Beyond Charitable Rollovers Leveraging Large IRAs into Large Charitable Gifts

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Morgan Copeland
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Beyond Charitable Rollovers Leveraging Large s into Large Charitable Gifts Robert Lew Planning & Financial Advisors What & Who Massive Pool of Assets assets have grown to over 7.4 Trillion dollars.

1 Beyond Charitable Rollovers Leveraging Large s into Large Charitable Gifts Robert Lew Planning & Financial Advisors What & Who Massive Pool of Assets assets have grown to over 7.4 Trillion dollars. (December 2014) 401(k) assets grew to over 4.8 Trillion dollars. (March 2016) Well to do clients with Philanthropic Intent. Will not cover Charitable Rollover planning. s are Subject to Estate Tax 5,000,000 exemption adjusted for inflation has grown to 5,490,000. (2017) 40% estate tax on excess. 1

2 s are IRDs IRDs are subject to Federal and State income taxes. (39.6%, 13.3%) Unpaid Compensation Royalties Variable Annuities Qualified Retirement Assets (s, 401(k)s, Pension and Profit Sharing Plans) 13M Estate - Double Tax 2,500,000 2,250,000 2,000,000 1,750,000 1,500,000 1,250,000 1,000,000 2,000,000 Estate Tax 800,000 IRD Tax 634,800 ========== Net after tax 565, , , , %, 52.9% 4M Estate 2,500,000 2,250,000 2,000,000 1,750,000 1,500,000 1,250,000 1,000,000 2,000,000 Estate Tax 0 IRD Tax 1,058,000 ========== Net after tax 942, , , , % 2

3 Options for the Owner No Planning S (Inherited ) TCRUT PLR Insurance Children Assumptions Fred and Wilma Jones, 72&68 in good health Beth and Judy, 44, will live 10 years past life expectancy 11,000,000 of non- assets 2,000,000 - not needed for retirement 7% earnings, 40% income tax bracket No Planning The Jones withdraw money from only as required by the Required Minimum Distribution (RMD) rules. The after-tax RMDs are invested in a Side Fund. Upon the 2 nd death, Beth and Judy will receive the Side Fund net of estate tax. Beth and Judy will receive the net of IRD and estate tax. Side Fund Beth & Jen 3

4 Assumes Parents Die in 2017 (Age 72/68) Children, 44 years old, live 10 years past life expectancy (94) No Planning S TCRUT Children 565,200 Charity - - Inherited (S) Planning The Jones designate their daughters as the beneficiaries of their. (Side Fund) Estate Upon the 2 nd death, Beth and Judy distribute income from the slowly over their life expectancy. Estate tax attributable to the must be paid with non- assets. Side Fund Beth & Judy Assumes Parents Die in 2017 (Age 72/68) Children, 44 years old, live 10 years past life expectancy (94) No Planning S TCRUT Children 565,200 2,138,552 Charity - - 4

5 Implementation Issues Stretch-Out planning requires discipline. To maximize the benefits the daughters cannot take more than 50,251at age 44. A see-through trust can be used to compel a distribution rate. 96,835 at age 54 (4%) Assumes Parents Die in 2017 (Age 72/68) Children, 44 years old, live 10 years past life expectancy (94) No Planning S TCRUT Children 565,200 2,138,552 Charity - - No Planning 7% TCRUT Children 565,200 1,483,758 Charity - - * * 140,000 a year Split Interest Gift Donor CRT Principal Donor Tax Exempt Charity 5

6 Annuity Trust Donor CRAT Donor Unitrust Donor CRUT Donor TCRUT Planning The Jones draft but do not fund two 7% payout TCRUTs, one for Beth and the second for Judy. 3.5% AFR assumption used. Upon death the is distributed to the two TCRUTs. Beth and Judy also receive the Side Fund assets. Estate tax attributable to the must be paid with non- assets. Estate Each daughter receive income from their respective TCRUT for as long as they live. Remaining Trust assets will be distributed to charity upon their deaths. Side Fund Beth & Judy TCRU TCRUT T 6

7 Assumes Parents Die in 2017 (Age 72/68) Children, 44 years old, live 10 years past life expectancy (94) No Planning 7% TCRUT Children 565,200 1,483,758 1,478,511 Charity ,214 STT vs. TCRUT Nearly identical benefits at life expectancy plus 10 years. TCRUT The daughters will receive more if they live longer.no life expectancy table. STT The third generation may inherit something upon Beth and Judy s deaths. STT income (IRC 691(c)) vs. TCRUT estate tax deduction can offset IRC 691(c) s benefits. TCRUT Distributions can be directed to a Special Needs Trust. PLR The taxpayer created a self-directed with a selfdirected custodian. He proposed to invest a part of his with his church, in the form of a loan. Charity The concluded that a loan to the church will not be a prohibited transaction as there will be no transaction between disqualified persons. The taxpayer was not a disqualified person as he was not an employee, a member of the board or had any financial interest in the church. The church was not a disqualified person. 7

8 Two Charitable Options A charity can use borrowed money to help fund a Capital Campaign. A charity can use borrowed money to purchase a life insurance policy. Charity Capital Campaign Life Insurance Policy Capital Campaign Gift A donor wants to donate 1M to Stanford s capital campaign but cannot due to lack of liquidity. Withdrawing 1M from her would not be an option because of deductibility issues. Stanford Her self-directed can loan Stanford 1M with arm-length terms. (2.7% interest only paid annually with the principal due in 11 years) Stanford can use the loan proceeds to help build their new gym. Building Capital Campaign Gift The donor will annually withdraw the higher of her deductible limit, the Charitable Rollover limit or her RMD. The will donor her deductible distributions to Stanford until the loan is paid off. Stanford Stanford will use her annual donations to pay their annual interest obligations (27,000) before repaying loan principal. Building The donor designates Stanford as the beneficiary of an amount equal to any unpaid interest and principal. 8

9 Capital Campaign Assist A donor s self-directed makes a 1M, 9 year, 1.1% interest only loan to U.C. Berkeley. Current mid term rate is 1.94%. Berkeley uses money to help build a new building. U.C. Berkeley Berkeley pays 11,000 a year in interest, buying time to raise more money or obtain financing. Berkeley pays off the loan within 9 years. Building Second Charitable Option A charity can use borrowed money to help fund a Capital Campaign. A charity can use borrowed money to purchase a life insurance policy. Charity Capital Campaign Life Insurance Policy Assumptions Value 3,000,000 Owner Female, 65, in excellent health Loan rate 2.5% 9

10 PLR Insurance A donor wants to leverage what she can leave to Princeton. Her self-directed makes a 1M, 40 year, 2.5% interest only loan to her Princeton. Interest to be paid annually. Principal to be repaid upon her death or after 40 years. Princeton Princeton buys a single pay 2.8M life insurance policy on the donor s life. Upon death Princeton collects the death benefit and use some of the money to repay the loan. Insurance Policy The Economics Princeton 25,000 Princeton will pay 25,000 of interest annually to the donor s. 1M of the 2.8M death benefit will be used to repay the loan. The will still have Required Minimum Distribution. 2,800,000 Policy Economics for Charity 3,000,000 2,000,000 1,000, Cost to Northwestern (2.5%) Insurance Insurance less note 679K in 20 years 10

11 Questions Presented to the Is this a prohibited investment? Sec. 408(a)(3) states no part of an may be invest in life insurance contracts. The concluded that the will be making a loan, not an equity investment in a life insurance contract. Church The church will maintain all rights of ownership to the policy and solely benefit from any death benefit. The loan can be secured with a Collateral Assignment Agreement. Insurance Policy Leverage Roland and Mary, 75 and 74. Joint life expectancy = 90 Daughter has been taken care of. 4,000,000 Annual taxable income of 300,000 growing 1% a year. Leveraged Your Estate Guild Dogs The Donor annually withdraws the greater of 200,000 or the Required Minimum Distribution (RMD) from his. (taxable distributions) The Donor donates each distribution to Guild Dogs for the Blind. (charitable tax deduction) Guild Dogs purchases a 7M second-to-die insurance policy on the donor and her husband s life. Guide Dog names itself the owner and beneficiary of the policy. The policy will cost 145,479 a year. Guild Dogs annually spends 54,521 (or more in later years) on current needs. Policy MM SULG, ages 74,75 Ultra to

12 Leveraged The Donor designates Guild Dogs the beneficiary of his. Your Estate Guild Dogs will receive 7,000,000 of insurance death benefit plus roughly 4,000,000 of assets. Guild Dog Current Programs Policy ATRA 3% Over Threshold Phase Out of Itemized Deduction Inflation Adjusted Distribution Roland's 200k or Taxable Total ATRA in Excess of Cost of Age Earning 7% RMD Threshold Threshold ATRA 75 / 74 4,000, , , , ,200 2, / 75 4,066, , , , ,493 2, / 76 4,136, , , , ,715 2, / 77 4,212, , , , , ,363 2, / 78 4,285, , , , , ,688 2, / 79 4,349, , , , , ,560 2, / 80 4,405, , , , , ,991 2, / 81 4,450, , , , , ,992 2, / 82 4,483, , , , , ,570 2, / 83 4,503, , , , , ,724 2, / 84 4,507, , , , , ,377 2, / 85 4,497, , , , , ,300 2, / 86 4,470, , , , , ,441 3, / 87 4,426, , , , , ,734 3, / 88 4,363, , , , , ,097 3, / 89 4,279, , , , , ,101 3, / 90 4,177, , , , , ,618 3, / 91 4,056, , , , , ,491 3, / 92 3,914, , , , , ,535 3, / 93 3,752, , , , , ,953 3, % inflation assumption ATRA 3% Over Threshold Phase Out of Itemized Deduction Inflation Adjusted Distribution Roland's 200k or Taxable Total ATRA in Excess of Cost of Age Earning 7% RMD Threshold Threshold ATRA 75 / 74 4,000, , , , ,200 2, / 75 4,066, , , , ,493 2, / 76 4,136, , , , ,715 2, / 77 4,212, , , , , ,363 2, / 78 4,285, , , , , ,688 2, / 79 4,349, , , , , ,560 2, / 80 4,405, , , , , ,991 2, / 81 4,450, , , , , ,992 2, / 82 4,483, , , , , ,570 2, / 83 4,503, , , , , ,724 2, / 84 4,507, , , , , ,377 2, / 85 4,497, , , , , ,300 2, / 86 4,470, , , , , ,441 3, / 87 4,426, , , , , ,734 3, / 88 4,363, , , , , ,097 3, / 89 4,279, , , , , ,101 3, / 90 4,177, , , , , ,618 3, / 91 4,056, , , , , ,491 3, / 92 3,914, , , , , ,535 3, / 93 3,752, , , , , ,953 3, % inflation assumption 12

13 Spend On Current Needs Annual Contribution 200k or in Excess of Age Roland's RMD Premium 75 / 74 4,000,000 54, / 75 4,066,000 54, / 76 4,136,620 54, / 77 4,212, ,497 62, / 78 4,285, ,744 74, / 79 4,349, ,612 87, / 80 4,405, , , / 81 4,450, , , / 82 4,483, , , / 83 4,503, , , / 84 4,507, , , / 85 4,497, , , / 86 4,470, , , / 87 4,426, , , / 88 4,363, , , / 89 4,279, , , / 90 4,177, , , / 91 4,056, , , / 92 3,914, , , / 93 3,752, , , / 94 3,573, , , / 95 3,445, , ,916 Total 3,576,599 Gift vs. Net to Children Joint Life Expectancy 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Net to Guild Dogs Net to Daughter 7% vs. Insurance Premium Saved - 7% Cummulative 200k or Cumulative Saved Plus Insurance Plus Age Roland's RMD Earnings 75 / 74 4,000, ,479 4,145,479 11,000, / 75 4,066, ,142 4,367,142 11,066, / 76 4,136, ,700 4,604,320 11,136, / 77 4,212, , ,918 4,858,102 11,212, / 78 4,285, , ,612 5,121,627 11,285, / 79 4,349, ,612 1,040,654 5,390,493 11,349, / 80 4,405, ,114 1,258,978 5,664,412 11,405, / 81 4,450, ,262 1,492,586 5,943,058 11,450, / 82 4,483, ,063 1,742,546 6,226,071 11,483, / 83 4,503, ,520 2,010,003 6,513,058 11,503, / 84 4,507, ,555 2,296,182 6,803,595 11,507, / 85 4,497, ,940 2,602,394 7,099,452 11,497, / 86 4,470, ,626 2,930,041 7,400,626 11,470, / 87 4,426, ,547 3,280,622 7,707,170 11,426, / 88 4,363, ,622 3,655,745 8,019,205 11,363, / 89 4,279, ,423 4,057,126 8,336,953 11,279, / 90 4,177, ,825 4,486,604 8,664,316 11,177, / 91 4,056, ,671 4,946,145 9,002,394 11,056, / 92 3,914, ,779 5,437,854 9,352,532 10,914, / 93 3,752, ,350 5,963,983 9,716,365 10,752, / 94 3,573, ,845 6,526,941 10,100,776 10,573, / 95 3,445, ,395 7,129,306 10,574,695 10,445,389 13

14 Saving vs. Insurance 7% Joint Life Expectancy 11,000,000 9,000,000 7,000,000 5,000,000 3,000, Net Insurance Net Pure Endowment 7% earning Options for the Owner No Planning S (Inherited ) TCRUT PLR Insurance Children Beyond Charitable Rollovers Leveraging Large s into Large Charitable Gifts 14

15 PRACTICAL PLANNED GIVING CONFERENCE SPEAKER EVALUATION Date: Speaker: Name (optional): Please rate the following: Excellent Good Neutral Fair Poor I. OVERALL Were your major objectives for this session met? Was the content of the session vital, timely, substantive? Comments: II. RELEVANCE Was the subject matter directly related to the requirements of your job? Comments: III. VALUE Do you believe the benefits of this session were worth the time, effort and cost? Comments: IV. SPEAKER How was their presentation style? Did the session move along at the right pace? Did they have appropriate knowledge on the topic? Comments: V. MATERIALS Were the materials clear and organized and appropriately helpful for the session? Comments: Vi. What did you like the most about the session? VI. Any suggestions to improve future sessions? XII. How many years of gift planning experience do you have?

THE MAGIC OF CHARITABLE GIVING Win-Win Strategies That Benefit Both the Charity and the Donor (ILLUSTRATIONS BASED ON RATES AND TAXES FOR APRIL 2014)

THE MAGIC OF CHARITABLE GIVING Win-Win Strategies That Benefit Both the Charity and the Donor (ILLUSTRATIONS BASED ON RATES AND TAXES FOR APRIL 2014) Presented to: CENTENNIAL ESTATE PLANNING COUNCIL November