Presented by Richard D. Cirincione 677 Broadway Albany, NY 12207 Direct: 518-447-3389 Fax: 518-867-4789 646 Plank Road, Suite 206 Clifton Park, New York 12065 518-383-9200 518-867-4789 facsimile cirincione@mltw.com www.mltw.com outline E. Charitable Planning; 1. Income and Estate and Gift Tax Deductions; 2. Outright Bequests; 3. Use of Trusts: An Introduction to Split-Interest Techniques 1
Estate tax charitable deduction IRC 2055 permits a deduction from the value of a decedent's estate for estate tax purposes for transfers to certain qualifying recipients for public, charitable and religious purposes Gift Tax Deduction IRC 2522 governs the gift tax charitable deduction. substantially similar to the estate tax deduction exception - gifts to political organizations are not subject to the gift tax, but are subject to the estate tax. 2
The donor of the gift must be competent when making the gift, but a guardian or committee can made a gift for an incompetent. Income Tax Deduction the rules for obtaining an income tax deduction for gifts made to charitable organizations are similar to the gift and estate tax rules. Unlike gift and estate tax charitable deductions, there are limitations on the extent to which gifts are deductible for income tax purposes. 3
Deduction limitations a The deduction is limited to 50% of the donor's adjusted gross income when the gift is cash and the charity is publicly supported. Generally, those charities described in IRC 170(b)(i)(A). b. The deduction is limited to 30% of the donor's adjusted gross income when the gift is long-term appreciated securities or real property and the charity is publicly supported. c. The deduction is limited to 30% of the donor's adjusted gross income when the gift is cash and the charity is a private foundation. d. The deduction is limited generally to 20% of the donor's adjusted gross income when the gift is long-term appreciated securities or real property and the charity is a private foundation. Public Uses. Gifts to the United States, any State, any political subdivision thereof, or the District of Columbia, for exclusively public purposes 4
Charitable. Gifts to or for the use of any corporation organized and operated exclusively for religious, scientific, literary, or educational purposes -- IRC 501(c)(3) organizations. Trustees/Veterans Trustees. Gifts to trustees or to a fraternal organization, but only if those gifts are to be used for charitable purposes. Veterans. Gifts to veterans organizations. 5
Split interest gifts IRC 2055(e)(2) prohibits a charitable deduction for any gifts which splits the gift between charities and non-charities unless the gift is structured in a certain manner. Qualified split interest gifts a. Charitable Remainder Trust. b. Charitable Lead Trust. c. Pooled Income Fund. d. Remainder Interest in Personal Residence or Farm. e. Undivided Fractional Interests. 6
Charitable Remainder Trust (CRT) A CRT is an irrevocable trust makes annual or more frequent payments to an individual reserve income/annuity interest for yourself and/or others Upon death, the balance passes to a charitable organization. Grantor receives a current income tax charitable contribution deduction for the actuarial value of the charity's interest in the trust. The deduction is permitted when the trust is created even though the charity has to wait to receive anything. Because the CRT pays no income taxes, the CRT can generally sell an appreciated asset without recognizing any gain. The trust will be eligible for the estate tax charitable deduction if it passes to one or more qualified charities at death. Charitable Remainder Trust (CRT) Benefits reduce liability for income taxes Reduce estate taxes diversify assets in a tax-advantaged manner IRS sample forms 7
CRUT Unitrust A unitrust requires that the annual payments be a fixed percentage (not less than 5%) of the value of the principal as determined each year ("CRUT"), but not more than 50% Valued annually Income interest changes each year as the value changes Actuarial remainder must be at least 10% If the donor is young, may not be able to form a CRUT for life without failing the 10% rule. Can be for life or a term of years (max 20) CRAT Annuity Trust An annuity trust requires annual payments of a fixed dollar amount, expressed as a percentage of the initial value of the trust principal ("CRAT'') Actuarial remainder must be at least 10% Can be for life or a term of years (max 20) Fixed annuity based on initial contribution Annuity must be at least 5% of initial contribution Only one-time contribution allowed 8
Income Taxes Income tax consequences for donor, trust and beneficiary. 1. The donor receives an income tax charitable deduction in the year he or she makes the gift, subject to the applicable percentage limitations. 2. The trust is not subject to income taxes - charitable deduction available for capital gains and excess income. Income Taxes, cont. The beneficiary is taxed based on a "tier system. The distributions to the beneficiary are treated as consisting of the following items, in the order listed: a. Ordinary income earned by the trust; b. Capital gains realized by the trust; c. Tax-exempt income; d. Corpus. 9
NIM-CRUT A unitrust may provide that the annual payments will be the lesser of net income for any year or a fixed percentage of the principal value each year. To the extent that income in any year is less than that percentage, the document creating the CRUT may require excess income in subsequent years be distributed to "make-up" the shortfall ("NIM-CRUT ). The agreement creating a NIM-CRUT may also provide that post contribution capital gains be considered as part of the trust's "net income" in any year. FLIP CRUT starts out as a CRUT which pays the lower of the unitrust percentage or the actual income and, at a later date, convert to a standard CRUT. known as a Flip-CRUT useful if the grantor gifts assets that produce low income Later when the assets are sold, the trust flips to a standard CRUT. requirements for a Flip-CRUT: The flip must occur on a specific date or at a single event; it cannot occur at the discretion of the trustee or other person. The "flip" must occur in the first tax year after the triggering event. Only the unitrust amount may be thereafter paid to the beneficiary. 10
charitable lead trust A charitable lead trust provides for current payments to a charitable beneficiary and at a specific termination date, the remaining amount of the trust is payable to a non-charitable beneficiary. Like the CRT, a CLT may be either an annuity trust or a unitrust. Unlike the CRT, there are no minimum nor maximum limitations on the amount of the annuity payment or the unitrust amount. CLT's cannot be structured to provide the lesser of income or a unitrust amount. There is no limitation on a CLT's term (absent rule against perpetuities limitations) Different types of CLT. A qualifying non-grantor charitable lead trust the grantor receives no income tax deduction, but receives a gift tax (or estate tax, if created at death) deduction for the actuarial value of the charitable lead interest. A grantor charitable lead trust the grantor receives both a gift tax and income tax deduction upon its creation; however, the grantor remains taxable on the trust's income, thereby "recapturing" the deduction over time. 11
Income tax cont. A CLT is taxed like a complex trust. A non-grantor CLT is entitled to a charitable deduction for amounts paid for charitable purposes from gross-income; the trust s net income, after, deductions, is taxable in the same manner as trusts with no charitable interests. Gains on sales of assets within two years of their transfer to the trust may be taxed at the grantor's rates. Private Foundations It is a charitable organization other than a public charity or a supporting organization. It is formed as a separate legal entity that holds funds as an endowment and uses the income to support other charitable activities and organizations. Usually formed as a Trust or as a nonprofit organization. Usually formed in accordance with the laws of the state in which the principal office will be located. State requirements, as well as language necessary to satisfy federal tax law, should be incorporated in the organizational documents. If the state and federal laws are not accurately followed, the organization will not be granted charitable status and contributions to the entity will not be tax deductible. 12
Private Foundations cont. Advantage. By creating a private foundation, an individual has complete control over how much to distribute in any year and for what purpose (5% minimum). Disadvantages. private foundations are exempt from federal income tax, but they are subject to other taxes. An excise tax equal to 2% of net investment income must be paid on the foundation's net investment income a 15% penalty tax if it does not annually distribute 5% of the average fair market value of its assets. The charitable deduction for gifts of appreciated securities to a private foundation is limited to 20% of adjusted gross income Tax exempt status Private foundation needs to apply for tax exempt status IRS form 1023 Exemption will be granted retroactive to date of formation if application is filed within 27 months of formation 13
Required provisions for exemption Need certain provisions to qualify for tax exempt status Certain default provisions found in N-PCL 406 however, the default rules do not include the requirement that the governing instrument provide in the event of dissolution of the Corporation, all the remaining assets of the Corporation shall be distributed to another organization exempt under Section 501(c)(3) of the Code, or to the federal government, or state or local government, for public purposes, subject to the approval of a Justice of the Supreme Court of the State of New York, in which County the office of the Corporation is located. Tax on self-dealing IRC 4941 list of acts of self-dealing between a private foundation and certain donors, family members of donors, foundation managers, and entities controlled by such individuals known as disqualified persons. Section 4941 imposes an excise tax on any disqualified person who knowingly engages in any act of self-dealing. The rate of taxation begins at 5% of the amount involved with respect to the act of self-dealing and increases to 200% of the amount involved if the act is not corrected within the period specified by Section 4941. Any foundation manager who knows of the self-dealing and allows it to continue is also subject to imposition of the excise tax on self-dealing, up to 50% of the amount involved in the selfdealing. The maximum tax imposed on the foundation manager, is $10,000 for any single act of self-dealing. 14
disqualified persons defined (IRC 4946) A substantial contributor to the foundation (contributes more than $5,000 if it is more than 2% of the total contributions received by the foundation for taxable year) A foundation manager (officer, director, trustee, or certain employees or agents) owner of more than 20% of a corporation, partnership, trust, or unincorporated enterprise that is a substantial contributor to the foundation members of the family of any individual described above A corporation, partnership, trust, or estate, if a person listed above holds more than a 35% interest in the entity A government official self-dealing IRC 4941 sale, exchange, or leasing of property with a disqualified person lending of money with a disqualified person furnishing of goods, services, or facilities with a disqualified person payment of compensation to a disqualified person, unless its reasonable transfer to, or use by or for the benefit of, a disqualified person of the income or assets 15
supporting organizations A supporting organization is similar in structure to a private foundation, but created to benefit one public charity The supporting organization must be "operated, supervised, or controlled by" that charity and cannot be controlled by the donor or his or her family. board of directors of which individuals selected by the charity hold 50% or more of the voting power. A donor and his or her family members could also be members of the board of directors, but none of them could have a veto power. Supporting organizations, cont. Advantages. treated like a public charity for income tax purposes. A charitable deduction will be available for contributions of appreciated assets for up to 30% of adjusted gross income. no 2% excise tax is imposed on a supporting organization, nor are there any minimum distribution requirements. 16
Supporting organizations, cont. Disadvantages. 1. Neither the donor nor his or her family can control the organization's functions. 2. There are administrative responsibilities associated with the operation of the organization, including several annual filings (somewhat less onerous than a private foundations). 3. more complicated to form compared to a private foundation. donor advised funds A donor advised fund is a fund over which the donor and/or the donor's selected advisor(s) may suggest the donees of grants from the fund. Funds are connected with a publicly supported charitable organization. Community Foundation allows designated funds which will make grants to a specified charitable organization or several organizations to fulfill a donor's intended purpose. 17
donor advised funds, cont. Advantages. is a public charity for income tax purposes. A charitable deduction will be available for contributions of low basis stock for up to 30% of adjusted gross income. no 2% excise tax is imposed, nor are there any minimum distribution requirements. There are few, if any, administrative responsibilities associated with the operation of the fund. simple to create and minimum of start-up costs. donor advised funds, cont. Disadvantages. Neither the donor nor his or her family will have direct control over the fund's grant making. Grants will have a less direct connection with a donor and his or her family than if the grants are made from an organization, such as a private foundation, that bears the family s name. 18
End of Presentation Richard D. Cirincione 677 Broadway Albany, NY 12207 Direct: 518-447-3389 Fax: 518-867-4789 646 Plank Road, Suite 206 Clifton Park, New York 12065 518-383-9200 518-867-4789 facsimile cirincione@mltw.com www.mltw.com 19