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)

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1 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 13, 2014 Presented by: L. William Schmidt, Jr. Senior Trust Officer First Western Trust th Street - Suite 1200 Denver, CO (303) William.Schmidt@myfw.com

2 Federal Transfer Tax System

3 Federal Transfer Tax System Lifetime Gifts Annual Exclusion = $14,000 per year per beneficiary Split gifts with spouse = $28,000 per year per beneficiary Unlimited gifts for education and medical expenses Marital Deduction All gifts during life or transfers at death to a spouse are exempt Charitable Deduction All transfers to recognized charities are exempt Transfer Tax Exemption Estate/Gift Tax Exemption = $5,340,000 (inflation adjusted) Portability. Unused exemption of first spouse to die can be used by the surviving spouse giving combined exemption for married couples of $10,680,000 Tax Rate Estate/Gift Tax Rate = 40%

4 The Gift You Get to Keep (Charitable Life Estate)

5 Deed Reserves Life Estate Results: Donor is 65 Value of residence is $550,000 Calculations using Sept AFR 2.2% Charitable deduction is $313,606

6 The Charitable Retirement Plan (Charitable Gift Annuities)

7 Asset (Value = $200,000) (Basis = $25,000) Annuity (4.7%) $9,400/year Age 65 Taxation of Annuity Payments: Non-taxable = $ Ordinary income = $ 2, Capital Gain = $ 5, Total = $ 9, Charitable income tax deduction = $ 68, Annuity percentage payment based on latest ACGA published rate which was effective1/1/2012

8 Charitable Remainder Unitrust

9 The Problem: Selling Appreciated Assets Taxable Sale (Income Tax) Land (current market value) $1,000,000 Cost Basis $ 100,000 Taxable Gain $ 900,000 Capital Gains Tax (*25% Federal and Colorado) $ (225,000) Net proceeds $ 675,000 Estate Tax Remaining Value $ 675,000 Estate Taxes (40% bracket) $ (270,000) Proceeds to Heirs $ 405,000 Tax Erosion Percentage 40.50% Inheritance Percentage 59.50% *3.8% Net Investment Income Tax May Also Apply

10 Selling the Asset Tax-Free Step 1: The Smiths transfer the property (land) to a Charitable Remainder Trust GIFT Charitable Remainder Unitrust LAND CASH Buyer Mr. & Mrs. Smith Benefits: No Tax Upon Transfer to Trust No Tax Upon Sale by Trustee

11 Income For Life Step 2: Each year the Smiths will receive a unitrust distribution of 6% of the Trust s annual value for life Initial income payment $60,000* Charitable Remainder Unitrust Mr. & Mrs. Smith * Amount increases or decreases depending on value of trust on first day of the year.

12 Tax Benefits Step 3: The Smiths receive income and estate tax benefits Mr. & Mrs. Smith Land Gift 6.0% Income ($60,000) Tax Deduction ($277,390) Charitable Remainder Unitrust At Survivor s Death Benefits: Income Tax Deduction in Year of Trust Creation Lifetime Annuity Trust not Taxed in Estate at Death Philanthropic Legacy Illustrations Assume: 6% Unitrust Income Payments ToThe Smiths For Life Husband and Wife Are Both 65 September Rate 2.2% Charity

13 Wealth Replacement Step 4: The Smiths will create a wealth replacement strategy for their heirs Annual Premium Gifts $22,541/year Irrevocable Life Insurance Trust Mr. & Mrs. Smith $1,000,000 Benefits: Estate Tax-Free Inheritance Liquidity for Payment of Estate Tax Leveraged Gifting Heirs

14 Non-Grantor Charitable Lead Trust (The Wealth Transfer Boomerang)

15 Value of Gifted Asset $1,000,000 Charitable Lead Trust Annual Payout $50,000 After 25 years, $1,548,645 passes tax-free to grandchildren Value of Gift Charitable Deduction Taxable Gift $1,000,000 $ (953,635) $ 46,365 *Assumes September Rate of 2.2% *Assumes 5% Annuity and 6% Growth

16 Analysis of CLAT Payments Year Opening Balance Assumed Growth Annuity Closing Balance 1 $1,000,000 $60,000 $50,000 $1,010,000 2 $1,010,000 $60,600 $50,000 $1,020,600 3 $1,020,600 $61,236 $50,000 $1,031, $1,114,913 $66,895 $50,000 $1,131, $1,210,151 $72,609 $50,000 $1,232, $1,373,790 $80,256 $50,000 $1,367, $1,508,156 $90,489 $50,000 $1,548,645 Assumes 5% annual payments to charity Assumes 6% annual appreciation

17 Grantor Charitable Lead Trust (The Income Tax Boomerang)

18 Value of Gifted Asset $1,000,000 Grantor Charitable Lead Trust Annual Payout $60,000 After 4 years, $1,000,000 returned to grantor Value of Gift Charitable Income Tax Deduction $1,000,000 $ 227,358 *Assumes 7520 Rate of 2.2% (September 2014) *Assumes 6% Annuity and 6% Growth *Grantor taxed on trust income

19 Retirement Plan Taxation

20 Dr. Gold is single and has an estate of $6,250,000. His largest single asset is a $1,000,000 retirement plan. What happens to the IRA upon his death assuming a $5,250,000 estate tax exemption? $1,000,000 IRA Estate Tax (40%) $400,000 Income Tax (35%) $350,000 Net to Heirs $250,000 As much as 75% of IRA can be lost to taxes!

21 A Possible Solution for Dr. Gold 1. Kids get $6,250,000 tax free! 2. Charity gets $1,000,000 (or IRA remainder) 3. No income or estate tax $5,250,000 $1,000,000 $1,000,000 Dr. Gold Life Insurance Trust Premium Gifts I R A Charity Children Children

22 IRA Funded Charitable Life Insurance CAUTION: This strategy is based on a single I.R.S. Private Letter Ruling (PLR ) which can only be relied on by the taxpayer who requested the ruling. FAILURE TO MEET STRICT STATUTORY REQUIREMENTS UNDER CODE SECTION 408(a)(3) RELATING TO LIFE INSURANCE CONTRACTS AND CODE SECTION 4975(c)(1)(B) RELATING TO LOANS TO A DISQUALIFIED PERSON COULD RESULT IN A TAXABLE TERMINATION OF THE ENTIRE IRA. Seek qualified tax counsel, and consider obtaining a private ruling on your specific facts before implementing this strategy.

23 IRA FUNDED CHARITABLE LIFE INSURANCE (PLR /12/07) IRA LOAN REPAY LOAN CHARITY DEATH BENEFIT PREMIUM INSURANCE POLICY

24 Assumptions: * Male Age = 55 * Death Benefit = $ 1,000,000 * Loan Amount = $ 185,000 * Interest Rate = 5 % Paid Annually * Annual Interest = $ 9,250 IRA FUNDED CHARITABLE LIFE INSURANCE (PLR /12/07) * Loan Interest may be: - Accrued - Paid annually by charity - Gifted by donor/insured Death Benefit $1,000,000 Total Interest ($ 277,500) Loan ($ 185,000) Net to Charity $ 537,500