Estate Planning Through Charitable Gifting

Donna Sheehy, CFP 29605 US Highway 19 Suite 250 Clearwater, FL 33761 727-943-8813 dsheehy@harborfs.com www.investdonna.com Estate Planning Through Charitable Gifting Call today for a personal consultation (727) 943-8813 (866) 943-8813 Page 1 of 9, see disclaimer on final page

Table of Contents Charitable Giving... 3 A few words about transfer taxes... 3 Make an outright bequest in your will... 3 Make a charity the beneficiary of an IRA or retirement plan...3 Use a charitable trust...3 Why use a charitable lead trust?... 4 Why use a charitable remainder trust?... 4 Life Insurance and Charitable Giving...5 How can life insurance be used for charitable giving?...5 Name charity as beneficiary of proceeds...5 Name charity as recipient of dividends... 5 Donate an existing life insurance policy to charity... 6 Donate a new policy to charity...6 The Best Property to Give to Charity... 7 Donor Advised Funds and Private Foundations Compared... 8 Page 2 of 9, see disclaimer on final page

Charitable Giving When developing your estate plan, you can do well by doing good. Leaving money to charity rewards you in many ways. It gives you a sense of personal satisfaction, and it can save you money in estate taxes. A few words about transfer taxes The federal government taxes transfers of wealth you make to others, both during your life and at your death. In 2011, generally, the federal gift and estate tax is imposed on transfers in excess of $5 million and at a top rate of 35 percent. There is also a separate generation-skipping transfer (GST) tax that is imposed on transfers made to grandchildren and lower generations. For 2011, there is a $5 million exemption and the top rate is 35 percent. In 2012, the top tax rates for both taxes will remain the same (35 percent), but the $5 million exemptions will be indexed for inflation. Note: In 2013, unless Congress enacts further legislation, the top tax rates will increase to 55 percent and the exemptions will generally drop to $1 million. You may also be subject to state transfer taxes. Careful planning is needed to minimize transfer taxes, and charitable giving can play an important role in your estate plan. By leaving money to charity the full amount of your charitable gift may be deducted from the value of your gift or taxable estate. Make an outright bequest in your will The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will that names the charitable beneficiary and states the amount of your gift. The outright bequest is especially appropriate when the amount of your gift is relatively small, or when you want the funds to go to the charity without strings attached. Make a charity the beneficiary of an IRA or retirement plan If you have funds in an IRA or employer-sponsored retirement plan, you can name your favorite charity as a beneficiary. Naming a charity as beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account. Use a charitable trust Another way for you to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust. A charitable lead trust pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction. Page 3 of 9, see disclaimer on final page

Why use a charitable lead trust? The charitable lead trust is an excellent estate planning vehicle if you are optimistic about the future performance of the investments in the trust. If created properly, a charitable lead trust allows you to keep an asset in the family while being an effective tax-minimization device. For example, you create a $1 million charitable lead trust. The trust provides for fixed annual payments of $80,000 (or 8 percent of the initial $1 million value of the trust) to ABC Charity for 25 years. At the end of the 25-year period, the entire trust principal goes outright to your beneficiaries. To figure the amount of the charitable deduction, you have to value the 25-year income interest going to ABC Charity. To do this, you use IRS tables. Based on these tables, the value of the income interest can be high--for example, $900,000. This means that your estate gets a $900,000 charitable deduction when you die, and only $100,000 of the $1 million gift is subject to estate tax. Why use a charitable remainder trust? A charitable remainder trust takes advantage of the fact that lifetime charitable giving generally results in tax savings when compared to testamentary charitable giving. A donation to a charitable remainder trust has the same estate tax effect as a bequest because, at your death, the donated asset has been removed from your estate. Be aware, however, that a portion of the donation is brought back into your estate through the charitable income tax deduction. Also, a charitable remainder trust can be beneficial because it provides your family members with a stream of current income--a desirable feature if your family members won't have enough income from other sources. For example, you create a $1 million charitable remainder trust. The trust provides that a fixed annual payment be paid to your beneficiaries for a period not to exceed 20 years. At the end of that period, the entire trust principal goes outright to ABC Charity. To figure the amount of the charitable deduction, you have to value the remainder interest going to ABC Charity, using IRS tables. This is a complicated numbers game. Trial computations are needed to see what combination of the annual payment amount and the duration of annual payments will produce the desired charitable deduction and income stream to the family. Page 4 of 9, see disclaimer on final page

Life Insurance and Charitable Giving How can life insurance be used for charitable giving? Giving life insurance to a charity may allow you to make a larger gift than you otherwise could afford. Further, the government encourages charitable giving by providing tax advantages for certain charitable donations (the charity must be a qualified charity). This means that both you and the charity could benefit from your donation (though some charities may not accept a gift of life insurance for various reasons). Typically, a donor makes a charity the owner and beneficiary of some type of permanent life insurance policy. But, there are many ways of structuring a charitable gift involving life insurance, and one alternative may better suit your needs and those of the charity than others. Caution: This discussion contains only a brief description of some of the many charitable giving strategies involving life insurance. You should consult your tax advisor before making such a gift to make sure it is structured properly. For further information on charitable gifts and tax advantages, see Charitable Gifting, Charitable Deduction, and Deductions: Charitable Gifts. Name charity as beneficiary of proceeds How to do it This is the simplest type of charitable gift using life insurance. You designate the charity as the beneficiary of your existing policy or a new policy by completing a beneficiary designation form. (See Life Insurance Ownership and Beneficiary Designations). You own the policy and pay the premiums. Upon your death, the charity receives some or all of the proceeds from the policy. Advantages and disadvantages Designating a charity as beneficiary while retaining ownership of the policy allows you to retain control over and rights to the policy, including the ability to change the beneficiary or access to the policy's cash value. However, because you retain ownership of the policy, the premium payments you make are not tax deductible for either income tax or gift tax purposes. At your death, the proceeds will be included in your gross estate, however, there is an offsetting estate tax charitable deduction for the amount of proceeds that pass to the charity. Name charity as recipient of dividends How to do it Another simple way of making a charitable gift is to assign to the charity policy dividends from cash values (term life insurance cannot be used). You own the policy and your heirs (the designated beneficiaries) receive the proceeds at your death. Advantages and disadvantages By assigning policy dividends to charity, you are able to make a gift without diminishing the amount of your heirs' inheritance. You retain ownership of the policy allowing you access to the policy's cash value. The dividends paid to the charity are deductible for both income tax and gift tax purposes. Because you retain ownership of the policy, the proceeds will be included in your gross estate at your death. However, in this case, your estate will not receive an offsetting estate tax charitable deduction because the proceeds will not go to charity. Tip: Your estate may be entitled to the unlimited marital deduction, though, if your spouse is the beneficiary. Or, your estate may not owe estate taxes anyway because of the applicable exclusion amount and other deductions and credits. Page 5 of 9, see disclaimer on final page

Tip: With permanent life insurance policies that are not modified endowment contracts, you do not have to include dividends until they exceed your basis (generally, gross premiums paid) in the policy. Donate an existing life insurance policy to charity How to do it In order to donate an existing life insurance policy to charity, you must assign all rights in the policy to the charity. You must also deliver the policy itself to the charity. The charity becomes the new owner of the policy as well as the beneficiary, but you will continue to pay the premiums (unless the policy is paid up). As the owner, the charity will have access to any cash values during your life. Caution: If you retain any "incidents of ownership, " no income tax or gift tax deductions will be allowed. Advantages and disadvantages The gift of the policy and any future premium payments you make will be deductible for both income tax and gift tax purposes. Further, because you give up ownership of the policy, the proceeds will not be included in your gross estate at your death (unless you die within three years of the transfer, and then your estate will also get an offsetting estate tax charitable deduction). However, by relinquishing ownership of the policy, you give up all control over and rights to the policy, including the ability to change the beneficiary and access to the policy's cash value. Tip: When you donate an existing policy, the amount of your deduction is either the value of the policy or your cost basis (net premiums paid), whichever is less. Tip: Premium payments made directly to the insurer may be considered to be gifts for the use of the charity (rather than gifts to the charity) and, as a result, may be deductible only up to 30 percent of your contribution base (your contribution base is generally equal to your adjusted gross income). On the other hand, if you make a cash donation to the charity that is used to pay the premiums, your deduction is limited to 50 percent of your contribution base. Donate a new policy to charity How to do it In order to use this strategy, you purchase a new insurance policy in the charity's name. You never own the policy. The charity is the owner and beneficiary. You will make any future premium payments (unless it is a single premium policy). As the owner, the charity will have access to any cash values during your life. Advantages and disadvantages The gift of the policy and any future premium payments you make will be deductible for both income tax and gift tax purposes. Further, because you never own the policy, the proceeds will not be included in your gross estate at your death (unless you die within three years of the transfer, and then your estate will also get an offsetting estate tax charitable deduction). However, because you do not own the policy, you do not have any control over and rights to the policy, including the ability to change the beneficiary or access the policy's cash value. Caution: The IRS may treat this transaction as if the charity itself had purchased the policy on your life. Most states require the purchaser of a policy to have an insurable interest in the life of the insured. If the charity does not have an insurable interest, all deductions may be lost. If this is the case in your state, consider having your spouse purchase the policy and then immediately assign all rights to the charity. Tip: When you donate a new policy, your deduction will generally be equal to your cost basis (i.e., initial premium) in the policy. Page 6 of 9, see disclaimer on final page

The Best Property to Give to Charity Giving to charity is not only personally satisfying, the IRS (and possibly your state) also rewards you with generous tax breaks. Current income tax deduction if you itemize, subject to certain percentage limitations for any one year Tax benefit received reduces the cost of the donation (e.g., a $100 donation from someone in a 30 percent tax bracket has a net cost of $70) Reduces or eliminates capital gains tax if appreciated property is given No transfer (gift and estate) taxes imposed Removes any future appreciation of the donated property from your taxable estate Highly appreciated or rapidly appreciating property* Such as: Intangible personal and real property (e.g., stock or real estate) Tangible personal property (e.g., art, jewelry) Cash Easy to give--the type of donation most charities like best Be sure to get a receipt or keep a bank record, regardless of the amount Income-producing property* Such as: Artwork (if given by the artist) Inventory Section 306 stock (stock acquired in a nontaxable corporate transaction) Tangible personal property* Such as: Cars Jewelry Paintings Remainder interests in property Lets you use the property, or income from the property, until a later date. Gift and estate tax deductions are not allowed unless a trust is used. You may only take the income tax deduction in the year that the gift is actually conveyed. * You may need to have certain types of property appraised. Page 7 of 9, see disclaimer on final page

Donor Advised Funds and Private Foundations Compared Donor advised funds (DAFs) and private foundations both offer a way to make significant charitable gifts over the long term. By comparison, DAFs offer simplicity and low costs, while private foundations allow additional control over gifts and investments. Donor's startup and administrative costs Feasible to start with a modest donation (e.g., $10,000) Ultimate control over grants belongs to Ultimate control over investments belongs to DAF None (but administrative costs are paid from fund assets) Yes DAF DAF Private foundation Substantial Not economical Donor Donor Excise tax on income None Up to 2% of annual net investment income Income tax deduction--percent of adjusted gross income (AGI) Up to 50% for cash contribution Up to 30% for long-term appreciated property Up to 30% for cash contribution Up to 20% for appreciated securities that are publicly traded Income tax deduction equals the fair market value of gift Yes, for most assets Only for cash or publicly traded securities; deduction for other gifts is generally their cost basis Annual payout requirement None At least 5% of a private foundation's assets must be paid out annually Privacy DAF donors can remain anonymous Private foundations' tax returns and donors' names are public record Page 8 of 9, see disclaimer on final page

This information was developed by Forefield, Inc. an independent third party. It is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Donna Sheehy, CFP 29605 US Highway 19 Suite 250 Clearwater, FL 33761 727-943-8813 dsheehy@harborfs.com www.investdonna.com Page 9 of 9 Prepared by Forefield Inc. Copyright 2011