ESTATE AND TAX PLANNING AND CHARITABLE GIVING

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1 ESTATE AND TAX PLANNING AND CHARITABLE GIVING James J. Flaherty, Jr. Gager, Emerson, Rickart, Bower & Scalzo, LLP Southbury, Connecticut April 11, James J. Flaherty, Jr.

2 It s a new world for accountants and estate planning attorneys The Tax Cuts and Jobs Act, enacted on December 22, 2017, was not just about income taxes. The estate tax regime was also significantly revised so that fewer people are affected by the estate tax. The estate tax exemption amount has doubled to $11.2 million per person. However, there is a sunset provision which means that unless Congress acts to make these cuts permanent, the exclusion amount will revert back to the 2017 exemption ($5.2 million). The annual gift exemption amount is now at $15,000.

3 The Changes Are Not Limited to the Federal Estate Tax Rules In a rather surprising move, the Connecticut legislature raised the Connecticut Estate Tax Exemption amount. In 2017, it was $2 million $2.6 million $3.6 million 2020 ` - $6.1 million The notion was that Connecticut s exemption amount would parallel the federal exemption amount (currently $11.2 million). This was enacted prior to the federal tax cuts, so we do not know whether Connecticut will actually follow the federal exemption amounts.

4 So.... What does this all mean? Fewer people will be affected by the estate tax, thus: Less of a need for more complicated estate planning. Estate planning becomes more about where or to whom your estate will pass at your death. Income tax will become more of a focus, as there will be no need for estate tax planning.

5 But remember... THIS CAN ALL CHANGE IN AN INSTANT. A new administration could seek to reimpose the estate tax at the 2017 levels. This could always happen on the Connecticut side as well. IT S EASY TO FORGET. In 1995, the federal estate tax exemption was $600,000 and the top marginal estate tax rate was 55%. While it would be highly unlikely, the potential for returning to a more onerous estate tax is there.

6 NOW IS THE TIME TO REVIEW YOUR ESTATE PLAN WITH YOUR ATTORNEY WHY YOU ASK? Given the magnitude of the changes, older plans may have been designed to allocate property to trusts in order to minimize the tax burden. Those plans may be overly complicated and result in restrictions for a surviving spouse that are unnecessary. It will be important to maintain communication with your attorney so that if things change yet again, your attorney will already be prepared to adjust your plan as necessary.

7 NECESSARY ELEMENTS OF AN ESTATE PLAN Will The document which directs the disposition of your probate estate. Advance Health Care Directive The document which informs your physician of your desires concerning end of life treatment and the person who will make those decisions for you (Health Care Representative), in the event that you cannot. Power of Attorney Extraordinarily powerful tool, allowing your agent to act on your behalf in nearly every sort of transaction. Guardianship Memorandum Any person with minor children should provide direction to the probate court, in the event that a guardian should be appointed. Otherwise, the court will decide.

8 NECESSARY ELEMENTS OF AN ESTATE PLAN Designation of Conservator - Directs the probate court to appoint your chosen conservator, rather than having the judge make that decision. Revocable Trust No longer absolutely necessary, at least in Connecticut. Yet, it still remains an effective estate planning tool and can be drafted to proactively address future changes to the tax code.

9 CHARITABLE GIVING The new tax code has severely limited the benefits of charitable giving. Because of the increased standard deduction, fewer individuals will itemize deductions and realize a tax benefit from charitable giving. However, the need has not diminished. While few people make charitable contributions solely for the tax deduction, it will be incumbent upon charitable organizations to develop innovative means of attracting donors. So what methods of giving are available?

10 LIFETIME GIFTS Most simple of all forms of charitable giving. It s as simple as writing a check. Provides an immediate benefit to your congregation. While more elaborate gifts are important for major projects or long term programs, NOTHING is more important to the operation of your church than your periodic cash contribution. This is what keeps the lights on! The deduction for cash contributions is limited to 60% of your AGI. The deduction for contributions of appreciated securities and other property is limited to 30% of your AGI.

11 CHARITABLE REMAINDER TRUSTS (CRT) An irrevocable trust which can generate a stream of income for the donor, while insuring that the remaining trust property, at the end of the trust term, passes to a charitable beneficiary. The two main types of CRTs are: Charitable Remainder Annuity Trust (CRAT) Pays out an fixed annuity amount each year. Charitable Remainder Unitrust (CRUT) Pays out a fixed percentage, based upon the trust principal (revalued each year) to the donor or other designated beneficiary.

12 CHARITABLE REMAINDER TRUSTS (cont.) BENEFITS OF A CHARITABLE REMAINDER TRUST CRTs can provide an immediate income tax deduction to the donor. An excellent vehicle to place highly appreciated assets, as the capital gains are exempt from taxation. Assurance that the remainder interest will pass to the beneficiary(ies) of your choice. Can benefit one or more charities.

13 CHARITABLE LEAD TRUSTS (CLTs) An irrevocable trust which can generate a stream of income for the charity, with the remaining trust property, at the end of the trust term, passing to an individual. Can be done as an annuity trust or a unitrust, just as we can with a Charitable Remainder Trust. Can benefit one or more charities.

14 CHARITABLE LEAD TRUSTS (Cont.) Grantor charitable lead trust - The donor is afforded an immediate income tax charitable deduction for the present value of the future payments that will be made to the charitable beneficiary, subject, however, to applicable limitations on deductibility. Please remember that the trust's investment income is taxable to the donor during the trust's term.

15 CHARITABLE LEAD TRUSTS (Cont.) Non-grantor charitable lead trust: - The trust (not the donor) is considered the owner of the trust assets. Thus, the donor is not eligible to take a charitable income tax deduction for the present value of the lead interest to charity. It is the trust that pays income tax and may also claim an income tax charitable deduction for its distributions to the charitable beneficiary. This type of trust is used more to reduce the potential taxable estate of a donor, rather than for the income tax benefits.

16 GIFT ANNUITIES A gift annuity is nothing more than a contract between a charity and an individual or couple. The terms of this agreement will provide for the amount and timing of the payments to the annuitant(s). A gift annuity may only involve a single charity. Tax benefits and drawbacks: Potential for a income tax deduction at inception. Based upon the terms of the annuity and the age of the donor(s). Excellent vehicle for avoiding capital gains treatment of highly appreciated assets. Potential for income taxation on a portion of the annuity payment.

17 DONOR ADVISED FUNDS A donor-advised fund is an asset management vehicle established by the charity. It permits donors to make a charitable contribution and then recommend grants from the fund over time, toward those endeavors closest to the donor s interest. Provides an immediate charitable tax deduction to the donor, subject to the applicable limits. Allows the ultimate beneficiaries to change over time, if the interests of the donor(s) change or if circumstances change.

18 LIFETIME GIFTS OF RETIREMENT ASSETS For IRA account holders, the tax code provides a real benefit for those who are charitably inclined: Anyone who is 70 ½ or older may gift up to $100,000 to a qualified charity. This qualified charitable distribution (QCD) is not includable as part of your Adjusted Gross Income AND can satisfy your annual Required Minimum Distribution. This only applies to IRAs and not 401(k) plans.

19 ESTATE GIFTS OF RETIREMENT ASSETS If one is charitably inclined and has a large qualified plan or IRA account, naming a charity or charities as a beneficiary is an excellent way to benefit the charity. Passes free of estate tax, as a charitable gift. In other words, while an IRA is a part of one s taxable estate, the charitable gift is considered a deduction. Individual beneficiaries (heirs) would be required to pay income tax on their respective distributions. Using non-qualified assets to provide for an individual s inheritance, likely avoids an income tax issue. Charitable beneficiaries will not incur income tax on the liquidation of the IRA.

20 THANK YOU!

21 Gager, Emerson, Rickart, Bower & Scalzo, LLP Founded in 1917, our firm has a long tradition of providing high quality legal services to our corporate and individual clients. Whether you have an estate planning or probate issue; wish to buy or sell real estate; you ve been injured in an accident; or need representation for your business, our firm stands ready to assist you. 325 Main Street South 2 Stony Hill Road Southbury, CT Bethel, CT (203) (203)

22 James J. Flaherty, Jr. Jim joined Gager, Emerson, Rickart, Bower & Scalzo, LLP as a Partner in Jim s practice focuses on assisting high net worth individuals, including closely held business owners in the creation of wealth succession plans. These plans are designed to preserve the client s wealth while planning appropriately for the next generation. Jim is admitted to practice in Connecticut and Massachusetts. He has appeared in many of the probate courts in Connecticut in matters concerning will contests, trust construction proceedings, conservatorship and mental capacity issues, and administration of estates. Residing in Woodbury, Jim has been involved in many civic and charitable organizations. Notably, he is the current president of the Southbury Historical Society and a member of the board of directors of the Connecticut, Estate and Tax Planning Council. Bar Admissions State of Connecticut Commonwealth of Massachusetts U.S. District Court, District of Connecticut U.S. Court of Federal Claims U.S. Tax Court U.S. Supreme Court Professional Affiliations Connecticut Bar Association, Estates and Probate Section Executive Committee Western Connecticut Estate and Tax Planning Council American Bar Association, Real Property, Probate and Estates Section American Bar Association, Tax Sections Connecticut Estate and Tax Planning Council Education Boston University School of Law, LL.M. Taxation, 2004 University of Connecticut School of Law, J.D., 1995 Fairfield University, B.S., cum laude, 1991 (o) (c) Flaherty@gagerlaw.net