Transcript Irrevocable Planned Gift Basics

2013 Western Regional
Planned Giving Conference
PRIMER SECTION III:
IRREVOCABLE PLANNED GIFTS
CHARITABLE GIFT ANNUITIES
LIFE INSURANCE
CHARITABLE TRUSTS
SUZANNE ZOLFO, CSPG
Party at 6:00 if you stay awake!
Charitable Gift Annuity
VERY COMMON IRREVOCABLE PLANNED GIFT
EASY FOR A DONOR TO UNDERSTAND AND
FUND
ANY CHARITY CAN OFFER THEM, EITHER
INDEPENDENTLY OR THROUGH A
COMMUNITY FOUNDATION
Charitable Gift Annuity
CHA RITY
March 19, 2013
Gift of prope rty
Donor
Charitable
Gift
Annuity
CHARITY
Rem ainde r to
CHARITY
Incom e tax deduction
Fixe d paym e nts
How it works
You transfe r cas h, s e cur itie s , or other pr ope rty to CHARITY.
You re ce ive an incom e tax deduction and m ay s ave capital gains tax.
CHARITY pays a fixe d am ount each ye ar to you or to anyone you nam e for life .
Typically, a portion of thes e paym ents is tax-fre e .
Whe n the gift annuity e nds , its r em aining pr incipal pass e s to CHARITY.
Basic Elements of a CGA Contract
• Donor
• Charity
• Income beneficiary name, birthdate, age to nearest birthday &
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address
Gift date
Fair market value of gift
Annuity amount
Date payments commence, frequency, method, any prorated
amount
Statement that gift is irrevocable and non-assignable
Termination
Gift designation
Power to revoke payments (2 life)
Governing law (state)
Signatures of donor and an authorized signer of charity
Deduction & the AFR
• 2 parts of deduction: immediate and tax-free income
• Amount is determined by IRS formula where a variable is
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the AFR
5-year carry forward to use up the immediate part of the
deduction if they can’t use it all in one year
If they don’t itemize and there are no special circumstances,
probably will want more tax-free income
Must discuss this with the donor before you draw up
documents
Only need signed election document if they choose other
than the current month
What is the AFR?
• The Treasury Department issues the Applicable Federal
Rate, or AFR, every month.
• The AFR, sometimes also called the Rate of the Month,
represents 120% of the interest rates paid on medium term
(3-9 years) government securities.
• Sec. 7520 of the Internal Revenue Code allows donors to
elect either the AFR in effect for the month in which the gift
is made or for either of the two preceding months.
• Generally, a higher AFR will produce a higher
immediate income tax deduction for charitable gift
annuities.
Additional Contract Documents
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Attachment to Schedule A, for donor’s tax return – so make it useful
• These elements not set in stone, but should be spelled out in your gift annuity policies &
procedures
• Donor name, address & SS#
• Principal donated and asset (stock, cash, real estate, etc.)
• AFR and month
• Deduction being claimed
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AFR Election, if required
• Statement explaining AFR – this protects YOU!
• Month and AFR selected
• Donor signature
From Donor/Income Beneficiary (good ideas, not required in CA)
• Photo ID with date of birth and address
• Bank account info for direct deposit payments (voided check)
Types of Annuities
Immediate
• 1 or 2 income beneficiaries
• If 2, concurrent or successive
Deferred
• Fund now, must wait at least 1 year to start payments
• Choose a date in the future when payments begin
• Get a higher rate based on how long you defer
• Deduction based on deferral period, use a current AFR
• Good way to set up income for retirement
Types of Annuities (cont.)
Tuition or Commuted Payment
• A 1-life deferred annuity, usually funded by parent, grandparent or
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guardian, for a young child
Donor defers payments until child is 18
Child has option before payments begin to either elect lifetime
payments or much larger “commuted value” payments over a
period of 4-5 years, as spelled out in the contract, then the contract
terminates
If lifetime payments are elected, the rate would be very low because
the income beneficiary is so young
With a low AFR, may have to reduce the annuity rate to get the
annuity to qualify for the deduction under the 10% rule: there must
be at least a 10% residuum calculated for the charity
Types of Annuities (cont.)
Flexible Deferred
• Like a deferred, but choose a “target date” with earliest
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and latest dates selected
Deduction based on target date
If payments begin between earliest and target dates,
then lower rate than planned; later date, higher rate
Inform charity prior to first payment date desired (put
timing in your policies & procedures)
Good option if donor has not decided when to retire, or
just to give more flexibility in their planning
Gift Tax Implications
Gift tax implications depend on:
• who owns the gifted property
• whether or not it is appreciated, long-term property, and,
• who the annuitants are
Be aware of gift tax when spouses fund with separate
property, or when donor funds an annuity for anyone other
than themselves or spouse.
Scenario 1: donor funds with separate property and spouse receives annuity
first, then donor
• Gift tax is an issue when the marital deduction does not apply, but for spouses,
it usually does.
• This circumstance is the exception: But this does qualify for the annual
gift tax exclusion, $14,000 in 2013, which can be applied to the annual
payments.
Gift Tax Implications (cont.)
Scenario 2: Donor is first annuitant, then someone other than spouse.
 Annual gift tax exclusion does not apply as the gift is of a future interest – so
the current gift tax due
 However, the Donor can reserve the right to revoke annuity interest by will in
the contract, making the gift incomplete – then current gift tax is due on the
income as it is paid out to the second annuitant, and it qualifies for the annual
gift tax exclusion
Scenario 3: Donor funds for someone other than spouse
 Gift tax is due on present value of annuity
 But this does qualify for the annual gift tax exclusion of $14,000
 In addition, the donor can reserve the right to revoke annuity interest by will in
the contract – then the gift that is reportable is only the present value for the
donor’s life expectancy
Gift Tax – The Reality
The good news about gift tax:
 The marital exclusion almost always applies for spouses and is
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unlimited
The lifetime exclusion in 2013 is $5,250,000
The annual exclusion in 2013 $14,000
You are probably not an accountant or tax advisor, so you should NOT
be calculating gift tax due for your donors
Be aware of it and know to advise your multi-millionaire donors who
you think have exceeded their lifetime gift tax exclusion to get tax
counsel
SO, IN REALITY…
You will probably never have to deal with this!
CGA Prospects
AGE
• Average age of annuitants for immediate gift annuities: 79
• Average age of annuitants for deferred gift annuities: 64
78% of charities report having a minimum age for
annuitants
• 57% require a minimum age of 60 or older for an
immediate annuity
• 28% require annuitants be 65 or older to begin receiving
payments on a deferred annuity, and 26% stated age 60 for
the same
Source: ACGA Survey of Charitable Gift Annuities, 2009
Minimum Funding Amount
 55.1% of charities require a minimum contribution of
$10,000-$25,000, 29.6% require $5,000-$9,999
 For subsequent contributions from the same donor
for an immediate annuity, 39.3% of charities require
a minimum of $10,000-$25,000, and 38.5% require
a minimum of $5,000-$9,999
 Results were about the same for deferred annuities
 Average size of gift annuities among charities
nationwide is $43,371
Source: ACGA Survey of Charitable Gift Annuities, 2009
Life Insurance
EASY GIFT TO GIVE, IF CERTAIN CRITERIA
ARE MET
MAY REQUIRE ADMINISTRATIVE WORK FOR
THE CHARITY
NEED TO HAVE GOOD POLICIES AND
PROCEDURES IN PLACE
Donor Retains Ownership of Policy
 Revocable gift
 Donor makes charity beneficiary of the policy
 No administration for charity
 No current tax advantage for the donor
 Policy payout is excluded from the estate at death
 Charity determines how to recognize gift from donor
as a revocable gift
 Insurer can provide the value of the policy at any
time
Donor Transfers Ownership of Policy
If Donor gives ownership of policy to charity, it is an
irrevocable gift
Paid-up policy donated to charity:
1. Wait until insured passes to receive payment, OR,
2. Cash out the policy when donated
Gift value is as of the date it is transferred to the
charity, donor gets tax deduction for that amount
Charity Owns Policy
2 Scenarios if premiums are still payable:
Donor does not want to pay premiums (if any due)
so charity must decide whether to continue to pay
premiums out of reserves or cash it out – gift value
is what policy is worth when it transfers to charity
2. Donor continues to pay premiums and charity
holds policy – donor gets deduction for each
payment made since it goes to the charity, so gift
value is what the policy is worth when transferred
to charity PLUS the premium payments as they are
made
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Life Insurance Administration
If donor is paying the premiums and charity is the owner,
Development and Finance must have tight procedures in place
to administer
 Premium bills will go to the charity to pay, have them come
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into Development
Charity pays premiums (via Finance dept)
Send a reminder to the donor to make the donation to offset
the premium (include proof of payment)
When donation is received, send acknowledgement to donor –
full amount is tax deductible
Make sure at least 2 people in Development are aware of the
donor, the premium amounts and the timing of payments so
premiums do not get overlooked
Charitable Trusts
COMPLEX GIFTS
REQUIRE DONOR TO HAVE COMPETENT
ESTATE, FINANCIAL AND TAX COUNSEL
REQUIRE CHARITY TO HAVE COMPETENT
COUNSEL AND ASSET MANAGEMENT
REMAINDER AND LEAD TRUSTS
Acronyms from Hell
CRUT
CRAT
CLUT
CLAT
NIMCRUT
NICRUT
FLIP NIMCRUT
Charitable Remainder Trusts
Charitable Remainder Unitrusts (CRUTs)
 Pay non-charitable beneficiaries for lifetime or term
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of years and remainder goes to charitable
beneficiaries
Donor receives deduction at time of donation,
taxation of payments depends on investments
Can add to the principal
Pay a set percentage of the trust balance as of
January 1 each year
Must meet IRS test to qualify for deduction
Charitable Remainder Trusts (cont.)
Charitable Remainder Annuity Trusts (CRATs)
Similar to CRUTs, but:
 Pay a set dollar amount each year, regardless of
portfolio performance of the trust
 Cannot add assets to a CRAT
 These trusts are the ones that run out when paying
more than they are earning for a long time
 Usually not a good idea unless the non-charitable
beneficiaries are elderly and want a set income
stream – in this case, consider a CGA instead
Charity as Trustee
 Policies & Procedures need to address whether the
charity will act as trustee or co-trustee, or not at all –
different schools of thought on this
 If trustee, must manage the assets, prepare annual
tax returns and make payments to beneficiaries
 If going to do this, good policy to require that your
charity is XX% irrevocable in the trust
 Individual employees of charities should NOT act as
trustee, conflict of interest
Charity Considerations
Ask questions when donors tell you they already have a
“charitable trust” and your charity is in it – don’t assume it
is a qualified trust OR that your charity is irrevocable. This
is important because:
 When charity is irrevocable, can book present value of
the remainder as a gift and any subsequent additions
 Must also carry liability on your books
Remember, donors don’t always use the right language to
describe their estate plans, and they don’t always recall the
exact terms of their documents
Charitable Lead Trusts
Charitable Lead Unitrusts (CLUTs)
Charitable Lead Annuity Trusts (CLATs)
 Asset is put into trust and income generated goes to
charities
 At end of the term, the asset reverts to the donor
 Good vehicle in a low-AFR environment
Charitable Trust Summary
 Get a good estate planning attorney who has
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experience drafting these trusts to advise you
You should NEVER draft documents if you are not
an attorney
If you are an attorney, your organization needs to
decide if you are allowed to draft documents
Also need to decide if your organization will pay to
draft trusts or if the donor must pay – if charity pays,
must 1099 the donor for the cost
Get help!
Resources
AMERICAN COUNCIL ON GIFT ANNUITIES
ACGA-WEB.ORG
PLANNED GIVING DESIGN CENTER
PGDC.COM
PARTNERSHIP FOR PHILANTHROPIC PLANNING
OF GREATER LOS ANGELES
PPPLA.ORG
YOUR SOFTWARE PROVIDER
YOUR ASSET MANAGER
Q&A
Suzanne Zolfo, CSPG
[email protected]