Transcript When your client want to include charity in their estate plans

INCLUDING CHARITY IN
ESTATE PLANS WITH
INDIVIDUAL RETIREMENT ACCOUNTS
P R E S E N T E D B Y:
David DelFiandra, Esq.
Leech Tishman
WEALTH TRANSFER
 At least $41 trillion in
U.S. wealth will be
transferred by 2052
 Approximately $20 trillion
will be charitable
John J. Havens and Paul G. Schervish, 1999. Millionaires and the Millennium: New Estimates of the Forthcoming Wealth
Transfer and the Prospects for a Golden Age of Philanthropy, Social Welfare Research Institute, Boston College.
2013 Contributions: $335.17 billion
Corporations
5%
Bequests
8%
Foundations
15%
Individuals
72%
Giving USA 2014, The Annual Report on Philanthropy
HOW TO GIVE TO CHARITY?
 Outright gift
 Planned gift
 Establish a private foundation
 Donor Advised Fund
 Community Foundation
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Allows advisors to retain management of the assets and provides
local expertise on the area.
WHY GIVE TO CHARITY?
 Charitably inclined
 Tax savings
CHARITABLY INCLINED?
Source: Congressional Budget Office based on data from Internal Revenue Service, Statistics of Income Division, Individual Income Tax Returns
2008 (revised July 2010); the Federal Reserve Board’s 2004 Survey of Consumer Finances; and the Bureau of Labor Statistics’ 2002 Consumer
Expenditure Survey. Note: Includes C.B.O.’s estimates of charitable contributions by people who filed income tax returns in 2008 but did not itemize
deductions.
TAX SAVINGS
 Federal income tax deduction (subject to limitations)
 Federal estate tax deduction – unlimited
 Federal gift tax deduction – unlimited
 Pennsylvania Inheritance tax – 0% rate
INCOME TAX DEDUCTIONS
Type of Property
Donated
Valuation for Purposes
of Charitable
Deduction
Ceiling for Public
Charities, Private
Operating Foundations
and Certain Private
Nonoperating
Foundations
Ceiling for Other Private Nonoperating
Foundations (PNOF)
Cash
Fair market value
50%
30%
Ordinary Income
Property and
Short-term
Capital Gain Property
Lesser of the adjusted
basis or the fair
market value
50%
30%
Long-term Capital
Gain property:
- Intangible
Fair market value
30%*
- Tangible
Personalty
Fair market value –
(a) related use
Adjusted basis –
(b) unrelated use
- Real Property
Fair market value
30%
20%**
Adjusted
Basis
20%
50%
30%
20%
ESTATE & GIFT TAX RATES AND
CREDITS
2014
Unified Credit against
Federal Estate and Gift
Tax
Maximum Estate and Gift
Tax Rate
GST exemption
GST tax rate
Annual exclusion
$5.34M
40%
$5.34M
40%
$14,000
VEHICLES FOR CHARITABLE GIVING
 Lifetime Giving
 Testamentary Bequests
 Charitable Gift Annuities
 Charitable Remainder Trusts
 Charitable Lead Trusts
 Charity as IRA beneficiary
 IRA Charitable Rollover (currently expired)
SIMPLE APPROACH
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Lifetime Giving
Income tax deduction
Unlimited gift tax
deduction
Removes asset and
future appreciation from
taxable estate
Recognition to donor
during lifetime
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Testamentary Bequests
Takes effect at death
No income tax deduction
Unlimited estate tax
deduction
Beneficiary designations
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Qualified plans
Life Insurance
INDIVIDUAL RETIREMENT ACCOUNTS
 Usually a large asset
 Always subject to Federal income tax when
withdrawn (unless Roth)
 Ordinary income tax rates
INDIVIDUAL RETIREMENT ACCOUNTS
 Participant’s use of Uniform Table versus taking as a
beneficiary
 Participant dates:
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Age 59 ½ - Penalty if withdrawn earlier
Age 70 ½ - Penalty if required minimum distributions are not
taken
INDIVIDUAL RETIREMENT ACCOUNTS
 Spouse as beneficiary
 Non-spouse as beneficiary
 Trust as beneficiary
 No designated beneficiary
INDIVIDUAL RETIREMENT ACCOUNTS
 There are tax ramifications of dying with an IRA
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An IRA is fully subject to Federal estate tax
The Federal Estate tax rate is 40% in 2014
Beneficiary must pay income tax on proceeds as received
INDIVIDUAL RETIREMENT ACCOUNTS
 Income in Respect of a Decedent (IRD)
 The basic concept of IRD applies to assets that, had the
decedent lived, would have been subject to Federal income
tax
 IRA’s are an IRD asset because the funds in the IRA have
never been subject to Federal income tax
 The IRA beneficiary must pay the Federal income tax on the
IRA
IRD
 IRD Deduction
 The IRA beneficiary pays income tax (IRD) on the IRA
proceeds as they receive them
 The IRA is also subject to Federal Estate tax
 The IRS allows the beneficiary an income tax deduction
for the Federal Estate tax paid
 The beneficiary must itemize but it is not subject to the
2% floor
BENEFICIARY DESIGNATION
 Beneficiary Designation Controls
 The beneficiary designation will determine not only who
inherits but also the tax ramifications
 Spouse as Beneficiary
 Usually no Federal Estate tax because of the unlimited
marital deduction; no PA Inheritance tax because of 0% rate
 Spouse will most likely roll over the IRA and treat it as her
own IRA
BENEFICIARY DESIGNATION (CONTINUED)
 Children as Beneficiary
 Naming “my children in equal shares” as beneficiary is
very common
 Note that the children must withdraw the IRA over the
oldest child’s life expectancy
 This is detrimental to the younger children, especially if
not close in age, because they realize less tax deferral
 Separate Shares
BENEFICIARY DESIGNATION (CONTINUED)
 Trust as Beneficiary
 Becoming more and more common
 The IRA passes to the Trust for the benefit of the Trust
beneficiaries
 The IRA must be withdrawn over the life expectancy of
the oldest Trust beneficiary
 May want to implement separate trusts when
beneficiaries are not close in age
 See through trust vs. Conduit trust
BENEFICIARY DESIGNATION (CONTINUED)
 Estate (or No Designated) Beneficiary
 The IRA passes equally to the beneficiaries of the Estate
 The Estate must withdraw and pay income tax within 5
years of the Decedent’s death (unless death is after 70 ½)
 IRA must pass through probate
 No opportunity for continued deferral
 Not a good answer
WHAT DOES ALL THIS MEAN?
 IRAs are great assets to give to charities
 Charity as Beneficiary at death
 A charity is exempt from income tax
 Charity gets 100% benefit of full IRA proceeds free of tax
IRA CHARITABLE ROLLOVER
 IRA Charitable Rollover was not extended for 2014
 Allowed individuals to give up to $100,000 of IRA to
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charity
Does not count as income to participant
But does count as a required minimum distribution
Must be at least 70 ½
Must pass directly from account to charity
No donor advised funds but can pass to a general
endowment fund at a foundation
IRA CHARITABLE ROLLOVER
 On July 17, 2014, the House passed the “America
Gives More Act” which makes the IRA Charitable
Rollover permanent
 Has not yet passed the Senate – still not law
 Hold off on required minimum distributions until after
November election
CREDITOR PROTECTION
 US Supreme Court ruled recently in Clark v.
Remeker, 134 S.Ct. 2242 (June 12, 2014) that an
inherited IRA is not exempt from bankruptcy.
 Supreme Court indicated that inherited IRAs are not
“retirement funds” protected under the Bankruptcy
Code since they are not intended for retirement.
 State law may protect – not PA.
 Designate spendthrift trust as beneficiary