Beyond Charitable Rollovers Leveraging Large s into Large Charitable Gifts Robert Lew Planning & Financial Advisors What & Who Massive Pool of Assets assets have grown to over 7.4 Trillion dollars. (December 2014) 401(k) assets grew to over 4.8 Trillion dollars. (March 2016) Well to do clients with Philanthropic Intent. Will not cover Charitable Rollover planning. s are Subject to Estate Tax 5,000,000 exemption adjusted for inflation has grown to 5,490,000. (2017) 40% estate tax on excess. 1
s are IRDs IRDs are subject to Federal and State income taxes. (39.6%, 13.3%) Unpaid Compensation Royalties Variable Annuities Qualified Retirement Assets (s, 401(k)s, Pension and Profit Sharing Plans) 13M Estate - Double Tax 2,500,000 2,250,000 2,000,000 1,750,000 1,500,000 1,250,000 1,000,000 2,000,000 Estate Tax 800,000 IRD Tax 634,800 ========== Net after tax 565,200 750,000 500,000 250,000 0 40%, 52.9% 4M Estate 2,500,000 2,250,000 2,000,000 1,750,000 1,500,000 1,250,000 1,000,000 2,000,000 Estate Tax 0 IRD Tax 1,058,000 ========== Net after tax 942,000 750,000 500,000 250,000 0 52.9% 2
Options for the Owner No Planning S (Inherited ) TCRUT PLR 200741016 Insurance Children Assumptions Fred and Wilma Jones, 72&68 in good health Beth and Judy, 44, will live 10 years past life expectancy 11,000,000 of non- assets 2,000,000 - not needed for retirement 7% earnings, 40% income tax bracket No Planning The Jones withdraw money from only as required by the Required Minimum Distribution (RMD) rules. The after-tax RMDs are invested in a Side Fund. Upon the 2 nd death, Beth and Judy will receive the Side Fund net of estate tax. Beth and Judy will receive the net of IRD and estate tax. Side Fund Beth & Jen 3
Assumes Parents Die in 2017 (Age 72/68) Children, 44 years old, live 10 years past life expectancy (94) No Planning S TCRUT Children 565,200 Charity - - Inherited (S) Planning The Jones designate their daughters as the beneficiaries of their. (Side Fund) Estate Upon the 2 nd death, Beth and Judy distribute income from the slowly over their life expectancy. Estate tax attributable to the must be paid with non- assets. Side Fund Beth & Judy Assumes Parents Die in 2017 (Age 72/68) Children, 44 years old, live 10 years past life expectancy (94) No Planning S TCRUT Children 565,200 2,138,552 Charity - - 4
Implementation Issues Stretch-Out planning requires discipline. To maximize the benefits the daughters cannot take more than 50,251at age 44. A see-through trust can be used to compel a distribution rate. 96,835 at age 54 (4%) Assumes Parents Die in 2017 (Age 72/68) Children, 44 years old, live 10 years past life expectancy (94) No Planning S TCRUT Children 565,200 2,138,552 Charity - - No Planning S/STT @ 7% TCRUT Children 565,200 1,483,758 Charity - - * * 140,000 a year Split Interest Gift Donor CRT Principal Donor Tax Exempt Charity 5
Annuity Trust Donor CRAT Donor Unitrust Donor CRUT Donor TCRUT Planning The Jones draft but do not fund two 7% payout TCRUTs, one for Beth and the second for Judy. 3.5% AFR assumption used. Upon death the is distributed to the two TCRUTs. Beth and Judy also receive the Side Fund assets. Estate tax attributable to the must be paid with non- assets. Estate Each daughter receive income from their respective TCRUT for as long as they live. Remaining Trust assets will be distributed to charity upon their deaths. Side Fund Beth & Judy TCRU TCRUT T 6
Assumes Parents Die in 2017 (Age 72/68) Children, 44 years old, live 10 years past life expectancy (94) No Planning S/STT @ 7% TCRUT Children 565,200 1,483,758 1,478,511 Charity - - 456,214 STT vs. TCRUT Nearly identical benefits at life expectancy plus 10 years. TCRUT The daughters will receive more if they live longer.no life expectancy table. STT The third generation may inherit something upon Beth and Judy s deaths. STT income (IRC 691(c)) vs. TCRUT estate tax deduction can offset IRC 691(c) s benefits. TCRUT Distributions can be directed to a Special Needs Trust. PLR 200741016 The taxpayer created a self-directed with a selfdirected custodian. He proposed to invest a part of his with his church, in the form of a loan. Charity The concluded that a loan to the church will not be a prohibited transaction as there will be no transaction between disqualified persons. The taxpayer was not a disqualified person as he was not an employee, a member of the board or had any financial interest in the church. The church was not a disqualified person. 7
Two Charitable Options A charity can use borrowed money to help fund a Capital Campaign. A charity can use borrowed money to purchase a life insurance policy. Charity Capital Campaign Life Insurance Policy Capital Campaign Gift A donor wants to donate 1M to Stanford s capital campaign but cannot due to lack of liquidity. Withdrawing 1M from her would not be an option because of deductibility issues. Stanford Her self-directed can loan Stanford 1M with arm-length terms. (2.7% interest only paid annually with the principal due in 11 years) Stanford can use the loan proceeds to help build their new gym. Building Capital Campaign Gift The donor will annually withdraw the higher of her deductible limit, the Charitable Rollover limit or her RMD. The will donor her deductible distributions to Stanford until the loan is paid off. Stanford Stanford will use her annual donations to pay their annual interest obligations (27,000) before repaying loan principal. Building The donor designates Stanford as the beneficiary of an amount equal to any unpaid interest and principal. 8
Capital Campaign Assist A donor s self-directed makes a 1M, 9 year, 1.1% interest only loan to U.C. Berkeley. Current mid term rate is 1.94%. Berkeley uses money to help build a new building. U.C. Berkeley Berkeley pays 11,000 a year in interest, buying time to raise more money or obtain financing. Berkeley pays off the loan within 9 years. Building Second Charitable Option A charity can use borrowed money to help fund a Capital Campaign. A charity can use borrowed money to purchase a life insurance policy. Charity Capital Campaign Life Insurance Policy Assumptions Value 3,000,000 Owner Female, 65, in excellent health Loan rate 2.5% 9
PLR Insurance A donor wants to leverage what she can leave to Princeton. Her self-directed makes a 1M, 40 year, 2.5% interest only loan to her Princeton. Interest to be paid annually. Principal to be repaid upon her death or after 40 years. Princeton Princeton buys a single pay 2.8M life insurance policy on the donor s life. Upon death Princeton collects the death benefit and use some of the money to repay the loan. Insurance Policy The Economics Princeton 25,000 Princeton will pay 25,000 of interest annually to the donor s. 1M of the 2.8M death benefit will be used to repay the loan. The will still have Required Minimum Distribution. 2,800,000 Policy Economics for Charity 3,000,000 2,000,000 1,000,000 0 65 67 69 71 73 75 77 79 81 83 85 Cost to Northwestern (2.5%) Insurance Insurance less note 679K in 20 years 10
Questions Presented to the Is this a prohibited investment? Sec. 408(a)(3) states no part of an may be invest in life insurance contracts. The concluded that the will be making a loan, not an equity investment in a life insurance contract. Church The church will maintain all rights of ownership to the policy and solely benefit from any death benefit. The loan can be secured with a Collateral Assignment Agreement. Insurance Policy Leverage Roland and Mary, 75 and 74. Joint life expectancy = 90 Daughter has been taken care of. 4,000,000 Annual taxable income of 300,000 growing 1% a year. Leveraged Your Estate Guild Dogs The Donor annually withdraws the greater of 200,000 or the Required Minimum Distribution (RMD) from his. (taxable distributions) The Donor donates each distribution to Guild Dogs for the Blind. (charitable tax deduction) Guild Dogs purchases a 7M second-to-die insurance policy on the donor and her husband s life. Guide Dog names itself the owner and beneficiary of the policy. The policy will cost 145,479 a year. Guild Dogs annually spends 54,521 (or more in later years) on current needs. Policy MM SULG, ages 74,75 Ultra to 104 11
Leveraged The Donor designates Guild Dogs the beneficiary of his. Your Estate Guild Dogs will receive 7,000,000 of insurance death benefit plus roughly 4,000,000 of assets. Guild Dog Current Programs Policy ATRA 3% Over Threshold Phase Out of Itemized Deduction Inflation Adjusted Distribution Roland's 200k or Taxable Total ATRA in Excess of Cost of Age Earning 7% RMD Threshold Threshold ATRA 75 / 74 4,000,000 300,000 500,000 313,800 186,200 2,234 76 / 75 4,066,000 303,000 503,000 318,507 181,493 2,178 77 / 76 4,136,620 306,030 506,030 323,285 176,715 2,121 78 / 77 4,212,183 207,497 309,090 516,587 328,134 179,363 2,152 79 / 78 4,285,015 219,744 312,181 531,926 333,056 186,688 2,240 80 / 79 4,349,839 232,612 315,303 547,915 338,052 194,560 2,335 81 / 80 4,405,434 246,114 318,456 564,570 343,122 202,991 2,436 82 / 81 4,450,472 260,262 321,641 581,902 348,269 211,992 2,544 83 / 82 4,483,526 275,063 324,857 599,920 353,493 221,570 2,659 84 / 83 4,503,055 290,520 328,106 618,625 358,796 231,724 2,781 85 / 84 4,507,413 304,555 331,387 635,942 364,178 240,377 2,885 86 / 85 4,497,058 318,940 334,701 653,641 369,640 249,300 2,992 87 / 86 4,470,586 333,626 338,048 671,673 375,185 258,441 3,101 88 / 87 4,426,547 348,547 341,428 689,975 380,813 267,734 3,213 89 / 88 4,363,460 363,622 344,842 708,464 386,525 277,097 3,325 90 / 89 4,279,827 375,423 348,291 723,714 392,323 283,101 3,397 91 / 90 4,177,712 386,825 351,774 738,599 398,208 288,618 3,463 92 / 91 4,056,249 397,671 355,291 752,963 404,181 293,491 3,522 93 / 92 3,914,678 407,779 358,844 766,623 410,243 297,535 3,570 94 / 93 3,752,382 412,350 362,433 774,782 416,397 295,953 3,551 1.5% inflation assumption ATRA 3% Over Threshold Phase Out of Itemized Deduction Inflation Adjusted Distribution Roland's 200k or Taxable Total ATRA in Excess of Cost of Age Earning 7% RMD Threshold Threshold ATRA 75 / 74 4,000,000 300,000 500,000 313,800 186,200 2,234 76 / 75 4,066,000 303,000 503,000 318,507 181,493 2,178 77 / 76 4,136,620 306,030 506,030 323,285 176,715 2,121 78 / 77 4,212,183 207,497 309,090 516,587 328,134 179,363 2,152 79 / 78 4,285,015 219,744 312,181 531,926 333,056 186,688 2,240 80 / 79 4,349,839 232,612 315,303 547,915 338,052 194,560 2,335 81 / 80 4,405,434 246,114 318,456 564,570 343,122 202,991 2,436 82 / 81 4,450,472 260,262 321,641 581,902 348,269 211,992 2,544 83 / 82 4,483,526 275,063 324,857 599,920 353,493 221,570 2,659 84 / 83 4,503,055 290,520 328,106 618,625 358,796 231,724 2,781 85 / 84 4,507,413 304,555 331,387 635,942 364,178 240,377 2,885 86 / 85 4,497,058 318,940 334,701 653,641 369,640 249,300 2,992 87 / 86 4,470,586 333,626 338,048 671,673 375,185 258,441 3,101 88 / 87 4,426,547 348,547 341,428 689,975 380,813 267,734 3,213 89 / 88 4,363,460 363,622 344,842 708,464 386,525 277,097 3,325 90 / 89 4,279,827 375,423 348,291 723,714 392,323 283,101 3,397 91 / 90 4,177,712 386,825 351,774 738,599 398,208 288,618 3,463 92 / 91 4,056,249 397,671 355,291 752,963 404,181 293,491 3,522 93 / 92 3,914,678 407,779 358,844 766,623 410,243 297,535 3,570 94 / 93 3,752,382 412,350 362,433 774,782 416,397 295,953 3,551 1.5% inflation assumption 12
Spend On Current Needs Annual Contribution 200k or in Excess of Age Roland's RMD Premium 75 / 74 4,000,000 54,521 76 / 75 4,066,000 54,521 77 / 76 4,136,620 54,521 78 / 77 4,212,183 207,497 62,018 79 / 78 4,285,015 219,744 74,265 80 / 79 4,349,839 232,612 87,133 81 / 80 4,405,434 246,114 100,635 82 / 81 4,450,472 260,262 114,783 83 / 82 4,483,526 275,063 129,584 84 / 83 4,503,055 290,520 145,041 85 / 84 4,507,413 304,555 159,076 86 / 85 4,497,058 318,940 173,461 87 / 86 4,470,586 333,626 188,147 88 / 87 4,426,547 348,547 203,068 89 / 88 4,363,460 363,622 218,143 90 / 89 4,279,827 375,423 229,944 91 / 90 4,177,712 386,825 241,346 92 / 91 4,056,249 397,671 252,192 93 / 92 3,914,678 407,779 262,300 94 / 93 3,752,382 412,350 266,871 95 / 94 3,573,835 353,845 208,366 96 / 95 3,445,389 310,395 164,916 Total 3,576,599 Gift vs. Net to Children Joint Life Expectancy 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 75 77 79 81 83 85 87 89 91 93 95 Net to Guild Dogs Net to Daughter Save @ 7% vs. Insurance Premium Saved - 7% Cummulative 200k or Cumulative Saved Plus Insurance Plus Age Roland's RMD Earnings 75 / 74 4,000,000 145,479 4,145,479 11,000,000 76 / 75 4,066,000 301,142 4,367,142 11,066,000 77 / 76 4,136,620 467,700 4,604,320 11,136,620 78 / 77 4,212,183 207,497 645,918 4,858,102 11,212,183 79 / 78 4,285,015 219,744 836,612 5,121,627 11,285,015 80 / 79 4,349,839 232,612 1,040,654 5,390,493 11,349,839 81 / 80 4,405,434 246,114 1,258,978 5,664,412 11,405,434 82 / 81 4,450,472 260,262 1,492,586 5,943,058 11,450,472 83 / 82 4,483,526 275,063 1,742,546 6,226,071 11,483,526 84 / 83 4,503,055 290,520 2,010,003 6,513,058 11,503,055 85 / 84 4,507,413 304,555 2,296,182 6,803,595 11,507,413 86 / 85 4,497,058 318,940 2,602,394 7,099,452 11,497,058 87 / 86 4,470,586 333,626 2,930,041 7,400,626 11,470,586 88 / 87 4,426,547 348,547 3,280,622 7,707,170 11,426,547 89 / 88 4,363,460 363,622 3,655,745 8,019,205 11,363,460 90 / 89 4,279,827 375,423 4,057,126 8,336,953 11,279,827 91 / 90 4,177,712 386,825 4,486,604 8,664,316 11,177,712 92 / 91 4,056,249 397,671 4,946,145 9,002,394 11,056,249 93 / 92 3,914,678 407,779 5,437,854 9,352,532 10,914,678 94 / 93 3,752,382 412,350 5,963,983 9,716,365 10,752,382 95 / 94 3,573,835 353,845 6,526,941 10,100,776 10,573,835 96 / 95 3,445,389 310,395 7,129,306 10,574,695 10,445,389 13
Saving vs. Insurance 7% Joint Life Expectancy 11,000,000 9,000,000 7,000,000 5,000,000 3,000,000 75 77 79 81 83 85 87 89 91 93 95 Net Insurance Net Pure Endowment 7% earning Options for the Owner No Planning S (Inherited ) TCRUT PLR 200741016 Insurance Children Beyond Charitable Rollovers Leveraging Large s into Large Charitable Gifts 14
PRACTICAL PLANNED GIVING CONFERENCE SPEAKER EVALUATION Date: Speaker: Name (optional): Please rate the following: Excellent Good Neutral Fair Poor I. OVERALL 5 4 3 2 1 Were your major objectives for this session met? Was the content of the session vital, timely, substantive? Comments: II. RELEVANCE 5 4 3 2 1 Was the subject matter directly related to the requirements of your job? Comments: III. VALUE 5 4 3 2 1 Do you believe the benefits of this session were worth the time, effort and cost? Comments: IV. SPEAKER 5 4 3 2 1 How was their presentation style? Did the session move along at the right pace? Did they have appropriate knowledge on the topic? Comments: V. MATERIALS 5 4 3 2 1 Were the materials clear and organized and appropriately helpful for the session? Comments: Vi. What did you like the most about the session? VI. Any suggestions to improve future sessions? XII. How many years of gift planning experience do you have?