WRPGC Primer May 31, 2017

Transcription

1 WRPGC Primer May 31, 2017 Ray Rotolo, Claremont McKenna College Patience Boudreaux, University of Redlands Moderator: Kimberley Valentine, LA Philharmonic Special thanks to our Primer Sponsor! What is Gift Planning or Planned Giving? Maximizing philanthropy while minimizing taxes Any gift made after considering tax and family implications Dreaming great dreams, planning great plans and implementing those plans Gift Planning involves a continuous process of cultivation focused on raising ultimate gifts from individuals. The ability for donors to make larger gifts than they believed possible. Usually made with assets rather than from income. Benefits to charity are often deferred and frequently involve some type of gift plan (annuity or trust) or estate planning. 1

2 Why is Gift Planning Important? Gift planning programs range from simple to robust, but not having a program is leaving significant money on the table. Maximize Donor s philanthropy: Enables donors to make larger gifts. Increases the pool of donors who can make a significant gift. Can become one of the largest revenue sources within an organization s fundraising program In times of economic downturn, it is often the estate gifts program that sustains the organization when other donations fizzle Why Do People Make Planned Gifts? Support Organization Create a legacy Capture tax incentives (reduce income taxes; avoid/minimize capital gain, gift, and estate taxes) Generate life income Non-cash assets Financial Planning Philanthropic Personal and Family Provide for self Provide for loved ones Family legacy Your Role as a Fundraiser Identify: Discover prospects Cultivate: Build relationships & facilitate the giving process Educate: Provide tools for appropriate giving strategies Solicit: Ask for the gift Steward: Create opportunity for donor appreciation and recognition 2

3 Identify The Gift Planning Prospect Who to Look For Typical Planned Giving Prospects are 55+. Interdepartmental referrals Committed to your organization. Actively engaged with the organization. Often have a long history of giving small amounts to your organization. May or may not have family, but No Children are the PG officer s two favorite words in the English language. They are in the process of selling an appreciated asset. How or Where to Look Research & Prospect Management Self-Identification Marketing Phone solicitations Cultivation & Solicitation 3

4 Donor Visits Ask open-ended conversations listen for cues Ask the passion question: What would you like to accomplish with your money that would be the most meaningful to you? Be mindful of making assumptions Take someone with you on a first visit Meetings Coffee, Lunch, Drinks, Dinner, Charity Events, Home Visits Solicitation Protocol: The Four P Strategy People Property Priorities Plan People Donor Prospect Family members and other heirs Special Needs Advisors (Financial, Tax, Estate Planning Attorney) 4

5 Property Cash Appreciated Securities Real Property Valued Artwork or Other Collectibles Intellectual Property Priorities Current Income Taxes: Income, Capital Gains, Estate Retirement Philanthropy/Legacy Plan Does the donor have a professional advisor or advisors? Is there an estate plan? When did the donor last update their estate and financial plan? Are there charitable provisions in the donor s estate plans? Life income agreements Annuity contracts Trust documents 5

6 Some Gift Plan Basics Two Categories of Gifts Revocable: The donor retains the ability to revoke the gift. Not considered complete for tax purposes Estate gift intentions (bequests) or any gift where the donor retains ownership of the asset while naming a charity as the designated beneficiary OR Irrevocable: The donor transfers ownership of an asset in exchange for tax and, generally, income benefits Charitable trusts, charitable gift annuities, retained life estates, outright gifts General Benefits Personal Benefits Creation of a legacy Ability to make a gift you might not otherwise be able to make Enhanced personal financial security Provide for others Financial Benefits Income you can t outlive Minimize or eliminate market risk Professional asset management Tax Efficiency Charitable deductions Capital gain benefits Tax-favored payments 6

7 Planned Giving Options Outright Giving IRA Charitable Rollover Gift Real Estate Gift Outright Bargain Sales Mineral/Oil Rights Gift of Tangible Personal Property Business Interests Life Insurance (owner) (LI) Most of these assets can be used to fund a life income agreement. Deferred Giving Estate Gifts Life Income Gifts (Gifts That Pay Income) Charitable Gift Annuity (CGA) One Life/Two Life Deferred CGAs (DCGA) Flexible Deferred CGAs (FDCGA) Commuted CGAs Step CGAs Charitable Remainder Trust Life Insurance (beneficiary) (LI) Charitable Lead Trust (CLT) Retained Life Estate (RLE) Bargain Sale Assets Utilized Cash Appreciated securities Stocks (Publicly Traded, Closely Held) Mutual Funds Real Estate Examples: second home, personal residence when moving into a retirement home, vacation property, residential or commercial investment property Business Interests Tangible Personal Property Examples: artwork, cars, wine, stamp collection Life Insurance Policies Retirement Plans (IRA) Gift Vehicles Identify and educate to create the best plan for your donor prospects 7

8 Life Income Gift Funding Assets Donors 1 Estate Gift Provision (Bequest) Estate Plans 2 Gift to charity Look & Act Like Estate Gifts Life Insurance Retirement Plans Charity Estate Gifts Gift by Will or Living Trust Can Be Fixed Amount/Percentage A Specific Asset Residue (or percentage) Contingent (e.g., only if my 3 rd cousin predeceases me) Testamentary planned gift A Few Statistics Only 25% to 35% of estate gift donors will inform you Less than 20% of estates under $20 million include charity Significantly larger than other gifts Sample estate gift language I give to [CHARITY NAME], a California non-profit public benefit corporation or trust, located at (CITY NAME), California, [insert here: a dollar amount; percentage [%] of estate, or description of the property you intend to bequeath] to be used for its general purposes / an agreed upon restricted purpose. To be used in accordance with a signed gift agreement of file with (the organization) 8

9 Identifying Estate Gift Donors Profile 55+ years old Committed to your organization Typically a long history of giving, often smaller amounts Planning Goals To benefit the charity or charities they love To plan ahead and care for their family beyond their lifetimes To reduce estate and gift taxes Current estate tax credit is $5.49M per person or $10.98M for a couple Portability Not automatic Note: Less than 1% of estates are now subject to estate tax Life Insurance New or Existing Policy Logistics Designate charity as a beneficiary (revocable) Designate charity as the owner and beneficiary (irrevocable) Benefits Particularly useful if the original purpose for purchasing an existing policy is no longer relevant (e.g. child s college education, mortgage, funds to cover estate taxes, money for loved ones) Charitable deduction for premiums paid to date or cash value (interpreted terminal reserve), whichever is less, and future premiums Gift Acceptance Policy Non-standard gifts like life insurance may be accepted or not, depending on your gift acceptance policies Retirement Plans IRAs, 401(k)s, 403(b)s, SEP IRAs There are billions of $ held in these types of plan Logistics Donor completes the beneficiary form Benefits Avoidance of double taxation (estate and income) if left to an individual other than a spouse Simplicity - Not necessary to meet with an attorney Easiest way to leave an estate gift May be used to fund a life income gift as a stretch out 9

10 Example: Retirement Plan Benefits Distribution to Family Distribution to Charity Retirement Plan Asset Value $1,000,000 $1,000,000 Income 39.6% ($396,000) $0 Federal Estate ($400,000) $0 Savings from 691(c) Deduction $110,880 n/a Net Gift $314,880 $1,000,000 Charitable Gift Annuities Defined: A contractual agreement between a donor (or donors) and a charity whereby in exchange for a gift the charity creates a legal obligation to pay a fixed amount to 1 or 2 people for life. Some Basics More often funded with cash The donor is entitled to a tax deduction and a significant portion of the payment is tax free Once payments cease, the remaining funds (the residual) are distributed to the charity May be funded with appreciated securities Because charities are tax exempt they pay no taxes when the securities are sold, thus the annuity is based on the full FMV of the securities If funded with appreciated securities part of the capital gain is avoided and the remaining gain is spread over a term of years. This reduces the amount of tax-free income received by the beneficiary Permissible to fund with Real Estate Minimum funding amount is often $10,000 10

11 Charitable Gift Annuity Flowchart Donors 79 & 79 $50, Income Tax Deduction: $20,212 If funded with Stock: ($30,000 Basis) $973 is Tax Free $1,124 is Cap. Gain $703 is Ord. Inc. $12,127 C.G. Avoided 5.6% Gift Annuity 4 Charity Immediate Fixed Annual Payments of $2,800 Residuum to Charity: $41,560 * 3 If funded with Cash: $2,097 is Tax Free $703 is Ord. Inc. Total Payments over 18.3 Yr. L/E: $51,240 After 14.8 Yrs. the Payment is fully taxable * Assumes 5.0% R.O.I. 2.6% AFR Retirement Plans Profile Average donor age: Usually Retired Hold significant cash reserves or appreciated securities Planning Concerns Increasing income because of low interest rates on savings or CDs Outliving their income Need for additional income to meet health care and assisted living or retirement home expenses Elimination of market risk in their investments Minimize the ACGA impact of capital Age gain taxation ACGA Age Rate (2 Lives) Rate % 70/70 4.6% % 75/75 5.0% % 80/80 5.7% % 85/85 6.7% Typical Prospects Profile Average donor age Usually Retired Hold significant cash reserves or appreciated securities Planning Concerns Increasing income because of low interest rates on savings or CDs Need additional income to meet health care and assisted living or retirement home expenses Outliving their income Elimination of market risk in their investments Minimize the impact of capital gain taxation 11

12 Deferred Payments Payments from a gift annuity may be deferred to: A specific future date commonly called a Deferred Gift Annuity A pre-determined range of dates - commonly called a Flexible Deferred Gift Annuity. Payments may start no sooner than the first date in the range and must start no later than the last date in the range. From the date of the gift until the payments start, the gift annuity rate for the age of the beneficiary as of the gift date (NOT the gift amount) is compounded (tax deferred) at a guaranteed rate (currently 3.25%). Deferring payments increases the charitable deduction and the longer the deferral period, the larger the charitable deduction. Important Miscellaneous Stuff Gift Annuity Rates Suggested rates are published by the American Council on Gift Annuities ACGA Assumptions 50% residual at life expectancy, 20% PV, All beneficiaries are female, 1-year younger than actual age, 4.25% gross ROI, 3.25% Net ROI (Deferral rate as well) Model Portfolio 55% 10-Year Treasuries, 5% cash or equivalents, 40% marketable securities State Regulation - California Minimum 10-years in operation Required Reserve 50% maximum in equities (incl. corp. bonds, mut. Funds), 50% & U.S. or St. Bonds No real estate, comm. annuities, foreign investments Charitable Remainder Unitrust Defined: A separate legal entity that can sell donated appreciated assets without paying capital gain tax at the time of the sale. Salvation Army calls them Capital Gain Bypass Trusts. 12

13 Charitable Remainder Trusts Three Versions Charitable Remainder Net Income Unitrust Pays the net dividend and interest income earned Not commonly used Charitable Remainder Annuity Trust Pays a fixed payment Standard/Basic Charitable Remainder Unitrust MOST COMMON Makes variable payments Some Basics Usually funded with an appreciated asset Payments are variable and equal a fixed percentage of the value of the trust assets Trust assets are revalued at the beginning of each year and payments reflect increases or decreases in trust values Payable to one or more beneficiaries, most often for life, but may be for a term of years, not to exceed 20 May name successor beneficiaries, such as children, typically for a term of years Additional contributions are permitted At the end of the trust term, the remainder is distributed to charity May have more than 1 charitable remainderman Charitable Remainder Unitrust Donors 65 & 65 $300, Income Tax Deduction: $101,547 5% Unitrust 4 Charity $15,000 (variable) 3 Total Remainder Amount to Charity: $734,917 * Beneficiaries Total Payments over 30.8 Yr. L/E: $720,363 * * Assumes 7.0% Avg. R.O.I. 2.6% AFR 13

14 Charitable Remainder "FLIP Unitrust Used for Gifts of Real Estate & Other Illiquid Assets Solves the problem of making payments when the CRUT has insufficient cash or cash flow. How It Works- Hybrid combination of the net income and the Standard unitrusts A Flip unitrust initially pays you a fixed percentage of the fair market value of the trust assets, or the net income, whichever is less. Then, beginning in January of the year following the year in which a triggering event, the method of payment changes, i.e., flips. You then begin to receive, for life, a fixed percentage of the fair market value of the trust assets each year, regardless of trust income. Identifying the CRT Donor Donor Profile Typically 60+ Charitably-minded Not in a position to make a large outright gift Contemplating a sale of an appreciated asset Maximize income from assets Minimize or eliminate the impact of capital gain tax Estate Reduction Concerned with inflation Wants to make a gift without undermining financial security Wants to make a gift and still provide for heirs Goals Charitable Lead Annuity Trust Definition: A wealth transfer technique for transferring assets to heirs free of gift or estate tax. Once funded, the trust makes fixed payments (the lead interest) to a charity for a term of years. At the end of the term, trust assets are distributed to heirs. Though this is a taxable gift, the charitable deduction for the income gift can fully offset the gift tax called zeroing out the gift. Any growth in asset value during trust term is distributed on a tax-deferred basis. 14

15 Charitable Lead Annuity Trust Versions Standard CLAT - Level Payments Shark-Fin CLAT Balloon Payment Step-Payment CLAT- Increasing Charitable Lead Annuity Trust Donors Results of Other Terms $700, Gift Tax Deduction: $473, % Lead Trust 4 Annual payments of $38,500 for 15 years Remainder: $1,175,162 3 Charity Beneficiary Gift to Charity: $577, % / 20 Yrs. = $540,505 Ded. 5.5% / 25 Yrs. = $700,000 Ded. 6.0% / 15 Yrs. = $516,215 Ded. 6.0% / 20 Yrs. = $648,599 Ded. 6.0% / 22 Yrs. = $696,983 Ded. Heirs 2.6% AFR Identifying the CLT Donor Profile Estate will be subject to estate tax 1 or more children or other heirs Assets that donor thinks will appreciate over time Goals To transfer wealth to children free of gift and estate tax To reduce estate taxes To see their philanthropy in motion today 15

16 Retained Life Estate Definition: Transfer of ownership in real estate to a charity now, while retaining the use of the donated property during remaining lifetime. Donor is responsible for insurance, taxes, and upkeep. At donor s death, the property is wholly owned by the charity. Retained Life Estate Home valued at $1,500,000 1 Donors Ages 75, 80 Retained Life Estate Home to charity 3 Charity 2 Income tax deduction: $905,747 Gains not taxed: $1,000,000 Beneficiary Gift to Charity: $1,500,000 Identifying the Life Estate Donor Profile Generally age 70+ Owns 1 or more pieces of real estate May not have heirs or children who are interested in inheriting and maintaining property Goals To qualify for a current income tax deduction while retaining use of property during life Reduce estate taxes Wants to enjoy the satisfaction of making a gift during life 16

17 Bargain Sale Definition: A simple agreement in which you sell real estate, tangible personal property, or other assets to a charity for less than their current value. Bargain Sale Example Donor owns property valued at $250,000 Cost basis is $100,000 Donor sells the property to Charity A for $169,377 Results Donor is eligible for a charitable deduction of $80,623 $250,000 - $169,377=$80,623 Donor receives a check for $169,377 There is reportable capital gain of $101,626 Can be structured such that the tax savings can fully offset the capital gain tax liability Testamentary Annuities & Trusts The Power of an Income Inheritance: For charitablyminded individuals who need, or want, to retain control of their assets during their life. Wish to make a gift but are concerned about the impact of the gift on their heirs inheritance. An annuity or trust funded through their estate plan may offer the best solution. 17

18 The Income Inheritance Charitable Gift Annuities and Charitable Trusts may be established and funded through a provision in one s estate plan Purpose: Provide secure income for a loved one or other heir Leverage one s estate to provide for a loved one AND for charity The Income-Inheritance Trust Estate $2,500,000 Estate Carve-out: $250,000 1 Remainder: 7% Immediate Inheritance: $250,000 Yr. $2,250,000 4 Annuity Trust Inheritance $2,250,000 $250,000 $2,500,000 3 Income: $250,000 CHARITY Outright Gifts that Sometimes Look Like Planned Gifts (or Fall in Our Laps Just Because ) IRA Charitable Rollover Gift Real Estate Gift Mineral Rights/Oil Rights Gift of Tangible Personal Property Business Interests Life Insurance (owner) 18

19 The Future of Planned Giving There s a shifting landscape for planned giving Legislation is changing and being proposed that present new opportunities and challenges IRA Assets into Income Gifts Elimination of Estate Tax Donor Advised Funds Previously seen a untouchable/unavailable pot or competition for a gift (of any sort) Now, nonprofits are beginning to create their own DAFs Financial organization offering partnerships as support for charities leery of logistics of administration Thinking outside the box Example: how you position or market traditional plans in nontraditional ways Stewardship Stewardship Why stewardship is important Tells the donor that you care about them and not just their $ May lead to leadership-type engagement Cements the gift, particularly estate gifts Recent research indicates that far more donors remove organizations from their estate plans than previously recognized Can result in: Increased annual gifts Repeat planned gifts Referrals to other donors 19

20 Stewardship Recognition of a gift takes many forms How you, as the charity, recognize your donors can be almost as important to the ongoing relationship as the gift itself Legacy Societies Donor wall or plaques Articles Newsletters Notes Visits Celebrations Small gifts Special events Introductions to the people who made the relationship important to your donor curators, staff, principal stakeholders Marketing Marketing Donor Education & Awareness Benefits of specific planned gift or legislation Self Identification Solicitation Emphasize deferred giving as a way to create a legacy Offer a deferred strategy as a solution to a problem A good marketing blast carefully embeds a solicitation within its broader theme of donor legacy/education. Marketing is an essential component to gift planning. 20

21 Marketing Newsletters Websites Brochures Taglines Response Boxes Social Media Seminars People Recognition Programs (Stewardship) Resources American Council on Gift Annuities ACGA-web.org Planned Giving Design Center PGDC.com Los Angeles Council of Charitable Gift Planners LACGP.org National Association of Charitable Gift Planners Charitablegiftplanners.org Software providers and asset management administrators Relevant Conference Sessions Closing Charitable Lead Trusts: As Easy as CRTs or Your Money Back Lani Starkey Thursday 10:15 a.m. 11:30 a.m. Charitable Gift Annuities: Sticking Your Toe into the Wading Pool Craig Wruck Thursday 2:00 p.m. 3:15 p.m. Charitable Remainder Trusts: Diving in Head First (Expecting There's Water in the Pool) Craig Wruck Thursday 3:45 p.m. 5:00 p.m. Bequests and Bequest Marketing - David B. Moore and Lindsey N. Jacobs Friday 9:30 a.m. 10:45 a.m. 21

22 Thank You! 22