Uncertainty Remains on Taxes. Renewal of Charitable IRA Rollover 5/17/2011. Charitable Gift and Estate Planning after the 2010 Tax Changes

Transcription

1 Charitable Gift and Estate Planning after the 2010 Tax Changes Presented by Marc Carmichael R&R Newkirk Company Partnership for Philanthropic Planning Gift Planning Opportunities IRA rollovers in 2011 Congress continues incentives for giving Healthier stock market Donors need to review estate plans this year Charitable deductions can reduce tax on 2010 Roth IRA conversions Low AFRs help some gifts Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 Uncertainty Remains on Taxes December Lame Duck session extended key tax law provisions and made a temporary estate tax fix (through 2012) but Congress kicked the can down the road on providing certainty and predictability in the tax system Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 Income tax rates, credits, deductions, etc., all carried over from 2010 to Important tax breaks extended through 2011 Fd Federal gift tax, estate tax and generation skipping i transfer tax all reunified with $5 million exemption and a top tax rate of 35%, through 2012 Unemployment benefits extended One year reduction in social security taxes Renewal of Charitable IRA Rollover IRA gifts authorized for 2011 by donors over 70½ Qualified charitable distributions will satisfy required minimum distributions for 2011 Opportunity to market beneficiary designations on other retirement accounts to those who don t qualify for QCDs IRAs 1

2 Benefits of Qualified IRA Gifts That Satisfy Minimum Distributions Taxable income goes down if gift occurs before taking required minimum distribution, even for nonitemizers IRA gifts also can reduce adjusted gross income (AGI) and avoid various tax penalties High AGI Can Adversely Affect: Taxation of social security benefits Eligibility for the savings bonds interest exclusion,; Eligibility to make contributions to a Roth IRA; Availability of passive activity losses and credits; Floors limiting deductions for certain expenses (excess over 2% of AGI for miscellaneous expenses, 10% for casualty losses, 7.5% for medical expenses) Eligibility for various tax credits IRA gifts can reduce taxable income AND AGI Message to Eligible Donors: An IRA Is Your Very Best Resource for Charitable Giving IRA Prospect Profile Owns traditional IRA (401k, 403b, pension plans, don t qualify) Is 70½ or older Has not yet taken a required minimum IRA distribution for 2011 (most receive in last quarter of year) Other Gift Provisions Extended Extension of special rules for qualified conservation gifts Favorable tax treatment of shareholders in S corporations that contribute property Food inventory gifts Books/computers S Corporation Makes Charitable Gift Shareholders Get Deductions Deductions 2

3 Owners Save Taxes Gifts by S corporations are tax deductible by the shareholders, pro rata Shareholders must reduce their basis in the shares they own in the company But 2010 law says that the reduction is limited to the cost basis the company had in any assets it gave away to charity Other Gift Provisions Extended Extension of special rules for qualified conservation gifts Favorable tax treatment of shareholders in S corporations that contribute property Food inventory gifts Books/computers Deductions for Inventory Gifts Generally, deductible at cost basis only Corporation gifts to certain donees yield enhanced deductions: cost plus 50% of profit for gifts of books, computers, science equipment, drugs, food items, etc. All business entities get break on food gifts. Charities Dodged Some Bullets Administration proposal to limit tax savings from contributions to 28% rate (for donors in the highest brackets) was not included in new law Charitable deduction cutbacks repealed for high income taxpayers (the Pease limitation, AKA the 3% haircut ) These charitable giving disincentives aren t dead yet! No Deduction Haircut for High Income Donors in Up to 3% of AGI in excess of threshold would have been shaved from certain itemized deductions, erasing up to 80% of some deductions (including charitable contributions) Donor with excess AGI of $1 million lost $30,000 of deductions Gift Planning Opportunities IRA rollovers in 2011 Congress continues incentives for giving H l hi k k Healthier stock market Donors need to review estate plans this year Charitable deductions can reduce tax on 2010 Roth IRA conversions Low AFRs help some gifts 3

4 Bull Market Going Strong Since March 2009 Stock Market Rebound Return of the wealth effect? Investors may be feeing better about giving Gifts of long term capital gain assets save income taxes and avoid capital gains tax Donors can use CRTs and gift annuities for low cost profit taking Gifts of Appreciated Stocks Gifts of stock save taxes twice Donors deduct cost plus paper profit if held more than a year Donors avoid capital gains tax (15%) on long term gains 30% of AGI ceiling (five year carryover) Stock Market Rebound Return of the wealth effect? Investors may be feeing better about giving Gifts of long term capital gain assets save income taxes and avoid capital gains tax Donors can use CRTs and gift annuities for low cost profit taking Charitable Remainder Trusts No capital gains tax when donors fund CRTs with highly appreciated securities or other assets Trustee can reinvest gift assets for higher income without capital gains tax Trust can pay a fixed or variable income for life or term of years (1 20) Part of payout may be taxed at low cap gain rates Soft Landing from Stock Market Exit Retiring baby boomers may seek to switch some stocks into a fixed income component for their portfolios Gift annuities permit the switch, with only about half the capital gain recognition which can be stretched over donor s life expectancy 4

5 Best 2011 Major Gift Ideas Highly appreciated marketable securities Gifts by donors who inherited it capital assets from 2010 estates Low basis stock in closely held business Real estate/collectibles Old U.S. savings bonds IRA gifts, if eligible Will You Owe Capital Gains Tax if You Inherit Uncle Louie s Studebaker? Death Historically Has Been a Tax Shelter for Capital Gains Taxes But relief is limited for 2010 estates Choose Your Poison Option New law applies 2011 estate tax rules ($5 million exemption and 35% rate) to 2010 estates, which can opt out of FET but remain subject to modified carryover basis Or 2010 estates can remain subject to 2011 rules but qualify for 100% stepped up basis Federal estate tax Capital gains tax exposure Heirs of 2010 Estates Face Taxes Most large 2010 estates will elect exemption from 35% federal estate tax but step up in basis for estate assets will then be limited to $1.3 million (plus $3 million for a surviving spouse) Heirs might consider CRTs, other gifts that reduce capital gains tax George Steinbrenner s $1.1 billion estate won t owe estate tax George Steinbrenner s $1.1 1 billion estate won t owe estate tax George Steinbrenner s $1.1 billion estate won t owe estate tax but heirs may face capital gains tax Best 2011 Major Gift Ideas Highly appreciated marketable securities Gifts by donors who inherited it capital assets from 2010 estates Low basis stock in closely held business Real estate/collectibles Old U.S. savings bonds IRA gifts, if eligible 5

6 Hidden Gold: Gift Planning with U.S. Savings Bonds Rest in Peace, Series H & E Bonds Donors must cash bonds and contribute proceeds, but charitable deductions generally offset any tax. No more interest after June 2010 Savings Bonds Donor (age 80) owns $40,000 in expired savings bonds with $20, of taxable interest Donor cashes bonds and gives proceeds for a gift annuity paying 7.2% $20,000 gift deduction cancels any tax on bonds Gift Annuity Who Owns U.S. Savings Bonds? More than 60 million people own savings bonds worth $200 billion Retirees, primarily Past participants in bond a month programs with employers or military Conservative investors Gift Planning Opportunities IRA rollovers in 2011 Congress continues incentives for giving Healthier stock market Donors need to review estate plans this year Charitable deductions can reduce tax on 2010 Roth IRA conversions Low AFRs help some gifts Tax Changes Upset Donor Complacency Estate Tax Exemption $3.5 M ($5 M)* $5 M Top Estate Tax Rate 45% (35%)* 35% Gift Tax Exemption $1 M $1 M $5 M Top Gift Tax Rate 45% $35% 35% GST Tax Exemption $3.5 M ($5 M) $5 M GST Tax Rate 45% (0%) 35% *Estates can elect exemption from FET in Transfer taxes are scheduled to go to a $1 million exemption and a top rate of 55% in 2013 (unlikely to happen, but estate plans need to provide for all contingencies) 6

7 Transfer Taxes Now Reunited 35% $5 M Gift tax, estate tax and generation-skipping tax now all have the same rates and a $5 million sheltered amount 2010 Estate Tax Changes Will Encourage Estate Plan Reviews $5 million exemption Spouses can inherit unused portable estate tax credit of first spouse to die and shelter $10 million 35% top tax rate 2010 estates can elect zero estate tax or 100% step up in basis Credit Shelter (Bypass) Trusts Obsolete? Marital Deduction Wife $10,000,000 W s estate tax credit $, $5,000,000, $5,000,000, Outright B-Trust Will People Get Married to Obtain Portable Estate Tax Credits? Husband s FET credit Kids get $10,000,000 Out of H s estate Estate Tax Return for First Spouse Questions??? Executors must file estate tax returns (Form 706) for first spouse to die or the survivor won t inherit any unused credit Even small estates should file 706 at first death, in case the surviving spouse later has a windfall (strikes oil, inherits a fortune, wins the lottery, etc.) 7

8 Effect of $5 Million Exemption You would have to attend 300 funerals before finding a decedent who owed federal estate tax Why Is the Federal Estate Tax Important to Charities? Only 6% 8% of general population leaves anything to charity (NCPG donor study) 18% of estate tax returns show charitable bequests Estate Planners Sometimes Tell Wealthy Clients: You Have Three Beneficiary Options and You Must Choose Two Federal Estate Taxes Put Charitable Bequest Planning on the Table Family Charities U.S. Treasury Charitable Estate Planning for the Mass of Humanity Freed from FET? Charitable Estate Planning Without the Estate Tax Potential State Inheritance/Estate Taxes (out ofstate property could be taxed even if home state has no death tax ). Charitable bequests reduce these taxes. Income in Respect of a Decedent (IRD) Problems Trusteeship/Money Management for Beneficiaries Donors who don t face estate tax should set up life income gifts during life for income tax savings 8

9 State Death Taxes May Be a Concern 22 states have some kind of death tax Inheritance taxes are based on relationship to heir Some states have state estate taxes similar to federal estate tax Hawaii reinstated estate tax in 2010 Charitable Estate Planning Without the Estate Tax Potential State Inheritance/Estate Taxes (out ofstate property could be taxed even if home state has no death tax ). Charitable bequests reduce these taxes. Income in Respect of a Decedent (IRD) Problems Trusteeship/Money Management for Beneficiaries Donors who don t face estate tax should set up life income gifts during life for income tax savings 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 Leave Tax Burdened Assets to CRTs U.S. Savings Bonds IRAs and deferred compensation Accounts receivable Installment payments on land sale contracts Unpaid commissions Commercial annuities Charitable Estate Planning Without the Estate Tax Potential State Inheritance/Estate Taxes (out ofstate property could be taxed even if home state has no death tax ). Charitable bequests reduce these taxes. Income in Respect of a Decedent (IRD) Problems Trusteeship/Money Management for Beneficiaries Donors who don t face estate tax should set up life income gifts during life for income tax savings Charitable Remainder Trusts Can Provide trusteeship for beneficiaries who need money management Achieve other nontax estate planning goals of donors Gift annuities provide similar benefits 9

10 Charitable Estate Planning Without the Estate Tax Potential State Inheritance/Estate Taxes (out ofstate property could be taxed even if home state has no death tax ). Charitable bequests reduce these taxes. Income in Respect of a Decedent (IRD) Problems Trusteeship/Money Management for Beneficiaries Donors who don t face estate tax should set up life income gifts during life for income tax savings Tax wise, Lifetime Gifts Beat Bequests for All Donors Income tax savings plus transfer tax savings for taxable estates (plus lifetime personal satisfaction and recognition) Include power to accelerate bequests in durable power of attorney (or enable trustee to prepay charitable distributions) Accelerate bequests using CRTs and gift annuities (great for 2010 heirs saddled with low basis inherited assets); give attorney in fact or trustee the same power $5 Million Gift Tax Exemptions Boost CGAs for Friends & Family Deferred annuities for baby boomer kids who didn t save for retirement t Annuities for siblings, partners, friends, etc. Support for aging parents Retirement plan for housekeeper Good through 2012 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 ) Perpetuate their annual giving Reduce taxes on their estates Planning Where Estate Taxes Remain a Concern 100% Estate Tax Charitable Deduction 10

11 100% Charitable Deduction Relieve Charitable Bequests of Death Taxes and Other Costs Bequest must pass from the decedent to a qualified organization [IRC 2055(a)] Qualified disclaimer by surviving heir will generate deduction if decedent provided for alternative bequest to charity [IRC 2518(d)] Deduction may be available where donor splits bequest between family/charity 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 Deferred Bequests Reduce Estate Taxes and Help Both Charity and Family Members Testamentary charitable gift annuity Charitable remainder annuity trust Charitable remainder unitrust Charitable lead trust Pooled income fund bequests Gift or bequest of home/farm with lifetime use retained for donor or another Charitable Bequest Formula Clauses Some wills leave charity amounts exceeding the current estate tax exemption ($5 million in 2011 and 2012, but only $1 million in 2013) Donors should revise these formula clauses to ensure charities receive an intended amount 2010 Estate Tax Changes Will Encourage Estate Plan Reviews $5 million exemption Spouses can inherit unused portable estate tax credit of first spouse to die and shelter $10 million 35% top tax rate Review = opportunity to add or augment charitable bequests 11

12 Charitable Gift Opportunities with Roth IRA Conversions New Roth IRA Conversion Rules Limits on Roth IRA conversions repealed permanently anyone can now convert IRAs For 2010 conversions most IRA owners will report taxable income 50/50 in tax years 2011 and 2012, unless they elected to report all income in 2010 It s Time to Pay the Tax Piper Large charitable deductions can reduce the tax bill on 2010 Roth IRA conversion income reported in 2011 and 2012 Charitable Deduction Strategies Accelerate payment of multi year pledges Bunch several years of annual gifts into the year of conversion, or make large gift to donor advised fund and advise annual distributions to charities Accelerate bequests into major gifts especially appreciated securities Charitable gift annuities especially deferred payment annuities that create mega deductions Gifts of remainder interests in homes & farms Charitable remainder trusts/pooled income fund gifts Flexible Deferred Payment Gift Annuities Offer Big Deductions Donor, age 60, converts $25,000 to Roth IRA She transfers $65,000 from savings to a deferred gift annuity that will start payments at age % payout at age 70 $25,000 deduction Ideal Time to Give Remainders in Farmland/Personal Residences Owner of vacation home, age 65, gives house worth $500, Charitable deduction is $220,000 at 3.0% midterm rate (AFR) Owner keeps use of vacation retreat for life 12

13 Ideal Time to Give Remainders in Farmland/Personal Residences Interest Rates (AFRs) at Low Levels Owner of crop land, pasture, orchards, etc., age 70, gives land worth $600,000 Charitable deduction is $400,000 at 3.0% midterm rate (AFR) Owner keeps use of property for life Low Interest Rate Gift Opportunities Assign income interest in CRAT or charitable gift annuity to charity Gift annuities yield higher tax free income High charitable lead annuity trust deductions Remainder interests in farms and residences Pooled income fund gifts CGA Payouts 75% Tax Free Many CGA donors don t itemize and can t realize full benefit from charitable deductions But all CGA recipients can benefit from tax free payments Exclusion Ratio is about 75% when AFR is 3% or lower Low Interest Rate Gift Opportunities The Stars Are in Alignment for Charitable Lead Annuity Trusts Assign income interest in CRAT or charitable gift annuity to charity Gift annuities yield higher tax free income High charitable lead annuity trust deductions Remainder interests in farms and residences Pooled income fund gifts 13

14 Charitable Lead Trusts Donor/Family Donors can leverage $5 million gift tax exemption into $10 million or $20 million of f gift tax shelter in Charities Planning for Low Interest Rates (AFR) Assign income interest in CRAT or charitable gift annuity to charity Gift annuities yield ild higher tax free income High charitable lead trust deductions Remainder interests in farms and residences Pooled income fund gifts Give Home/Farm, Keep Use for Life Donors Can Slice and Dice Remainder Gifts of Homes/Farms 30% to Charity At Death Rest of house or farm goes to Family Planning for Low Interest Rates (AFR) Assign income interest in CRAT or charitable gift annuity to charity Gift annuities yield ild higher tax free income High charitable lead trust deductions Remainder interests in farms and residences Pooled income fund gifts Pooled Income Fund Basics Donors transfer cash or securities to Fund Donors name one or two recipients, who receive shares (units) All gifts are pooled Participants divide income based on units of ownership Charity receives value of units at death 14

15 2011 Renaissance for New PIFs? Charitable deductions from new pooled income funds will be 40% to 50% higher for participants ages than deductions from unitrusts with 5% annual payouts(low t(l AFRs are responsible). PIFs are historically unpopular, partly because payouts have been taxed 100% as ordinary income Pooled funds that invest largely in dividendproducing stocks can provide participants with incomes that are taxed at only 15% (or even less, for those in low tax brackets) through Deductions for PIFs Established in 2011 Assume 2.8% Payout to Participants* PIF deductions at historic high levels Age Deduction 55 52% 60 57% 65 63% 70 69% 5% Payout Unitrust Comparison Age Payout Deduction 55 5% 32% 60 5% 38% 65 5% 45% 70 5% 52% *Same assumptions apply to PIFs created in Tax Changes May Help Pooled Income Funds Dividends from mutual funds and REITS taxed at 15% rate (qualified dividends) in 2011 and 2012 PIFs as a Unitrust Replacement: $1 Million PIF vs. Unitrust in 2011 Deduction for donor age 65 to new PIF is $630,490 Donor s family can also contribute to PIF Dividend income from PIF taxed at only 15% in Possibility of giving mortgaged real estate No 10% remainder test Deduction for donor age 65 to 5% CRUT is $451,030 Family members, other than spouse, can t contribute to same CRUT Income may be taxed as capital gain, qualified dividends, or tax free No mortgaged realty 10% minimum remainder New Baby Boomer PIF in 2011? Find one or two donors to seed the fund Market high charitable deductions (highlighting relief from Roth IRA conversion tax bills, etc.) Adopt investment plan that emphasizes qualified dividends (15% top rate in ) Gift Planning Opportunities IRA rollovers in 2011 Congress continues incentives for giving H l hi k k Healthier stock market Donors need to review estate plans this year Charitable deductions can reduce tax on 2010 Roth IRA conversions Low AFRs help some gifts 15

16 Questions??? 16