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FAMILY & CHARITABLE ESTATE PLANNING

FAMILY & CHARITABLE ESTATE PLANNING. CHRISTOPHER R. HOYT University of Missouri - Kansas City School of Law. WEALTH WILL GO EITHER -- TO FAMILY/FRIENDS OR TO SOCIETY--.

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FAMILY & CHARITABLE ESTATE PLANNING

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  1. FAMILY & CHARITABLE ESTATE PLANNING CHRISTOPHER R. HOYT University of Missouri - Kansas City School of Law

  2. WEALTH WILL GO EITHER -- TO FAMILY/FRIENDS OR TO SOCIETY-- PLANNED GIVING – INCREASE THE SHARE THAT GOES TO FAMILY & CHARITY BY REDUCING AS MUCH AS POSSIBLE THE SHARE THAT GOES TO TAXES

  3. TRANSFER OF WEALTH Family Gift Charity Gift Income Tax No Deduction Deduct ! Estate Tax Pay Tax Deduct! Gift Tax Pay Tax, Deduct! (if over $14,000/year/person)

  4. PLANNED GIFTS LIFETIME -- Outright -- Deferred – CRT, CGA, CLT AT DEATH -- Outright -- Deferred – CRT, CGA, CLT

  5. IMPACT OF NEW TAX RATES ON CHARITABLE GIVING

  6. 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)

  7. 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 > $183,250 -- single > $223,050 – married filing jointly

  8. 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

  9. 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

  10. 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%

  11. HEALTH CARE SURTAXMAGI > $200,000 ($250,000 joint returns) • Different rates for investment and labor -- 3.8% on interest, dividends, annuities, royalties, rents, profits from LLC/S Corp (if not employed) and most capital gains -- 0.9% earned income (wages, etc.) • $200k/$250k not indexed for inflation • Trusts and estates pay 3.8% at $11,950

  12. HEALTH CARE SURTAXMAGI > $200,000 ($250,000 joint returns) Income Exempt from Surtax: • Retirement: IRA distributions, etc. • Trade / Business income from a Subchapter S corporation or partnership, provided the recipient is employed at the business. -- “material participation” test (work 500+ hours during the year?)

  13. 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

  14. PHASEOUTSAGI > $250,000 ($300,000 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 > $372k ($422k jnt)

  15. 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 $372,000 ($422,000 jnt)]

  16. 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%

  17. 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% 44.4% 42.9% 24.8%

  18. 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%

  19. FUTURE INCOME TAX RATES STRATEGIES FOR HIGH-INCOMES * Reduce AGI !! “Charitable IRA Rollover” * Municipal bonds * Avoid spikes in income from major gains on property sales -- tax-exempt CRTs & installment sales

  20. PLANNING FOR CHARITABLE GIFTS OF APPRECIATED STOCK IN LIGHT OF FUTURE TAX RATE CHANGES

  21. DONORS LIKE TO CONTRIBUTE 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

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

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

  24. IMPACT OF INDIVIDUAL INCOME TAX RATE CHANGES in 2012 and 2013

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

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

  27. $ BenefitsMax Federal Taxes Saved Person in the Year 2013 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)

  28. PROPOSALS TO CHANGE THE INCOME TAX DEDUCTION FOR CHARITABLE GIFTS

  29. Obama Budget Proposal: TAX BENEFIT FROM CHARITABLE GIFTS & MORTAGE INTEREST LIMITED TO 28% Example: Rich person has $100 income $ 44 <<-- Pay tax at 44% [39.6%+surtax] -28 <<-- Tax savings from $100 gift $ 16 <<-- Cost of making $100 gift

  30. 2012 Presidential Candidate Mitt Romney Proposal: ITEMIZED DEDUCTIONS LIMITED TO A MAXIMUM OF $17,000 (or $25,000 or $50,000 or …) BOTTOM LINE: When there is serious tax reform, itemized deductions are the first target.

  31. HOUSE WAYS & MEANS CMTEE: PROPOSALS TO CHANGE CHARITABLE DEDUCTION February, 2013 “Options for Changing the Tax Treatment of Charitable Giving” Eleven proposals – examine impact on : -- charitable giving and -- tax collections

  32. 2013 WAYS & MEANS CMTEE: PROPOSALS TO CHANGE CHARITABLE DEDUCTION “FLOOR” PROPOSAL – can only deduct when gifts exceed dollar amount [$500/$1,000 joint] or percent of income [2% of income] “would reduce gifts, but add incentive for increased charitable giving”

  33. THE FEDERAL ESTATE TAX

  34. FUTURE OF ESTATE TAX ? Year Threshold 2001 $ 675,000 2002-2003 $ 1,000,000 2004-2005 $ 1,500,000 2006-2008 $ 2,000,000 2009 $ 3,500,000 2010 REPEALED ! [* carryover basis] 2011-2012 $ 5,000,000 inflation indexed 2013 $ 5,250,000 inflation indexed

  35. Federal Estate Tax Returns Filed 2012 [excludportab] 8,300(estim) 26% charit 2007 38,000 20% 2004 62,700 18% 2001 108,000 17% 1998 97,900 17% 1995 69,780 19% 1992 59,200 19%

  36. OTHER TRANSFER TAX RULES • Gift Tax -$5+million inflation indexed • GST - $5+ million inflation indexed • 40% estate & gift tax rate • Portability for married couples permanent

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