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CHARITABLE GIVING STRATEGIES

CHARITABLE GIVING STRATEGIES. Aryeh Guttenberg, Esquire 410-484-7711 aryeh@guttenberglaw.com. UMMS Foundation February 15, 2005. Charitable Giving- Background, Impetus, Challenges. Personal Story – UMMS/Shaare Zedek Lifetime Giving vs. Testamentary Giving

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CHARITABLE GIVING STRATEGIES

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  1. CHARITABLE GIVING STRATEGIES Aryeh Guttenberg, Esquire 410-484-7711 aryeh@guttenberglaw.com UMMS Foundation February 15, 2005

  2. Charitable Giving- Background, Impetus, Challenges • 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

  3. Estate and Gift Tax Landscape – A Moving Target • 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”

  4. Charitable Gifts-Tax Benefits Retained • Last of the Big Time Tax Savers • Income, Gift and Estate Tax Benefits • Leveraging Gift and Estate Transfers • Income and Estate Tax Deductions/Exclusions

  5. Charitable Giving Strategies/Vehicles • 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

  6. Testamentary Bequests • 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

  7. Retirement Plan Assets (e.g., IRA, 401(k), 403(b)) • 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

  8. Life Insurance- Name Charity as Owner and Beneficiary • Income tax deduction • Remove policy from estate • Used for (not needed) paid-up policies

  9. Gift of Appreciated Property (e.g., Securities) • 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).

  10. Basics of Charitable Remainder Trusts (CRT’s) • 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

  11. CRT Benefits • 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

  12. Fixed stream of income based upon % of initial funding Stable, predictable income 5% minimum payout Stream of income based upon % of FMV revalued annually Donor shares in appreciation—hedge against inflation 5% minimum payout Annuity Trust Unitrust

  13. Tax Benefits to Donor • 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)

  14. CRT Illustration- 2 Donors • 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)

  15. CRT ILLUSTRATION– Tax Benefits • 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 See Appendix C for Results of Illustration from Brentmark Software

  16. CRT Wrap-Up: Benefits Summary • No Diminution of Income to Donors (possible increase with unproductive assets) • Income and Estate Tax Deductions • Capital Gains Avoidance • Donor Control

  17. Charitable Gift Annuity-Basics • 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

  18. Charitable Gift Annuity- Benefits • 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

  19. Charitable Gift Annuity- Illustration • 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

  20. Basics of Charitable Lead Trusts (“CLT’s”) 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 are irrevocable trusts that provide for and maintain 2 sets of beneficiaries(essentially a “Reverse CRT”). • Income Beneficiary – Charity • Remainder Beneficiary– family

  21. CLT’s: Practical Uses and Benefits • 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

  22. CLT Illustration- Comparison with No Gift • 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)

  23. CLT Illustration- Benefits to Charity • Immediate funding of important projects for 15 years • Payout $30,000 per year. Donor can designate specific purpose

  24. CLT Illustration- Benefits to Donor • 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

  25. Illustration- Zero-out CLAT • 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.

  26. Best CLT Candidates • Donor holds asset likely to appreciate over time • Donor with no cash flow concerns • Donor with estate tax exposure • Low interest rate environment

  27. Private Family Foundations • 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

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