CHARITABLE PLANNING FOR UPPER-INCOME DONORS

1. CHARITABLE PLANNING FOR UPPER-INCOME DONORS PRINTING SUGGESTIONS: If you want to print out these slides, may I suggest: #1 – AVOID PRINTING THE DARK BACKGROUND. It makes it hard to read. Suggest using the print command “BLACK and WHITE”; avoid using “color” #2 – PRINT SIX SLIDES PER PAGE. Slides contain a very large font. Six slides per page will conserve paper.

2. CHARITABLE PLANNING FOR UPPER-INCOME DONORS Advancement Network 2014 Annual Conference Cleveland, Ohio -- October 18, 2014 CHRISTOPHER R. HOYT University of Missouri - Kansas City School of Law

3. Tax Planning Challenges * Planning Strategies for the new 3.8% surtax: Net Investment Income * Retirement Assets -- Hot Topics -- Lifetime planning -- Bequests of Retirement Assets -- spouse -- trusts -- charities

4. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% Congratulations! Brilliant tax planning! “Bush tax cuts” remain in full effect for people with adjusted gross income under $200,000 ($250,000 on a joint return)

5. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% 33% rate when taxable income > $186,350 -- single > $226,850 – married filing jointly

6. TAX RATES paid on TAXABLE INCOME ADJUSTED GROSS INCOME (“AGI”) Minus: Greater of -- Standard Deduction ($6,100) or -- Itemized Deductions (Mortgage interest; charitable contributions; state & local taxes) Minus:Personal Exemption & Dependents ($3,900 each) = TAXABLE INCOME

7. WEALTHY PAY SOME TAXES ON “AGI” ADJUSTED GROSS INCOME(“AGI”) Minus: Greater of -- Standard Deduction ($6,100) or -- Itemized Deductions (Mortgage interest; charitable contributions; state & local taxes) Minus:Personal Exemption & Dependents ($3,900 each) = TAXABLE INCOME

8. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% plus health care surtax 3.8% 0.9% 3.8% 36.8% 35.3% 18.8%

9. 0.9% MEDICARE SURTAX:When CompensationExceeds $200,000 ($250,000 married joint return) • Compensation -- wages & self-employment income (Added to 1.45% Medicare/Medicaid tax ) (Employee pays entire 0.9%; no employer match) • Employer must withhold when W-2 Form compensation exceeds $200,000 • Married joint? Together over $250,000? -- Pay on Form 1040 , e.g. if neither spouse has over $200,000 . (e.g., Husband has $100k and Wife has $160k = $260k)

10. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) 3.8% surtax on the lesser of: • Net Investment Income or • MAGI over $200,000 ($250,000 joint) ( $200k/$250k not indexed for inflation ) Trusts and estates pay 3.8% at $12,150 !!

11. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) How many people are affected? 2011 Tax Returns with AGI over $200,000: 3.2% of all returns • 0.7% of single returns • 7.6% of married joint returns 86% of the returns with over $200,000* of AGI were married joint

12. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Strategies for three different taxpayers: #1 - Richest 1% - Income over $400,000 -- Reduce NII (not likely to get AGI <200k) #2 – Taxpayers with AGI near $200k ($250 jt) -- Either reduce NII or reduce AGI #3 - Taxpayers with AGI below $200k ($250 jt) -- Avoid spikes in income that trigger 3.8% tax -- Charitable Remainder Trusts !!

13. CHARITABLE REMAINDER TRUSTS Payment to non-charitable beneficiary (ies) for life *or* for a term of years (maximum 20 years) Remainder interest distributed to charity Exempt from income tax

14. CHARITABLE REMAINDER TRUSTS EXAMPLE Husband & wife age 65 Sell stock or land for $1 million gain Other option: contribute to CRT before sale is finalized; have CRT make the sale

15. CHARITABLE REMAINDER TRUSTS CRT PROVIDES: 1. Charitable income tax deduction 2. Greater cash flow for life 3. Avoid spike in income – 3.8% tax 4. “Wealth replacement” strategy with life insurance.

16. CHARITABLE REMAINDER TRUSTS DONATE STOCK TO C.R.T.; KEEP THE STOCK C.R.T. SELLS STOCK Sales Price $ 1,000,000 $1,000,000 Cost of Stock -0--0- Gain on Sale $ 1,000,000 $1,000,000 Capital Gains Tax (about 25%)250,000None Remaining Proceeds $ 750,000 $1,000,000

17. CHARITABLE REMAINDER TRUSTS DONATE STOCK TO C.R.T.; KEEP THE STOCK C.R.T. SELLS STOCK Remaining Proceeds $ 750,000 $1,000,000 Interest Rate x 5% x 5% Annual Income $ 37,500 $ 50,000══════ ══════ (33% more)

18. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Net Investment Income • Interest & Dividends • Annuities • Rents & Royalties • Profits from LLC / S Corp (if not employed) • Business of trading commodities & fin instruments • Most capital gains

19. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Income Exempt from Surtax: • Trade / Business income from an LLC, partnership, Subchapter S corporation or sole proprietorship, provided the recipient is employed at the business. -- “material participation” test (work 500+ hours during the year?) • Gain from selling property used in trade/ business [rental property gains -> 3.8% tax]

20. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Other Income Exempt from 3.8% Surtax: Income that isn’t interest, rents, gains, etc : • Retirement income – social security, qualified plans: IRAs, 401(k), pensions, etc – (non-qualified annuities are subject to tax) • Wages & self-employment income ( 0.9% tax) • Alimony income • Lottery winnings

21. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% plus health care surtax 3.8% 0.9% 3.8% 36.8% 35.3% 18.8%

22. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% AGI > $250k/$300k33% 34.4% 15% -- 3% phase-out itemized deductions -- Phase-out personal exemptions

23. PHASEOUTSAGI > $250,000 ($300,000 joint returns)[2014: > $254,200 ($305,060 joint returns)] • 3% Phase-out Itemized Deductions -- disguised 1% tax rate hike (3% x 33% rate) • Personal and Dependent Exemptions -- $3,900 apiece for self & each dependent -- lose 2% for every $2,500 income increase -- 100% eliminated AGI > $377k ($427k jnt) (Phase-out $254k-$377k ( $305k-$427k jnt))

24. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $250k/$300k33% 34.4% 15% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% 37.8% 36.3% 19.8% [plus personal exemption phase-out means extra tax until AGI $377,000 ($427,000 jnt)]

25. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% Taxb>$400/$450 39.6% 41.0% 20%

26. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% Taxb>$400/$450 39.6% 41.0% 20% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% With $12,000+ income, 44.4% 42.9% 24.8% Trusts & Estates >> 43.4% 23.8%

27. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Two Ways to reduce the 3.8% surtax : #1 - Reduce AGI to less than $200,000 ($250,000 joint) and/or #2 – Reduce Net Investment Income

28. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Strategies for three different taxpayers: #1 - Richest 1% - Income over $400,000 -- Reduce NII (not likely to get AGI <200k) #2 – Taxpayers with AGI near $200k ($250 jt) -- Either reduce NII or reduce AGI #3 - Taxpayers with AGI below $200k ($250 jt) -- Avoid spikes in income that trigger 3.8% tax

29. Reduce Net Investment Income Two Ways to reduceNet Investment Income: #1 - Convert NII into income that isn’t NII #2 – Shift NII to family and to charity that aren’t subject to tax on their NII

30. Reduce Net Investment Income Convert NII into Income That Isn’t NII Some examples: #1 - Taxable interest to tax-free muni interest #2 – Life insurance #3 – Work 500+ hours at business #4 – Monster-size Roth IRA Conversions

31. Reduce Net Investment Income Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%] Family: Give income-generating investments Charity: #1 – Make gifts of appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts

32. #1 – MAKE GIFTSOF APPRECIATED STOCK DOUBLE-TAX ADVANTAGE • Charitable Income Tax Deduction for the Full Appreciated Value of the Stock • Never Pay Income Tax on the Growth of the Value of the Stock • Loss Property? Sell for tax loss; give cash

33. DOUBLE BENEFIT FROM GIFT OF APPRECIATED L.T.C.G. PROPERTY << AVOID LONG-TERM CAPITAL GAIN TAX << CHARITABLE INCOME TAX DEDUCTION

34. $ BenefitsMax Federal Taxes Saved Person in 2012 50% * 25% RE Dep Recap * 28% Collectibles << 15%* LTCG Tax Rate << 35% Marginal Tax Rate

35. IMPACT OF INDIVIDUAL INCOME TAX RATE CHANGES in 2012 and 2013-14

36. FUTURE INCOME TAX RATES Highest tax rates 20122013-14 Investment income 35% 44.4% Earned income 36.4% 43.0% (wages – 1.45% health) LT Capital Gains15% 24.8%

37. $ BenefitsMax Federal Taxes Saved Person in the Year 2012 50% * 25% RE Dep Recap * 28% Collectibles << 15%* LTCG Tax Rate << 35% Marginal Tax Rate

38. $ BenefitsMax Federal Taxes Saved Person in the Year 2014 65.4% * 29.8% RE Dep Recap * 32.8% Collectibles << 24.8%* LTCG Tax Rate << 39.6*% Marginal Tax Rate (3.8% surtax not avoided by charitable deduction)

39. Reduce Net Investment Income Shift investment income to charity: #1 – Make gifts of appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts

40. DONOR ADVISED FUNDS Administrative Convenience – split large gift to many charities -- anonymous gifts possible with DAFs -- one receipt from DAF/PF instead of many CWAs from many charities

41. ShiftNet Investment Income Client with $400,000+ of income says: • “My $100,000 investment produces $4,000 of taxable income every year” • “I give $4,000 to charity every year” • “I want to make a charitable bequest of $100,000”

42. ShiftNet Investment Income Client with $400,000+ of income says: • “My $100,000 investment produces $4,000 of taxable income every year” • “I give $4,000 to charity every year” SOLUTION: LIFETIME GIFT OF $100,000 TO PF or DAF; Shift income • Lifetime income tax deduction produces refund; better than just estate tax bequest • Investment income of PF/DAF not subject to 3.8% NII surtax • Tip: Make gift to DAF of appreciated stock

43. Reduce Net Investment Income Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%] Family: Give income-generating investments Charity: #1 – Make gifts of appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts

44. ShiftNet Investment Income Client with $400,000+ of income says: • “My $100,000 investment produces $4,000 of taxable income every year” • “I give $3,000 to charity every year” • “I don’t want a charitable bequest of $100k. Want $100k to go to family.”

45. ShiftNet Investment Income Client with $400,000+ of income says: • “My $100,000 investment produces $4,000 of taxable income every year” • “I give away $3,000 to charity every year” • “I want family to get the $100,000 investment” CONCEPT: Put $100,000 into a Charitable Lead Trust for a term of years. Whereas donor is paying 3.8% NIIT on all 4%, the CLT would pay only on undistributed 1%. [ PLUS: CLT discount on wealth transfer ]

46. Reduce Net Investment Income Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%] #1 – Donate appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts COST/BENEFIT – Is administrative cost of PF or CLT worth doing just for 3.8% tax savings? Other benefits are needed. ( Compare: DAF cheap!)

47. Taxpayers with AGI Near $200,000 Two Ways to reduce the 3.8% surtax : #1 - Reduce Net Investment Income (convert NII or shift NII) and/or #2 – Reduce AGI to less than $200,000 ($250,000 joint)

48. Taxpayers with AGI Near $200,000 and with lots of Net Investment Income Reduce AGI to less than $200k ($250 jnt) • Reduce NII (see strategies listed earlier) • Avoid large Roth IRA conversions • Maximize compensation deferral -- 401(k) contributions -- Non-qualified deferred comp (Sec. 409A) • “Charitable IRA Rollover”

49. Taxpayers with AGI Near $200,000 ”Charitable IRA Rollover” - over age 70 ½ • “QCD” – Qualified Charitable Distribution • Have charitable gift made directly from IRA to charity (max: $100,000 /year) • QCD distribution not counted as income (Price? No itemized charitable deduction) • QCD can satisfy annual RMD

50. REQUIRED MINIMUM DISTRIBUTIONS*LIFETIME DISTRIBUTIONS* Age of Account OwnerRequired Payout 70 1/2 3.65% 75 4.37% 80 5.35% 85 6.76% 90 8.75% 95 11.63% 100 15.88%