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PLANNED GIVINGCherokee Arts Center

William Clay Tucker, CAP, CRPS, CMFCChartered Advisor in PhilanthropyWoodville Advisory Svcs., LLC770-778-5242; [email protected]

Planned Giving Programs

• Basics of Planned Giving Strategies

• The various Planned Giving tools, techniques and the basics of how they work

• An overview of the tax implications to the donor for the gifting options

• Who is on GRN “Team”

What is Charitable Gift Planning?

Charitable Gift Planning is the process of cultivating, designing, facilitating, and stewarding gifts to charitable organizations.

Charitable Gift Planning:

• Uses a variety of financial tools and techniques for giving• Requires the assistance of one or more qualified specialists• Utilizes tax incentives that encourage charitable giving, when appropriate• Covers the full spectrum of generosity by individuals and institutions, and is based on powerful traditions of giving in the United States

What are Planned Gifts?

Planned Gifts are a variety of charitable giving methods that allow you to express your personal values by integrating your charitable, family, and financial goals.Making a planned charitable gift usually requires the assistance of the charity’s development professional and/or a knowledgeable advisor(s) such as an attorney, financial planner, or CPA to help structure the gift.

Planned Gifts can be made with cash, but many are made by donating assets.Such as securities, real estate, art, or business interests – the possibilities are endless. Planned Gifts can provide valuable tax benefits and /or lifetime income for the donor, donor and spouse, or other family members. The most frequently-made planned gifts are bequests to charities, made via wills or trusts.

Why Make a Planned Gift?

Many people want to make charitable gifts but need to do so in a way that helps meettheir other personal, family, or financial needs. Planned Gifts give donors the option formaking charitable gifts in a ways that may allow one to:

• Make a larger gift than thought possible• Increase current income• Plan for the future needs of a spouse or loved one• Provide inheritances for heirs at a reduced tax cost• Reduce income tax and/or avoid capital gains tax• Diversify investment portfolio• Receive income from personal residence or farm• Plan for the transfer of a business• Leave a charitable legacy for future generations

Types of Planned Gifts

• Bequests – make up over 80% of all Planned Gifts

• Life Insurance

• Retirement Accounts (IRA, 401k, 403b, etc.)

• Life Estate

• Charitable Remainder Trust (CRT)

• Charitable Lead Trust (CLT)

• Charitable Gift Annuity (CGA)

• Immediate Legacy

• Donor Advised Fund (DAF)

Bequests and Estate Tax

• Deductible for estate tax if – Made to eligible charity– The amount can be ascertained with reasonable

certainty– Passes in appropriate legal form rather than

executor’s discretion– Cannot be defeated by a contingency, event, or

person

Now/Later?

• Give now or at death?• Income tax deduction is available for life time

gifts – that is one advantage• Charities prefer “now” money• Donor may enjoy giving while alive• Advisor(s) can compute whether a major life

time gift is possible

Gifts of Real Estate• Real estate is 50% of individual wealth, but only 2% of gifts• A largely untapped market for planned gifts

To Prepare to Accept Real Estate• Include in Gift Acceptance Policies• Have a Gift Acceptance Committee• Establish if property is usable for CAC purposes• Consider transaction costs & carrying costs• Consider need for appraisal• Consider EPA inspection• Consider need for a real estate attorney to review title• Consider holding period – when will it sell?• Who will pay any debt associated with property?

Retirement Accounts• Gain inside an IRA, 401(k), or deferred annuity is taxable at

death as “income with respect to a decedent.” • IRD is taxed first under the estate tax rules. Then it is taxed

again under the income tax rules. The income taxable amount is reduced by the estate tax attributable to the IRD.

Practical Points• Clients generally have a variety of assets.• Capital gain assets (in years other than 2010), get a stepped

up basis at death.• IRD(Income in Respect of Decedent) assets can be subjected

to double tax: estate tax and income tax.• It just makes good sense to send the IRD assets to charity, for

those making gifts, and the capital gain assets to heirs.

Uses of Life Insurance

• Gift of existing policy: Make CAC beneficiary or gift unneeded policy to GRN:

• Income tax deduction for fair market value or basis, if less. • Deduct premiums up to 50% of AGI if check is made out to

charity which then pays premium• Deduct up to 30% of AGI if charity owned policy premium is

paid by donor direct to insurance company • Policies with FMV in excess of $5,000 require qualified

appraisal

• Encumbered Life Insurance – if policy has an outstanding loan – Red Flag/Avoid

Insurance and IRA• Make charity the beneficiary of the IRA• Meanwhile, use income from the IRA to fund life insurance

payable to heirs• Result can be better than having the IRA go to heirs, while

some other asset goes to charity

Zero Estate Tax Planning• Wealthy clients will most always say that they have a good

estate plan. When asked if they will still be paying some level of estate taxes, many will say they are

• To get to Zero Tax, charitable tools may be needed• As part of such a plan, life insurance often finds a natural role

CRTs, CGAs, and CLTs• Each requires donor to make an irrevocable transfer

to a charitable entity• Each generates an income stream to the donor or an

individual or individuals named by the donor.• Each is part charitable and part non-charitable• Each generates an income tax charitable deduction

for the charitable portion of the gift• We will consider each tool in turn

Charitable Remainder Trust• An irrevocable arrangement in which a donor transfers assets in

trust in exchange for an income interest. Parties to a CRT

• Donor(s)

• Trustee– Administration– Investment management– Tax reporting

• Income Beneficiary (donor or other)• Remainder Beneficiary (charity)• Heirs

Charitable Remainder Trusts

Donor CRT

• Donor gifts cash or assets• Deduction is for remainder interest• Income back to donor• Remainder to charity at end of the trust term

Charity

Types of CRT

• Charitable Remainder Annuity Trust (CRAT)• Charitable Remainder Unitrust (CRUT)• Net Income Charitable Remainder Unitrust

(NICRUT)• Net Income With Makeup Charitable Remainder

Unitrust (NIMCRUT)• Flip Unitrust

CRAT

• Pays fixed income to income beneficiaries• Fixed % of initial contribution• No adjustments to payout based on trust balance• No additional contributions to the trust

CRAT

•Must pass 5% probability test (a less than 5% chance that the trust will exhaust before the end of its term, based on factors in place when trust is established)

•Must pass 10% remainder test (must show at least a 10% remainder based on current assumptions when trust is established)

•CRAT may in reality exhaust itself, terminating income payout and leaving nothing for charity

CRUT

• Pays a fixed percentage of whatever the trust has grown to or shrunk to

• Income to donor varies• Additional contributions are allowed• Must pass 10% remainder test• 5% test always met – the trust pays a percentage of the remaining

balance, and so the trust may dwindle but not exhaust.

Permissible Trust Terms

• Life, or lives• Term of years not to exceed 20• Combination of the above

Among Assets to Avoid• Partnership interests– Income passes through to trust creating unrelated

business taxable income which is taxed at 100%

• Personal residence– Cannot live in residence without committing self dealing

Excellent Assets• Appreciated publicly traded securities• Unencumbered real estate

Estate Tax Issues

•Assets in CRT are includible in the donor’s estate•Charitable deduction generally will remove CRT assets from the taxable estate• Income to spouse may be excluded from decedent donor’s estate• Income to anyone other than spouse causes inclusion of all CRT income in the decedent donor’s estate

Gift Annuity

Donor Gift Annuity

• Donor gifts cash or assets• Often used for gifts of $50,000 or even less• The charity itself is the payer; no trust involved• Deduction is for remainder interest• Income back to donor is taxed with basis, capital gain, and income pro rata

Charity

Benefits of Gift Annuity• Income for life• Partial income tax deduction• Can defer capital gain• No legal work required• Can be done for small amounts

Essential Elements• One or two lives• Not a term of years• The annuity payments are fixed and are not based on the

charity’s own return• Gift portion must represent at least 10% of the gift’s value on

date of contribution

Payout

•Based on income beneficiary’s age at time of gift•Charity is free to set its own rates•Uniform (suggested) rates set by American Council on Gift Annuities (since 1927)•ACGA rates designed to retain half of gift for charity at life expectancy•Rather than GRN managing funds and distribution, can use outside providers.

Prospects•Typical gift annuity donor is single, age 77•Median CGA is $57,000• Competes with a CD for those with charitable intent

Advantages to Donor•Easy to understand• Provides donor with guaranteed income stream•Transaction is part gift• Income tax charitable deduction in year of gift•Beneficial capital gains treatment for donor• Simple documents, little or no legal expense

Charitable Lead Trusts

Donors CLT Remainder

Charities

Asset

Income

Asset

For non-grantor, CLT remainder goes to heirs; withgrantor trust maygo back to donor

Charitable Lead Trusts• “Split-interest” gift with a “lead (income)

interest” and a remainder interest• “Lead interest” goes to one or more

qualified charitable organization(s)• Remainder interest goes to non-charitable

entity• Income not tax exempt

Simple Points to Remember

• 90+% of CLTs are for estate tax reduction, not income tax reduction.

• Used by very wealthy families to reduce or zero out an estate for transfer tax purposes.

• Can be set up during life or at death• Compete with Foundations in some respects

as grant-making entities.

CLT Formats and Terminology

• CLUT– Income to charity varies

• CLAT– Income to charity fixed

• Testamentary– Set up to start at death

• Inter Vivos– Set up during lifetime

• Non-Grantor– Estate tax tool

• Grantor– Income tax tool

Benefits of Non-grantor CLT

• Zero out an asset• Or greatly reduce its

value for transfer tax• Can zero out an entire

estate

• Help charity with stream of income during trust term

Permissible Payout Term

• For either a fixed term or “lives in being”– limited to one or more of the donor, the donor’s spouse,

or a lineal ancestor or spouse of a lineal ancestor of all of the remainder beneficiaries

• Remainder to any non-charitable entity– may include Donor or Donor’s “heirs”

Charitable Lead Annuity Trust• Irrevocable gift to Trust, paying a fixed amount to Charity annually

– may be stated as a fixed dollar amount or– may be stated as percentage of initial value– payout does not change as assets in trust go up and down– no upper or lower limit on percentage/annuity amount

Charitable Lead Unitrust• Irrevocable gift to Trust, paying a fixed percentage of assets to charity

based on the value of those assets, as revalued annually – no upper or lower limit on percentage/annuity amount

CLT Donor Profile• A client who wants to benefit charity• Client whose non-charitable remainder beneficiaries can

afford to wait for property (BUT, think Irrevocable Life Insurance Trust as a temporary solution)

• Client who can forego income from CLT assets for term of trust

• Client is making gifts to charity• Use CLT to make current gifts • Move assets dedicated to supporting current gifts from

taxable estate and begin moving principal (and any net growth) to heirs today

Non-Grantor CLT Prospect

• Donor is hitting the AGI limits for annual gifts• Consider gifting to CLT an income producing asset. • Income from asset is 100% deductible to trust, but

limited to a fraction of AGI in donor’s hands.• Net result: Donor need no longer realize income from

the asset that donor cannot deduct as a gift.

CLT versus Foundation• Client considering a foundation?• Maybe a CLT would do the same job better.• A CLT is donor-created grant-making entity, but one that will

eventually pour over to the heirs.• Whereas, a foundation never reverts to the family.

CLT from Charity’s Perspective• A living lead trust can pump significant dollars to a charity for

current programs. • Life insurance can replace the stream of payments when the

trust term ends.

Questions for Prospects• You have an excellent estate plan, I am sure. Are you still paying any estate

tax?• You are considering a Foundation? Would you be interested in an

alternative in which your heirs can actually get the assets back, possibly free of estate tax?

• I am sure you have an excellent estate plan. Are your advisors aware how idealistic and committed you are to giving? Would it be helpful if I were to meet with them to discuss options that can help you personally, help your heirs, reduce estate tax, and make a big difference for the causes you care about?

Impact:• A CLT is a powerful tool for achieving a positive impact for heirs and for

charity. • What’s in it for the donor is knowing that his or her goals are

accomplished with great tax efficiency. • Sell impact and the rest falls into place.

Donor Advised Funds• Hugely popular• Can be considered like family foundation for those of more modest

means• Some of the largest donor advised fund complexes are offered by the

nonprofit arm of such financial firms as Fidelity, Schwab, and Vanguard (and many others)

• Have traditionally been offered by Community Foundations, Jewish Federation, and other nonprofits

• Donor makes irrevocable contribution to a non-profit organization that administers the fund (Mutual Fund Cos. manage these also)

• Receive immediate income tax deduction– Qualify for public charity deductions

• Donor recommends charitable grants based on his/her preferences• Some charities will allow named beneficiaries to assume advisory role

after death, if the charity allows this.

Which Tool is Right?

• What assets are being used?• How much will go into the tool? • How much control is enough?• How important is privacy?• How important is perpetuity?

Requirements for Income Tax Deduction1. Must be voluntary2. Made to an eligible charity3. Without consideration or benefit to donorNote: Above is the general rule. The majority of planned gifts are

exceptions to #3. Completed Gift• To be deducted a gift must be “complete”

– No strings attached– No ability to revoke– Nothing of value coming back to the donor (“quid pro quo”)– No deduction for gift of a partial interest.

• These are the general rules. For quid pro quo gifts and gifts of a partial interest certain special rules and exceptions apply.

Factors in Computing Deduction

• The type of property donated• The type of charity receiving the gift• The fair market value of the gifted property• The value of any goods or services received in

return for the gift

Small Organizations

• You can’t do “planned giving” as the big organizations do, but you can do bequests, CGA’s, CLT’s, IRA and insurance beneficiary designations

• CLT’s are good, as the income stream is transferrable to another charity should donor’s targeted charity terminate operations.

• CGAs, can provide “cash now”• And you can work with advisors to free up large blocks of

cash now, later, and at client’s death.• CAC does not bear any costs or liability in accepting

Planned Gifts

Team • Development Officer• Philanthropic Advisor• Estate planner• Financial planner• CPA• JD / Attorney• Insurance professional• Investment professional

Work with others

Or they will work against you

The bigger the case, the more team-intensive