Chicago Council on Planned Giving 2017 Annual Symposium. Presented by Marc Carmichael, J.D.

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1 Chicago Council on Planned Giving 2017 Annual Symposium Presented by Marc Carmichael, J.D.

2 Introduction to Planned Giving Opportunities I Wish I Could Do More

3 Gift Planning Involves WHAT to give HOW to give WHEN to give

4 Planned Giving Brings About Gifts That Are: Large $5,000 to $5 billion or more Economical donors may have most of the gift paid by the tax collector Beneficial financially often, donors incomes improve More satisfying greater significance For future support of the organization

5 Who was Marty McFly? And why would he make a GREAT planned giving officer?

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7 Outright Gifts Cash Stocks & Bonds Real Estate Collectibles Life Insurance Polices Stock in Family Corporations

8 Gifts of Cash Simple Deductible up to 50% of adjusted gross income (5- year carryover for excess)

9 Better to Give Stocks, mutual funds and other securities Stock in closely-held corporations Collectibles Real estate Unneeded cash-value life insurance policies

10 Outright Gifts Cash Stocks & Bonds Real Estate Collectibles Life Insurance Polices Gifts from IRAs (donors over 70½)

11 Make Gifts, Keep Benefits Major gift Retained income for life (or other benefits) Partial income tax deduction Other tax benefits

12 Gifts With Retained Benefits Charitable gift annuity Charitable remainder annuity trust Charitable remainder unitrust Charitable lead trust Pooled income fund Gift of home/farm with lifetime use retained for donor or another

13 Gifts Through Will/Estate Plan Outright bequests Bequests reserving life income to family member (trust, gift annuity, pooled fund) Contingent bequests Will substitutes life insurance, living trusts, IRAs, beneficiary designations on financial and brokerage accounts All are revocable

14 Purposes of Planned Gifts Seldom for current operating expenses Endowment, frequently Capital campaigns with endowment components (lead trusts and gifts of assets can go for bricks and mortar) Donors often want to restrict purposes of planned gifts

15 Market for Planned Giving Top of the donor pyramid Helpful if prospects face estate taxes But most planned gifts come from wills: Anyone can make a bequest

16 Advantages of Planned Giving Service, not just a solicitation Donors focus on their estates, not their checkbooks Larger gifts likely Bequests popular

17 Challenges in Planned Giving More reliance on staff Temptation to overstress tax benefits Need for current funds at institution may result in lack of focus and commitment to planned giving Sometimes, lack of patience to see program through

18 The Ideal Planned Gift Prospect Likes your organization Is retired or nearing retirement age Has sufficient wealth to make a planned gift Is childless or has few financial obligations

19 There is no good database on people who never had kids* Do I have any children? Well, (giggle), none that I know about! --Bette Midler *Childless donors are 50% more likely to make charitable bequests

20 What Does a Planned Gift Prospect Look Like?

21 Donor Profile: Age 60+ are best planned gift prospects Ages should be part of planned gift education efforts Any marketing to prospects in their 40s should be low-key and wills oriented

22 Four Ages of Planned Giving? 30s-40s are making their first wills 50s-early 60s in peak earning years, saving for retirement age group seek income security, money management 75+ reviewing plans for final dispositions

23 Donor Profile: Family Married/no children excellent prospects Married/children with independent means Unmarried, widows and widowers Individuals helping to support older relatives

24 Donor Profile: Giving Record Current major donors Steady donors of modest amounts Donors who have previously made planned gifts Families of deceased donors

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26 Donor Profile: Giving Record Current major donors Steady donors of modest amounts Donors who have previously made planned gifts Families of deceased donors

27 Donor Profile: Financial Ability Significant assets and high incomes Individuals subject to federal estate tax Single people with net worth in high six figures Millionaires next door

28 Donor Profile: Special Situations Real estate investors (many tax-deferred exchanges in past years) Business owners approaching retirement Washington University profiles: Average age of life income donors is 77

29 Raise Antenna for Donor Sounds I m getting ready to sell my business I m switching some stocks into bonds My farm/ranch/ investment real estate is up for sale I m tired of the low interest from my CDs I m revising my will

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31 Gifts of Cash Simple Deductible up to 50% of adjusted gross income (5- year carryover for excess)

32 Gifts of Cash Tax savings = gift x top tax bracket

33 Gifts of Cash Tax savings = gift x top tax bracket Example: $10,000 x 28% top rate = $2,800 tax savings What are savings from $10,000 cash gift by donor in the: 39.6% tax bracket? 33% tax bracket? 25% tax bracket?

34 Better to Give Stocks, mutual funds and other securities Stock in closely-held corporations Collectibles Real estate Unneeded cash-value life insurance policies

35 IRS Report on Noncash Gifts Corporate stock gifts averaged $141,448 Mutual fund gifts averaged $110,607 Other gifts (bonds, life insurance annuities, CDs, life insurance, notes, options, partnership and REIT interests) averaged $3,000 Improved real estate gifts averaged $163,134 Unimproved land gifts averaged $197,667 Gifts of artworks/collectibles averaged $11,799 (Amounts are for total deductions per tax return)

36 Gifts of Appreciated Stocks Gifts of stock save taxes twice You can deduct cost plus paper profit if held more than a year Donors avoid capital gains tax (15% or 20%) on long-term gains 30% of AGI ceiling (five-year carryover)

37 Stock Market Rebound Since March 2009 Encourages Gifts Gifts of appreciated securities may also avoid 3.8% net investment income tax Donors can achieve profit-taking, while minimizing tax, with CRTs and gift annuities

38 Tax Rates Affecting Investors Capital gains tax rate now 20% for taxpayers in the 39.6% tax bracket 20% rate also applies to qualified dividends of 39.6% taxpayers 15% rate on gains and dividends continued for 25% to 35% tax brackets No tax on gains/dividends below 25% tax bracket Singles: $418,401+ Married: 470,701+ Heads of Household 444,551+

39 Tax Changes Affecting Investors A 3.8% surtax applies on net investment income of single taxpayers with AGI over $200,000, $250,000 for married filing jointly Combined tax rate on long-term capital gains is now 23.8% for wealthy taxpayers 60% more than past years (only 15%)

40 Message to Donors Higher taxes on your investments increases tax savings from giving appreciated securities 39.6% bracket donors save almost 40 for every dollar they give and can also avoid capital gains and net investment tax totaling 23.8% on gifts of stock.

41 $20,000 Gift Costs only $9,700 $20,000 gift of stock with $10,000 cost basis $20,000 federal income tax deduction creates $7,920 tax savings in 39.6% tax bracket, plus $2,000 capital gains tax avoided (20% x $10,000) and $ 380 net investment tax avoided (3.8% x $10,000) $20,000 7,920 2,000 $380 = $9,700 out-ofpocket cost to Donor for $20,000 gift

42 Molly s Tax-Wise Gift $1,000 current value of stock cost basis (what she paid) $800 capital gain x 15% = $120 tax $1, = $880 true value $1,000 x 28% = $280 deduction savings $880 $280 = $600 final cost of gift

43 Gifts of Stock in Family Business 90% owner (Mom) gives stock worth $10,000 Corporation redeems shares for $10,000 cash Charity has $10,000 for its programs Mom gets $10,000 deduction on personal tax return, saving $3,960 in 39.6% tax bracket Stock is retired Mom keeps control Appraisal needed for deductions over $10,000

44 Gifts of Personal Property (Collectibles) Need Planning Require qualified appraisals if deduction exceeds $5,000 Maximum deduction is cost basis if object can t be put to some use related to charity s tax-exempt purposes

45 Effect of Unrelated Use $16,000 fair market value $10,000 cost basis $10,000 deduction Three-year tattletale form requirement (Form 8282)

46 Donors Need to Find the Right Charity for Gifts of Collectibles Maximum deduction is cost basis if object can t be put to some use related to charity s tax-exempt purposes IRS may accept creative related use claims but referrals to another charity can make sense

47 Special Planning for Real Estate Qualified appraisal required Mortgage reduces deduction; some capital gain reported Environmental inspection needed Can give just a slice

48 Gifts from One s Business Compare tax benefits: Does owner or firm save more taxes? Gifts of appreciated assets: real estate or marketable securities Gifts of inventory

49 IRA Rollover Gift Rules IRA owners must be over 70-1/2 on date of contribution. Only public charities can be recipients. No distributions to donor advised funds or life income gifts $100,000 maximum No quid pro quos to donors allowed at all. IRA gift law was made permanent in 2015

50 Best Major Gift Ideas Give appreciated securities Give stock in your family business Give real estate and collectibles (special planning needed & special rules apply) Donor s business can make the gift Give from IRA, if donor is eligible

51 Importance of Gifts from Wills 80%-90% of planned gifts from wills Simple to understand Any organization can accept and promote Donors more likely to consider major gifts through their estate plans than during life

52 Bequests = 80-90% of Planned Gifts Why are donors more receptive to making major gifts at death? What special motivations are there for making gifts through estate plans? If I had known I was going to live this long, I would have taken better care of myself.

53 Gifts Through Estate Plans Enable Donors to Accomplish Goals: Plan a significant, future gift that doesn t jeopardize current financial security Leave a legacy for good Provide a level of support that seemed impractical during life (e.g., tithing at death: I bequeath 10% of my estate to XYZ charity ) Reduce taxes on their estates Perpetuate their annual giving

54 Estate Tax Charitable Deduction

55 $5,450,000 Exemption Frees Most People from Gift & Estate Taxes 40% Should organizations continue discussing estate taxes in wills and bequest marketing?

56 Only 3,000 or 4,000 Estates a Year Will Owe Estate Tax* But donors still need to plan their estates. In fact, now is a very good time to review your estate plans * Out of 2.5 million deaths (average)

57 Why Should Donors Make Estate Plans if They Won t Owe Federal Estate Tax?

58 Marketing Should Emphasize Need for an Estate Planning Bucket List Thoughtful, Fair Distribution of Estates through Wills, Living Trusts and Beneficiary Designations Keep Probate Expenses as Low as Possible Trusts That Protect Family Beneficiaries Income Taxes at Death (IRD) and State Death Taxes Living Wills and Healthcare Powers of Attorney Powers of Attorney/Standby Trustees Charitable Bequests

59 Death Is a Tax Shelter for Capital Gains Taxes Only

60 Leave Charity Tax-Burdened Assets U.S. Savings Bonds IRAs and deferred compensation Accounts receivable Installment payments on land sale contracts Unpaid commissions Commercial annuities

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62 Retirement Accounts: A $13 Trillion Fruit Tree

63 Taxes on Retirement Accounts Federal Estate Tax (estates over $5.45 million) and State Death Taxes (in 19 states; Illinois estate tax affects estates over $4 million) Federal Income Tax (IRD) State Income Tax (but not in Illinois, at least so far)

64 IRA Charitable Bequest Options Beneficiary change part or all to charity Leave by will or living trust (rare) Make charity contingent beneficiary and give heir right to disclaim IRA Leave to remainder trust/gift annuity Spouse can disclaim to unitrust/annuity trust Reliable spouse gives from rollover IRA

65 Marketing Should Emphasize Need for an Estate Planning Bucket List Thoughtful, Fair Distribution of Estates through Wills, Living Trusts and Beneficiary Designations Keep Probate Expenses as Low as Possible Trusts That Protect Family Beneficiaries Income Taxes at Death (IRD) and State Death Taxes Living Wills and Healthcare Powers of Attorney Powers of Attorney/Standby Trustees Charitable Bequests

66 Gifts through Wills/Estate Plans Outright bequests Contingent bequests/disclaimers Bequests reserving life income to family member (trust, gift annuity, pooled fund) Will substitutes life insurance, living trusts, IRAs, beneficiary designations on financial and brokerage accounts (POD and TOD accounts)

67 Outright Bequest Options Specific $$ amount Specific assets Type of asset Percentage of net value of estate Residue of estate Percentage of residue

68 Bequests Beat Bonfires Bequeath ordinary income and tangible personal property to charities Ted DeGrazia, artist

69 Collectibles Make Good Bequests

70 Outright Bequest Options Specific $$ amount Specific assets Type of asset Percentage of net value of estate Residue of estate Percentage of residue

71 Who Was John Beresford Tipton? Residuary bequests can be uncertain

72 Disclaimers Give Flexibility Heirs can have right to disclaim (turn down) all or part of a bequest and gift will pass to named charity Possible income tax and death tax savings

73 Contingent Charitable Bequests Charity benefits if original named beneficiary has already died Possible tax savings to donor s estate

74 Ultimate Contingent Beneficiary I outlived three husbands and everybody else in my family

75 Deferred Bequests Are Shared Between Charity and Family Charitable gift annuity Gift of home/farm with lifetime use retained Charitable remainder annuity trust Charitable remainder unitrust Charitable lead trust Pooled income fund

76 Charitable Remainder Trusts at Death Charities Surviving spouse or other family

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78 Will Substitutes Life insurance part or all of the proceeds Pay on Death (POD) beneficiary designations (savings/checking accounts) Transfer on Death (TOD) designations on brokerage accounts Revocable living trusts IRAs and other retirement accounts

79 The Charitable Gift Annuity Is a Simple Contract To Pay Someone an Income for Life

80 History s First Gift Annuity

81 Gift Annuities: How They Work Gift of cash or securities o Payments for one or two lives o Large charitable deduction o Partial tax-free payments o Reduced capital gains taxes for gifts of securities o Satisfaction of making a truly significant gift

82 ACGA Recommended Payout Rates Age Rate Age Rate % %

83 The Charitable Gift Annuity Income for life (one or two people) Income tax deduction for part of amount transferred, based on age of recipient Payments are partly tax free Some capital gain reportable if gift is funded with stocks Payments can be deferred to future year

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85 Roll Over Low-Interest CDs Into Charitable Gift Annuities Certificates of deposit historically reach maturity in April and October Market higher gift annuity payout rates, tax-free benefits, in March/September Market: Retirees

86 Safe Way to Dip into Principal A man and his money should run out at the same time - John Barrymore The gift annuity an income you cannot outlive.

87 $8 Billion in Dead Savings Bonds New life as gift annuities?

88 Savings Bonds Gift Annuity Donor (age 80) owns $40,000 in expired EE bonds with $18,000 of taxable interest Donor cashes bonds and gives proceeds for a CGA paying 6.8% $18,000 gift deduction cancels any tax on bonds

89 Capital Gains and Gift Annuities Long-term capital gains taxed at zero % in 2017 for taxpayers in 15% and 10% tax brackets Many gift annuity prospects may benefit from giving stocks for CGAs in 2017

90 Deferred Payment Gift Annuities Higher payout rates Larger charitable deduction Good for supplementing retirement savings of baby boomers Good when donors need large deductions to offset unusual income

91 Deferred CGA Rates Are Higher Age 5-year 10-year 15-year Deferral Deferral Deferral % 6.6% 8.5%

92 Deferred Payment Gift Annuities Higher payout rates Larger charitable deduction Good for supplementing retirement savings of baby boomers Good when donors need large deductions to offset unusual income

93 $10,000 Flexible Deferred Annuity Starting Payout Annual Age Rate Payment % $ , ,110 (Donor is age 55 at date of gift)

94 Charitable Remainder Trusts Charities Donor, others

95 Charitable Remainder Trusts Can Pay fixed or variable income for life or term of years (1-20) Reinvest assets for higher income without capital gains taxes Provide income that is minimally taxed Yield large deductions

96 CRTs Can Achieve Personal Goals

97 Annuity Trust vs. Unitrust Flat dollar amount 5% probability test No additional contributions Deductions decline when applicable federal interest rates are low (as now) Payout varies Additional contributions O.K. Net Income provisions allowed Revaluation of assets required

98 Charitable Remainder Unitrust Options Standard (STANCRUT) Net Income (NICRUT) Net Income with Makeup (NIMCRUT) Flip (FLIPCRUT)

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100 CRTs Pay 100% Tax on UBTI Income from trade or business (but not stock dividends) Debt-financed income, including sale proceeds Rents are not treated as UBTI

101 Dividends Last CRT distributions in recent years have been about half long-term capital gains, onethird ordinary income and the rest tax-free corpus or tax-free interest.

102 Remainders in Homes & Farms

103 If You re a One-Person Shop Obtain a basic wills brochure Start a Heritage Society Promote bequests continuously in every way you can Make your own will and charitable bequest

104 Questions???

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