Legal and Accounting Presented by John D. Hawkins, JD, CPA

1. Legal and Accounting Presented by John D. Hawkins, JD, CPA

2. Agenda for today • Taxes • Income tax • Estate tax • How property passes at death • Sample language for bequests • Endowments

3. Tax Benefits of Charitable Giving: • Income Tax Deduction • Elimination of capital gains tax • Removal of property from taxable estate

4. Tax legislation • EGTRRA 2001- cut tax rates for both estate and income tax • Changes “sunset” after 10 years • Thus we would return to pre-2001 law on January 1, 2011 • 2010 Tax Relief Act (signed 12/17/10) • Extended the EGTRRA sunset for two years • Now return to pre-2001 law on January 1, 2013 • 2012 is an election year. • Will congress pass tax legislation before the November election? • If congress waits till after November election, how quickly can we know what the law will be on 1/1/13?

5. Federal Income taxes – 2012

6. Federal Income taxes – 2013

7. Oregon Income taxes – 2012

8. Tax savings for gift • Example: $4,000 Gift • If marginal tax rate is 25%, • Then Savings is $1000 • If marginal tax rate is 50% • Then Savings is $2,000

9. Estate and Gift Taxes

10. Oregon Estate Tax

11. How does the estate tax work? • Tax is based on the net value of estate; debts decrease the estate • The taxable estate is everything over which the person had control • Different from the probate estate • Includes life insurance • Includes gifts if they kept a “string” • A few deductions are allowed • Charitable donations • Unlimited Marital deduction • The exemption amount is deducted to determine the taxable estate • Gifts during life will reduce the exemption amount available at death

12. H W C Don’t waste your exemption • The “l Love You” estate plan • Pays no tax until the second death • Husband did not use his exemption amount

13. H W T C Don’t waste your exemption • Using a credit shelter or bypass trust • In 2012 can get $10 million to next generation without federal tax • In 2013 it might be only $2 million to next generation without federal tax

14. Tax to family for inheritance • The estate may have to pay the federal or state estate tax depending on size of estate • Inheritance is not income so no income tax on receipt • Heirs get a “step-up” in basis for assets • Dad bought land for $10,000, worth $100,000 at death • If dad sold day before death, he would have a $90,000 capital gain • Heirs get a new cost basis of value at death and could sell the next day without a capital gain • Income with Respect to a Decedent does not get a step up • IRA and retirement plans • Annuities • Installment sales (land sale contracts)

15. Tax on IRA • Sam has a $10 million estate which includes a $1 million IRA • Give IRA to family • The $1 million asset creates $500,000 estate tax • If family immediately takes cash out of IRA, they would have about $300,000 of income tax • Be aware that that there are income tax deduction for the estate tax paid on IRD assets that help…a little. • Give IRA to charity • The $1 million gift to charity qualifies for estate tax charitable deduction • The charity does not pay income tax on the IRA • What’s missing… • The family can “stretch out” the IRA over their lifetime. The tax free growth can provide a significant tax benefit is the heirs are young.

16. Outright Cash Gift during life • Benefits: • Help Charity – NOW • Simple, easy • Income Tax Deduction • Reduce Your Taxable Estate • Disadvantage-you need cash • Remember a loved one with a memorial gift

17. Property gift • Generally deduct value of property at time of gift • Must file form 8283 if non-cash donations over $500 • Must get appraisal if over $5000 • Special rules for car donations

18. Appreciated Property gift • Generally stock or real estate, but can be jewelry, art or collections • Deduct value of property and avoid capital gains

19. Avoid Capital Gains • Sale of Property: • Property Value $ 300,000 • Cost Basis 100,000 • Capital Gain $200,000 • Tax x 24% • Capital Gains Tax $48,000 • Or…..

20. Gift to Charity • Property Value $300,000 • Capital Gains Tax $0 • Tax Deduction $300,000

21. Bargain sale • Sell to charity for less than what property is worth • For tax treated as part sale and part donation • Example of rental worth $200,000 and cost of $40,000, Sale to charity for $120,000 • Sale of 60% of property, $120,000 minus $24,000 = $96,000 capital gain at 24% is $23,040 tax. • Donation of $80,000 gives tax savings at 34% of $27,200 • Overall tax benefit of $4,160 • Beware of debt on real estate

22. How property passes at death • Bequests by Will or intestacy • Operation of law (joint title) • Beneficiary designation

23. How property passes at death • Individual name – passes under that person’s will or by intestacy through a probate court proceeding • Joint Tenants with rights of survivorship (JTWROS) – will automatically pass to surviving joint tenant outside of the will and without probate • Tenants by Entirety – real estate owned by husband and wife, will automatically pass to surviving spouse outside of the will and without probate • TOD/POD - Transfer on Death (TOD) and Payable on Death (POD) designations are allowed by most banks and brokerage accounts. Recently real property deeds can be TOD. The asset will pass to named person at owner’s death and is not subject to probate • Beneficiary Designation – retirement plan assets and insurance proceeds pass to the person designated, will pass outside of the will and without probate • Living trust – any assets transferred to the trust pass to the persons named in the trust and are not subject to probate

24. Will vs. Living Trust • The concept of the Living Trust is to avoid probate. The person is legally broke and there is nothing to probate • Advantages of Living Trust • Private – no public court documents • Saves probate costs – but have costs to set up trust • Ability to manage assets if disabled • If I have a trust, do I still need a will??? • YES! You need a will • Assets leak out of trust over time • Assets are never titled in name of the trust • A “pour-over will” will catch these asset. Typically the will says anything in my estate is given to my trust. • If I have a trust, do I still need a power of attorney • Yes, the attorney-in-fact can transfer forgotten assets to trust

25. Bequest to Charity: • Named in Will or Living Trust • Named in beneficiary designation • IRA or retirement plan • Life insurance • Annuity • How to modify Will • A codicil is a document that will amend specific sections of a will • Must be signed with same formality as original will

26. Bequest to Charity: • Benefits: • Help charity -- after death • Retain the asset during your lifetime • Removes asset from your Taxable Estate • You can designate how your gift is to be used (i.e. -programs, operations, endowment)

27. Bequest to Charity: • Designate For Specific Purpose or for General Fund: • I give $25,000 to the XYZ Charity in Salem, 123 Main Street, Salem, OR 97301, EIN 93-1234567 to create a perpetual endowment fund. This fund shall be called the Brown Family Endowment Fund for Musical Excellence. The income of this fund shall be used to provide an annual scholarship for one or more disadvantaged youths to assist them in the advancement and pursuit of their musical education. • I give $25,000 to the General Fund of the XYZ Charity, to be used wherever the financial need is greatest.

28. Bequest to Charity: • 1. Designate Percentage of your Estate • I give to the XYZ Charity in Salem, 123 Main Street, Salem, OR 97301, EIN 93-1234567, twenty-five percent (25%) of the residue of my estate. • 2. Designate Dollar Amount • I give $100,000 to the XYZ Charity in Salem, 123 Main Street, Salem, OR 97301, EIN 93-1234567 • 3. Designate a Specific Asset of your Estate • I give to the XYZ Charity in Salem, 123 Main Street, Salem, OR 97301, EIN 93-1234567 my entire interest in the real property located at 111 Liberty Street, Salem, Oregon. The legal description of the property is …

29. Endowments – restricted assets • Unrestricted • Temporary restriction • Restricted to a particular purpose • Restricted for a period of time • Permanent restriction • The principle amount must be invested and never spent • Only the earnings can be spent by the charity • The restriction is imposed by the donor and cannot be modified by charity • Quasi-endowment • A restriction imposed by the board • A board restriction can be modified by a later board

30. Endowments • Uniform Prudent Management of Institutional Funds Act • ORS 128.305 • Gift Instrument includes the organization’s solicitation documents under which the property was granted • The appropriation for expenditure in any year of more than 7% creates a rebuttable resumption of imprudence • Fair market value is average of quarterly account values over last 3 years • Donor can consent to release or modification of restriction • Court can modify restrictions if impractical or wasteful, etc

31. Questions????