Transcript CHARITABLE GIVING STRATEGIES

CHARITABLE GIVING
STRATEGIES
Aryeh Guttenberg, Esquire
410-484-7711
[email protected]
UMMS Foundation
February 15, 2005
Charitable Giving- Background,
Impetus, Challenges
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Personal Story – UMMS/Shaare Zedek
Lifetime Giving vs. Testamentary Giving
Planned Giving- Gift that is (1) tax-advantaged, (2)
established during donor’s lifetime and (3) arranged
with the donor’s active involvement
A Family Philosophy – A Family Legacy
Challenge of wealth and a meticulous “mitzvah” –
Maimonides
Role of Advisor
Role of Charitable Partner
Estate and Gift Tax Landscape – A
Moving Target
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Federal (EGTRAA) – See Appendix A for
Confusing Rate Structure
Maryland Decouples-Ouch!! See “The
Guttenberg Press” (Fall 2004)
Politics and the Estate Tax – Repeal – See
“Estate Tax Timeline” (Appendix B)
Planning Amid “Uncertainty”
Charitable Gifts-Tax Benefits
Retained
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Last of the Big Time Tax Savers
Income, Gift and Estate Tax Benefits
Leveraging Gift and Estate Transfers
Income and Estate Tax Deductions/Exclusions
Charitable Giving
Strategies/Vehicles
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Testamentary Bequests
Retirement Plan Assets
Life Insurance
Gift of Appreciated Property
Charitable Remainder Trusts
Charitable Gift Annuities
Charitable Lead Trusts
Private Family Foundations
Donor Advised Funds
Testamentary Bequests
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Provision in Will or Revocable Trust
Specific Bequest, Residuary Bequest (% of estate),
Contingent Bequest
Private – need not be made public until death
Conditions on bequest; Caution: Beware of rigid
conditions, particularly since it may become effective
far into future
Revocable
No effect on donor’s assets or cash flow during lifetime
Reduces estate tax
Loss of planned giving tax advantages
Retirement Plan Assets (e.g., IRA,
401(k), 403(b))
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Designation of charity as beneficiary
Full control during lifetime
“I.R.D.- Hot Asset” – tax savings to heirs
(income and estate) at death of “participant”
Consider wealth replacement strategy for
family – use of life insurance
Selection of assets for maximum estate tax
advantage
Life Insurance- Name Charity as
Owner and Beneficiary
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Income tax deduction
Remove policy from estate
Used for (not needed) paid-up policies
Gift of Appreciated Property (e.g.,
Securities)
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Fair market value deduction (up to 30% of AGI, excess
5-year carryforward)
Avoid capital gains tax
Creative uses with closely-held stock
Example:Donor holds publicly traded stock with FMV of
$100,000, which she purchased for $10,000. Benefits
of contribution of stock: (1)Income tax deduction of
$100,000 and (2) avoid capital gains tax on gain of
$90,000 ($100,000FMV minus $10,000 basis).
Basics of Charitable Remainder
Trusts (CRT’s)
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CRT’s are irrevocable trusts
that provide for and maintain
two sets of beneficiaries.
Income Beneficiaries – donor
and, if married, a spouse –
who receive a set percentage
of income for lifetime/term of
years from the trust
Remainder Beneficiaries –
named charities receive
principal of the trust after the
income beneficiaries pass
away (or term expires)
Basic Objective: Retain income
in gift to family for life (or period
of time), benefit charity at death)with significant tax benefits
CRT Benefits
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Donor(s) maintains control-- change charitable
beneficiaries, selection of trustee, individually managed
Donor(s) draw Income/cash flow- during donor’s
lifetime- choices of annuity or unitrust –see later
Legacy to charity upon death (or after
term);Consider: Make-up distribution to children upon
death, i.e., legacy trust/life insurance
Tax benefits –see later
Increase cash flow from unproductive assets
Annuity Trust
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Fixed stream of income
based upon % of initial
funding
Stable, predictable
income
5% minimum payout
Unitrust
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Stream of income based
upon % of FMV revalued
annually
Donor shares in
appreciation—hedge
against inflation
5% minimum payout
Tax Benefits to Donor
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Avoid capital gains tax on sale of highly
appreciated assets
Immediate income tax deduction (preset value
of remainder in trust), subject to 10% test
Removal of Asset from Estate at Death (Estate
Tax Charitable Deduction)
CRT Illustration- 2 Donors
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Donor: age 76; spouse age 72
Amount of Funding - $200,000 in securities,
cost basis = $100,000
Return % for Donor and Spouse – 5%
Annuity Payment to Donors - $10,000 for life
AFR – 4.6% (2/05)
CRT ILLUSTRATION– Tax Benefits
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Charitable Income Tax
Deduction - $94,546 (annuity
trust), $95,168
(unitrust);Savings: $33,250,
based upon 35% federal and
state rate
Avoidance of capital gains tax
of $20,0000 on sale of
securities (based upon 20%
federal and state capital gains
tax)
Estate tax savings-in
surviving spouse’s estate
(assuming a 50% rate):
$100,000
Comparison-Annuity Trust
v. Unitrust
Comparison of
benefits
Unitrust
Annuity
Trust
Contribution:
$200,000
$200,000
Income Rate:
5%
5%
First Year's
Income:
$10,000
$10,000
Future Income:
Variable
$10,000
Charitable
Deduction:
$95,168
$94,546
See Appendix C for
Results of Illustration
from Brentmark Software
CRT Wrap-Up: Benefits Summary
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No Diminution of Income to Donors (possible
increase with unproductive assets)
Income and Estate Tax Deductions
Capital Gains Avoidance
Donor Control
Charitable Gift Annuity-Basics
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Contract between Donor and Charity that
provides a guaranteed lifetime income for
Donor and/or beneficiary. Annuity may be
funded with a gift of cash or securities
See UMMS Foundation Materials
Charitable Gift Annuity- Benefits
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Immediate income tax deduction (look at “AFR” –
choose higher of 3 months)
Capital gains tax savings (if funded by securities,
capital gains must be paid for by donor over life of
annuity, but lower rate than ordinary income)
Lifetime stream of fixed Income for 1 or 2 persons
Rate of return may be higher than most investments
Charitable Gift Annuity- Illustration
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Donor – 75 years old
Donor contributes $30,000 in cash; CD matures
Assume 7.1% Annuity Rate, Donor receives annual
payment of $2,120 before taxes
Donor receives current year income tax deduction of $
12,890.10
See Appendix D for UMMS Foundation Illustration for
Eileen Guttenberg
Basics of Charitable Lead Trusts
(“CLT’s”)
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CLT’s are irrevocable trusts
that provide for and maintain
2 sets of
beneficiaries(essentially a
“Reverse CRT”).
Income Beneficiary – Charity
Remainder Beneficiary–
family
Basic Tax Objective:Designed to
reduce donor’s taxable income and
estate tax by first donating a portion
of trust’s income to charity, and then,
after a specified period of time,
transfer remainder interest to family.
Provides immediate benefit to
charity and larger intergenerational
transfer of wealth to descendants.
CLT’s: Practical Uses and Benefits
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Estate Tax Savings Predominant: for
investors/entrepreneurs who are more concerned
about preserving estate for children than about
increased current income/cash flow
Appreciating Assets: Typically, trust holds appreciating
assets (e.g., real estate) that provides income to
charity and eventually passes to children
Reduction in value of asset’s gift and estate tax value:
value of trust assets subject to gift and estate taxes is
reduced by present value of income stream to charity
Estate Freeze-- value of asset is fixed at time of
transfer to trust
CLT Illustration- Comparison with
No Gift
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Donors plan to otherwise make full use of lifetime gift
tax exemption ($2,000,000 for couple) and annual
exclusion gifts ($22,000 per person)
Proposed use of CLT to expand this gift giving further –
in a leveraged manner
Amount of Funding: $500,000 (appreciated asset
preferable)
Term for Charity: 20 years
Payout for Charity:6% (choice annuity or unitrust)
AFR:4.2%
Growth Rate: 8% (6% income, 2% net appreciation on
total return)
CLT Illustration- Benefits to Charity
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Immediate funding of important projects for 15
years
Payout $30,000 per year. Donor can designate
specific purpose
CLT Illustration- Benefits to Donor
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Discounted Charitable Gift Tax Deduction of $400,000
Deduction is based on(1) Term of Trust, (2)Rate of
Income Payment and (3) Applicable Federal Rate
Principal distributed to family after 20 years with
significant growth-free of tax
No tax on appreciation
Note: Unlike CRT, no capital gains avoidance on sale;
therefore, hold asset for ultimate distribution to children
Bottom Line: Larger gift to charity without depriving
family of inheritance; possibly give more to family than
before (no concern re: wealth replacement vehicle)
See Appendix E for graphic summary
Illustration- Zero-out CLAT
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AFR:
4.2% (use December)
Payout: 7.5%
Funding: $500,000
Term:
20 years
See Appendix F for results
Result: No taxable gift upon transfer since gift tax
value of Hospital’s lead interest = $500,000; gift tax
value of children’s interest is $0.
Best CLT Candidates
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Donor holds asset likely to appreciate over
time
Donor with no cash flow concerns
Donor with estate tax exposure
Low interest rate environment
Private Family Foundations
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Contribute to charitable causes through foundation – immediate
tax deduction (up to 30% of AGI)
Minimize estate tax liability
Avoid capital gains on sale of appreciated publicly-held stock
Continuing employment, involvement and activity for family
members
Identifies and preserves family’s name, charitable intent and goals
Required payout of 5% of assets annually
Tax on net investment income (1%/2%)
Annual filing (990’s)
Self-Dealing Rules
Contrast with Donor Advised Funds