Charitable Estate Plans Using SRI Investments: Stewardship in Practice Bill Hartman MMA Trust Co.

SRI in The Rockies October 18, 2002 1

Stewardship Planning What Is It?

• Identify what is important to you and your family.

• Plan according to your faith and values.

• Share values across generations.

• Incorporate SRI investments in life and testamentary plans: extends the good.

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Stewardship Planning Important Questions

• How much is enough for descendants ?

• Is it too early or too late for leaving an inheritance ?

• How can I “give back” from my accumulated wealth ? • How can accumulated wealth celebrate my life and witness ?

• Can my estate plan include SRI-invested charitable tools ? 3

The road less traveled….an opportunity

• Choosing the “enriching journey” over the “toll road” often takes just a bit more planning. • You already offer your client this choice; you can offer more through their estate planning. 4

Traditional Approaches to Estate Planning

• “Nothing more than a series of unpleasant business decisions to minimize the damage.” • May ignore the income needs of the donor/subject. • Based on the net worth statement and “beating the tax man”.

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Family’s Net Worth

What you can’t keep What you can keep

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Social Capital Personal Capital $ $ Heirs GSTTax

Social Capital Personal Capital $ $ $ $

Change in Unified Credit in EGTRRA 2001 vs. 1997 Law I.e. “the vanishing repeal”

Year 2001 2002-3 2004-5 2006-7-8 2009 2010 2011 Applicable Exclusion Amount ‘97 TFRA ‘01 EGTRRA $675,000 $700,000 $675,000 $1,000,000 $700,000 $1,000,000 $1,000,000 $1,500,000 $2,000,000 $3,500,000 Unlimited $1,000,000 9

Federal Income Tax on IRAs distributions

1993 = $ 13 billion to IRS 1998 = $ 55 billion 2001 = $100 billion 10

Case Study of Jonas and Mary Leatherman”

•Good retirement income flow; supplement desired • Three children • Want to provide for children and charity • Jonas is 68 and Mary is 66 •Total estate: $4,000,000 11

Farm Land $1,000,000 Qual.Plan

$1,000,000 Other Assets: $2,000,000

First Death $3,000,000 Spouse Estate Second Death • Trust document (will) recommends Trustee invest corpus in SRI assets

$850,000 I R S

$1,000,000 Bypass Trust*

$2,990,000 Family

Leatherman Family: Appreciated Farm Real Estate

• Desire to sell farm land and home.

• Need some cash to purchase new home.

• Very low basis in the property.

• Desire to minimize taxes on disposal 13

Substantial appreciation results in over $161,000 in Capital Gain Tax on sale

$1,000,000 Sale Price $ 192,000 Cost Basis $ 808,000 x 20% =$161,000 14

Solution: Leatherman Family Charitable Remainder Uni-Trust

• Gift 60% undivided fractional interest to charitable remainder uni-trust • 40% sold outright for cash • Zero-Tax sale • (Family recommends) trustee invest solely in SRI assets after sale 15

Zero Tax Sale of Property $1,000,000 Farm Property

$192,000 Cost Basis

60% Leatherman Family Charitable Rem. Uni Trust $600,000

$245,000 Tax Deduction* x 27% Tax Bracket $66,150 Tax Savings *Subject to 30% AGI deduction limit

40% Cash to Leathermans $400,000

$400,000 76,800 Adjusted Basis $323,200 Capital Tax Gain x 20% Capital Gains Rate $ 64,640 Capital Gains Tax

Benefits to Family and Charity of a Zero Tax Sale of Real Estate

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Gift to Charity: Current year Estimated* $600,000 $875,000 at death

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Annual income from Trust: at 5% per year (with 23 year life expectancy)

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Cash Available from Farm Proceeds $ 30,000, Year 1 $766,000 through life $400,000

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Tax Paid on Sale: $ - 0 –

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Trust Corpus Invested in SRI assets (mutual funds and individual issues.)

17 * 23 year life expectancy, 2% annual average growth of trust

The charitable beneficiaries of the Leatherman Family Uni-trust: Community Library: 25% Church: 25% College: 25% Land Preservation Fund: 25% Projected Share ($218,750) ($218,750) ($218,750) ($218,750) 18

Sale of Assets & CRT

$1,000,000 Asset Transfer $600,000 Gift $248,860 Deduction Farm Land $1,000,000 Investment/ Purchase new home $400,000 First Death Second Death

$600,000 Charity

Qualified Retirement Plans: Gifts That Keep on Giving

• Jonas and Mary have accumulated over $1,000,000 of qualified retirement plan assets.

• Current plan: direct plan assets at death of surviving spouse to children.

• Children are in high income tax brackets and do not need income.

• Desire to have assets and benefits assist with education and environment. • What are the options?

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Qualified Plan Value $1,000,000 Life Insurance Contract *

Leatherman Family Endowment $1,000,000 IRS $0 Child 1 $333,333 Child 2 $333,333 Child 3 $333,334 * Assume paid by non-IRA assets or reinvested Required Minimum Distribution

Sale of Assets & CRT Asset Transfer Income Deduction Farm Land Qualified Plan $1,000,000 Annual Gifts of Premium

Asset Replacement Trust $1,000,000

First Death

$1,000,000 IRA

Second Death $1,000,000 By

Family Endowment

Beneficiary Designation

Fund $1,000,000 + income $136,257 I R S (includes effect of CRUT)

Leatherman Family Endowment

• Qualified Plan Assets are directed to endowment.

• Trustee instructed to invest solely in SRI funds and assets. • Distribution directed by Leathermans: – Income annually to charities directed by Leatherman children.

– Up to 5% of principal annually to local high school scholarship for student in life sciences or environmental curriculum. – Corpus after 20 years to college scholarship fund. 23

Multiple IRAs

IRA One Bequest to Children Children: Beneficiaries IRA Two Gift to Charity IRA Three Gift to Endowment Fund

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Donor Benefits: Financial

• Creates income sources • Eliminates or reduces tax burden – Income/capital gain – Estate, gift • Increases inheritance for family • Returns and performance of investments improved • Helps favorite charities and causes grow and thrive 25

Donor Benefits: Values

• Assets speak to values for family and others: – Redirects social capital • Investments of charitable gift plans continue with SRI difference.

• Creates legacy of stewardship that keeps on giving.

• Direct participation in philanthropy.

• Increased personal significance.

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Contact Information

Bill Hartman, Trust Advisor MMA Trust Co. 201 E. Oregon Rd., Ste 103 Lititz, PA 17543 Email: [email protected]

Phone: 800-494-6622 MMA Trust Co./ Mennonite Foundation Rod D. Diller, CEO 1110 No. Main St. Goshen IN 46527 Web: www.mma-online.org

Phone: 800-348-7468 27