Low-yielding, appreciated assets may be moved and repositioned for higher yields through CRT Entire value of asset captured for production in the client s plan 12

13 Estate/Gift Tax Benefits With CRTs in which the client and/or spouse are sole income beneficiaries, the entire value of the asset is removed from the client s taxable estate With CRTs in which others are included as income beneficiaries, the value of the asset is discounted for estate tax purposes 13

14 How The Charitable Remainder Trust Works Trustmaker s Property Contribute Charitable Remainder Trust: Charitable income tax deduction Trust sells property without incurring capital gains Assets accumulate without incurring taxes Assets are out of estate - no federal estate tax Income to Trustmaker s designated income beneficiaries for life or term certain Income Remainder Assets Remainder assets pass to Charity upon death or after set term 14

15 Trust Beneficiaries Income beneficiary options Trustmaker and spouse Other individuals (e.g., children) S-Corp. (period certain 20yrs.) Remainder beneficiary Tax exempt 501(c)(3) status 15

16 Distributable Income Under current Code and Regulations, the client may redefine what items of earnings are distributable from trust to income beneficiaries Without modification, rents, interest, and dividends are distributable May include realized capital gains as distributable income May exclude certain items from distribution (e.g., growth in variable annuity contracts) 16

17 Types of Charitable Remainder Trusts Charitable Remainder Unitrusts (CRUT) Charitable Remainder Annuity Trusts (CRAT) 17

18 Charitable Remainder Annuity Trust Annuity amount is a fixed sum certain paid at least annually Sum certain must be at least 5% of the initial fair market value Must be a charitable remainder computed using IRS prescribed actuarial tables Can t be more than a 5% probability the trust corpus will be exhausted before the remainder passes to charity The net present value of the remainder amount must be at least 10% 18

19 Choosing a CRT Type CRAT: useful in providing fixed income CRUT: useful in maximizing return on investment NICRUT: useful in maximizing benefit to charity NIMCRUT: useful in creating tax deferred opportunities within philanthropic planning 19

20 How The Charitable Remainder Trust Works Gift Irrevocable Life Insurance Trust Death Benefit Trustmaker s Property Contribute Charitable Remainder Trust: Charitable income tax deduction Trust sells property without incurring capital gains Assets accumulate without incurring taxes Assets are out of estate - no federal estate tax Income to Trustmaker s designated income beneficiaries for life or term certain Income Remainder Assets Tax-free assets to heirs upon death Remainder assets pass to Charity upon death or after set term 20

21 Charitable Lead Trust Trustmaker s Property Income during term of trust passes to a qualified public charity Contribute Charitable Lead Trust Income Remaining Assets Upon the expiration of the term, assets pass to the beneficiaries 21

22 The Charitable Lead Trust Income tax deduction is equivalent to the present value of income interest given away Gift is equal to the value of remainder interest 22

23 Charitable Remainder Trusts IRA/Pension Plans and Charitable Remainder Trusts 23

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25 Retirement Plans and CRTs Estate Tax Value of plan $2,000,000 (x) Estate tax rate 50% Estate tax due $1,000,000 25

26 Retirement Plans and CRTs Income Tax Value of plan $2,000,000 (-) Deduction for estate tax paid 1,000,000 (=) Value subject to income tax 1,000,000 (x) Income tax rate 40% Tax due on IRD $400,000 26

27 Retirement Plans and CRTs Qualified Taxation in the Estate Value of plan $2,000,000 (-) Total of two (2) taxes 1,400,000 (=) Value transferred to heirs $600,000 Percent of plan to heirs 30% 27

28 Retirement Plans and CRTs These rules apply to: Pension plans Profit sharing plans 401(k) plans IRAs and IRA rollovers 403(b) plans 28

29 Retirement Plans and CRTs What can we do about this? 29

30 Conventional Plan 1) Capital gain tax on $5MM sale $1,000,000 Donors $5 Million Net Worth 2) After-tax sale proceeds, $3,350,000 Marital Trust 3) $650,000 Family Trust 4) $1,272,000 5) $2,078,000 6) $650,000 IRS $2,272, Heirs $2,728,000

31 Philanthropic and Zero-Tax Estate Plan 1) $3,000,000 CRT 2) $240k/yr + Tax Benefits 4) Balance of Estate Donors $5 Million Net Worth Marital Trust 5) $650,000 Family Trust 3) $40k/yr ILIT 6) $3,000,000 7) $700,000 Family Foundation $3,700,000 8) $650, ) $650,000 10) $3,000,000 Heirs $4,300,000

32 Philanthropic and Zero-Tax Estate Plan $27 Million Estate $4MM at Death $8MM 8% CRT $3MM Tax Deduction / $640k/yr Income $15MM 10% CLT $15MM Remainder After 20 yrs. Family Foundation $18MM Over 20 yrs. Heirs $15MM Remainder After 20 yrs. Family Philanthropic Capital: $35MM Family Financial Capital: $15MM Total Family Capital: $50MM 32 Internal Revenue Service: $0

33 How to Make Estate Planning a Rewarding Part of Your Plan A Wealth of Opportunities David Nunheimer The Small Business & Estate Planning Law Group 26 George Ryder Road West Chatham, MA