2011 charitable taxes & trends
DESCRIPTION
A summary presentation to a local AFP chapter on taxes and demographic trends in 2011TRANSCRIPT
Charitable Giving 2011 Tax Tips, Techniques, Trends and Tomorrow
Russell James, J.D., Ph.D., CFP®Associate Professor and Director of Graduate Studies in Charitable Financial Planning
Division of Personal Financial Planning - Texas Tech Universitywww.EncourageGenerosity.com
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2011 special tax opportunities
• IRA qualified charitable distributions (QCDs)
• Roth IRA conversions• Low interest rates
Life stages of a retirement account
Early distribution (before 59 ½)
Regular distribution (59 ½ to 70 ½)
Required minimum distribution (after 70 ½)
Giving after 70 ½
After age 70 ½ participants must take required minimum distributions (account balance / remaining life expectancy) or pay 50% penalty
$10,000
$10,000 incomeIRA
Giving after 70 ½
For 2011, congress extended the Qualified Charitable Distribution (QCD): counts toward required minimum distribution without income or deduction
$10,000
$0 income
IRA$0 deduction
Qualified Charitable Distribution (QCD)
$10,000
$0 income
IRA$0 deduction$100,000
per person maximum
Participant 70 ½ or older
No private foundations, donor
advised funds, charitable trusts, or
charitable gift annuities
IRAs or IRA rollovers only; no
401(k), 403(b), SEP, SIMPLE,
pension or profit sharing plans
$1MM in standard IRA (withdraws
are taxable)
In 2011 no income limits for Roth
conversions
Roth Conversion
$1MM in Roth IRA (withdraws
are tax free)
TaxableTax Free
$1MM in standard IRA (withdraws
are taxable)
Conversion creates $1MM in immediate
taxable income
Roth Conversion
$1MM in Roth IRA (withdraws
are tax free)
TaxableTax Free
Roth conversions and charitable planning can work together to match
Income Deductions
$1MM in standard IRA (withdraws
are taxable)
Conversion creates $1MM in immediate
taxable income
Roth Conversion
$1MM in Roth IRA (withdraws
are tax free)
TaxableTax Free
Where can I find offsetting deductions?
Where can I find offsetting deductions?
• Direct charitable gift• Charitable remainder trust• Charitable lead trust
(grantor)• Charitable gift annuity• Donor advised fund• Private foundationOr give a remainder interest in a residence or farmland to a charity
Charitable deductions may be limited (with five year carryover) to 20%, 30%, or 50% of income depending on gift and recipient
If I have unused deductions, how can I pull future income into current year?
If I have unused deductions, how can I pull future income into current year?
With a Roth conversion
$1MM in standard IRA (withdraws
are taxable)
Conversion creates $1MM in immediate
taxable income
Roth Conversion
$1MM in Roth IRA (withdraws
are tax free)
TaxableTax Free
Roth conversions and charitable planning can work together to match
Income Deductions
Where can I find offsetting deductions?
• Direct charitable gift• Charitable remainder trust• Charitable lead trust
(grantor)• Charitable gift annuity• Donor advised fund• Private foundationOr give a remainder interest in a residence or farmland to a charity
Charitable gift of remainder interests in homes
and farms
A remainder interest gives the right to own the property after a set time or after the death of a person
OK, you can have my
stuff now.
Charles A. Donor
Charitable Deduction
Interest Rates
Deduction for remainder interest in $100,000 of farm land by age 59 donor
1.8% (Dec 10)
$68,23311.6% (May 89)
$15,684
Unlike a will, a remainder interest is not revocable, and can even be sold
Remainder Interest
A deductible remainder interest in farmland or a home must be transferred by deed, not by trust or contract
A farm is any land and improvements used (even by a tenant)
to raise crops or livestock
A remainder interest in any part of a farm may be gifted
(Rev. Rul. 78-303)
Can I give a remainder interest of an undivided share in
farmland?
12.5%
25%
Yes, donor may deduct a remainder interest shared by
charity and others as tenants in common (Rev. Rule 87-37)
12.5%
25%
However, IRS may deduct cost of partitioning (of forcing a sale
or division)
12.5%
25%
• No deduction for remainder just in mineral rights because it is not a “farm” Reg. 1.170A-7(b)(4)
• Can gift remainder in entire “fee simple” farm (even if land and mineral rights go to separate charities) PLR 8316037
• Can gift remainder in farm without mineral rights if you don’t owned them
mineral rights
How do you calculate the deduction for a remainder interest in farmland?
1. Find the §7520 interest rate (http://www.irs.gov/businesses/small/article/0,,id=112482,00.html)
2. Multiply value of land by remainder percentage in IRS Pub. 1457 (one or two lives or specific term) (http://www.irs.gov/retirement/article/0,,id=206601,00.html)
1. Find the §7520 interest rate (http://www.irs.gov/businesses/small/article/0,,id=112482,00.html)
Ex: A remainder interest in $100,000 of farmland given by a 59 year old donor 12/10
1.8%
Table S - Based on Life Table 2000CM Section 1Interest at 1.8 Percent
Life Life Age Annuity Estate Remainder Age Annuity Estate Remainder
2 40.4696 0.72845 0.27155 57 18.6758 0.33616 0.663843 40.2116 0.72381 0.27619 58 18.1618 0.32691 0.673094 39.9456 0.71902 0.28098 59 17.6482 0.31767 0.68233
1. Find the §7520 interest rate (http://www.irs.gov/businesses/small/article/0,,id=112482,00.html)
2. Multiply value of land by remainder percentage in IRS Pub. 1457 (one or two lives or specific term) (http://www.irs.gov/retirement/article/0,,id=206601,00.html)
1.8%
Ex: A remainder interest in $100,000 of farmland given by a 59 year old donor 12/10
X 0.68233 $100,000
= $68,233
Leaving land to charityby will
• Revocable• $0 income tax deduction
• Impacts charity after death
Leaving land to charityby remainder interest
• Irrevocable• $68,233 immediate income
tax deduction• Impacts charity after death
or immediately if charity sells remainder interest
Because farmland can be gifted in parts, a donor could annually give remainder interests up to income limits or desired marginal tax rate
• Allows for increasing valuation each year
• Avoids risk of losing carryover deduction at death
• Could use value of annual deductions to pay for ILIT life insurance passing tax free to heirs
Donor can use money from remainder tax deduction to buy tax free life insurance (ILIT) for children’s inheritance
Tax
Free
From
ILIT
IRS Cash Back
remainder interest in farmland given to charity
$68,233 tax deduction x 35% combined tax rate = $23,881
$23,881 buys est. $70,000 paid up ILIT life insurance
children receive
$70,000 (tax free from ILIT)
will divides farmland 10% to charity 90% to children
charity receives $12,500
(10% x $125,000)
children receive
$50,625 (90% x 125,000 =
112,500, less 55% for post ‘12 estate taxes)
charity receives
$125,000 farmland
farmland worth $125,000 at death
Age 59 wealthy donor with $100,000 farmland on 12/10
Gifts of remainder interests in personal residences can also be deducted
Remainder Interest
Includes second homes, vacation homes, even a boat with bathroom, cooking, and
sleeping facilities, if used by the donor as a residence
Deduction for a house is reduced because, unlike land, it is depreciable (it wears out)
Rules in IRS Pub. 1459 http://www.irs.gov/pub/irs-pdf/p1459.pdf
59 year old donor giving on 9/6/10
Remainder interest in $100,000 farm
.68233 x $100,000
$68,233 Deduction
*.68233 less .26821 depreciation reductioncalculatedon nextslide
Remainder interest in $100,000 home
.68233 x $20,000 (land)
.68233 x $10,000 (salvage)
.41412* x $70,000
$49,458 Deduction
Table C(2.4)Factors for Reducing Assurances - Based on Table 2000CM
Interest at 2.4 Percent Age
Remainder R-Factors D-Factors
Age Remainder R-Factors D-Factors
x
Factors Rx-0.5Mx
Dx x
Factors Rx-0.5Mx Dx
0 .17830 1202916 100000.0 55 .56322 317860.0 24748.541 .17677 1185429 96977.54 56 .57383 304002.2 24008.452 .18060 1168311 94656.94 57 .58449 290311.8 23274.973 .18466 1151231 92407.69 58 .59517 276800.1 22547.024 .18888 1134179 90219.15 59 .60589 263478.6 21825.10… … …… … … … … … … …… … … …48 .49158 418809.2 30218.64 103 .95802 60.91156 35.6359549 .50143 404011.4 29397.77 104 .96077 33.72948 21.05020
Depreciation reduction factor
R factor age now – R factor age after useful life of house
D factor age now X Useful life of houseAppraiser can estimate. IRS examples use 45 years.
Table C at http://www.irs.gov/retirement/article/0,,id=206601,00.html263478.6-60.91156
21825.1-45 =.26821
What if the donor leaves?
What if the donor leaves?
Agree with the charity to
a joint sale and divide proceeds
Give life estate to charity in
exchange for a gift annuity
Give life estate to charity
Rent property
Sell life estate
What if I make improvements to the property after giving a remainder interest?
You can deduct the remainder value of major
improvements as additional gifts
PLR 9329017; PLR 8529014
$8,000 for
new HVAC
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts
Dr. Russell JamesTexas Tech University
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
The donor sets aside money from which he takes payments, with any remaining amount going to charity
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
Payments can go to the donor, other people, or other people and charity
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments during life
or lives
Payments can be for donor’s life or for as many lives as desired or for 20
years or less
Donor CRT Charity
Initial Transfer
Anything Left at Death
$1,000 Per Year for Life
Payments can be a fixed dollar amount: Charitable Remainder
Annuity Trust (CRAT)
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
Payments can be a fixed percentage (5%-50%) of all trust assets: Charitable
Remainder UniTrust (CRUT)
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
The donor can give cash or property (usually appreciated securities)
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
The rules of a Charitable Remainder Trust cannot be changed
The donor may act as CRT trustee and manage the assets
The donor may keep the right to change which charity receives money
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
The donor receives an immediate tax deduction for the present value of the
amount that may go to charity
With a charitable gift in a will, there is no income tax deduction
There are no capital gains taxes when the donor makes a transfer to the CRT.
A CRT is itself a nonprofit entity and pays no capital gains tax when it sells
appreciated property
A client holds a large, highly appreciated asset that generates little income (like developable land or non-dividend paying stock). How can she convert it to income generating property?
Option 1: Sell it. Pay the capital gains tax. Invest the remaining amount.
$1,000,000 stock $900,000 gain (if $100,000 cost)
$135,000 tax (15% fed)
$865,000 left to invest
Option 2: Transfer to a CRT
$1,000,000 stock $900,000 gain (if $100,000 cost)
_____$0 tax (CRT pays no tax)
$1,000,000 left to invest
Donor CLT
Charity
Initial Transfer
Anything Left Over
Payments for
Life/Years
Charitable Lead Trusts
Donor’s heirs
Dr. Russell JamesTexas Tech University
Like a CRT where charitable and non-charitable beneficiaries switch places
Charitable Lead Trust
Charitable Remainder
Trust
Donor
Charity
Initial Transfer Anything
Left Over
Payments for Life/Years
Donor or heirs
DonorCharity
Initial Transfer Anything
Left Over
Payments for Life/YearsDonor or
heirs
A CLT locks in a stream of charitable gifting without requiring continuing requests
Donor
Charity
Initial Transfer
Anything Left Over
Payments for Years
Non-Grantor CLT: donor gives money from which charity receives payments,
remaining amount returns to donor
CLT (Grantor)
Donor
Charity
Initial Transfer Anything
Left Over
Payments for Life or Years
Projected Value of Future
Charitable Gifts
The donor can immediately deduct the present value of all future projected payments to charity in a grantor CLT
Donor
Charity
Initial Transfer Anything
Left Over
$10,000 Payments for 20 years
I give property to fund $10,000/year gifts for 20 years through a 20-year grantor CLAT that returns remainder to me. I deduct present value of $10,000/year for 20 years based on §7520 rate.
At 2%, deduction is $163,515
At 8%, deduction is $98,181
Future demographic trends in estate giving
The Fall and Rise in Live Births - US
1909 (Age
100)
1911 (Age
98)
1913 (Age
96)
1915 (Age
94)
1917 (Age
92)
1919 (Age
90)
1921 (Age
88)
1923 (Age
86)
1925 (Age
84)
1927 (Age
82)
1929 (Age
80)
1931 (Age
78)
1933 (Age
76)
1935 (Age
74)
1937 (Age
72)
1939 (Age
70)
1941 (Age
68)
1943 (Age
66)
1945 (Age
64)
1947 (Age
62)
1949 (Age
60)
1951 (Age
58)
1953 (Age
56)
1955 (Age
54)
1957 (Age
52)
1959 (Age
50)
1961 (Age
48)
1963 (Age
46)
1965 (Age
44)
1967 (Age
42)
1969 (Age
40)2,000
2,500
3,000
3,500
4,000
4,500
Live
Bir
ths
Age 50 to
54
Age 55 to
59
Age 60 to
64
Age 65 to
69
Age 70 to
74
Age 75 to
79
Age 80 to
84
Age 85 to
89
Age 90 to 94
Age 95 to
99
Age 100+
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
Y2000Y2001Y2002Y2003Y2004Y2005Y2006Y2007
Pers
ons
Aliv
e in
Am
eric
a
Dramatic increases on the horizon
Temporary drop in key demographic population
Charitable Estate Planning among US Adults Aged 55-65
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
1996 1998 2000 2002 2004 2006
Increases in charitable planning are driven by increases in childlessness and education
VariableEstimate
(s.e.) p-valueEstimate
(s.e.) p-valueEstimate
(s.e.) p-valueYear 0.0138
(0.0032)<.0001 0.0033
(0.0034)0.3298 0.0015
(0.0036)0.664
Any children -0.6251 (0.0345)
<.0001 -0.6224 (0.0479)
<.0001
Years of Education
0.1412 (0.0048)
<.0001 ….full set of
….
control variables
Probit analysis of all respondents age 55-65 in 1996-2006 HRS. Outcome variable is the presence of charitable estate planning.
Time trend exists
Time trend disappears
when including childlessness
and education
Among Donors ($500+) with an Estate Plan
Family Status
% indicating a charitable estate
planNo Offspring 50.0%Children Only 17.1%Grandchildren 9.8%
Regression: Compare only otherwise identical people
Example: The effect of differences in education among those making the same income, with the same wealth, same family structure, etc.
Likelihood of having a charitable plan(comparing otherwise identical individuals)
•Graduate degree (v. high school) +4.2 % points•Gives $500+ per year to charity +3.1 % points•Volunteers regularly +2.0 % points•College degree (v. high school) +1.7 % points•Has been diagnosed with a stroke +1.7 % points•Is ten years older +1.2 % points•Has been diagnosed with cancer +0.8 % points•Is married (v. unmarried) +0.7 % points•Diagnosed with a heart condition +0.4 % points•Attends church 1+ times per month +0.2 % points•Has $1,000,000 more in assets +0.1 % points•Has $100,000 per year more income not significant•Is male (v. female) not significant•Has only children (v. no offspring) -2.8 % points•Has grandchildren (v. no offspring) -10.5 % points
Find your estate donor…
Amakes substantial
charitable gifts, volunteers regularly,
and has grandchildren
Bdoesn’t give to charity,
doesn’t volunteer, and has no children
An Australian study by Christopher Baker including 1729 wills:
“Australian will-makers without surviving children are ten times more likely to make a charitable gift from their estate”
Both childlessness and college
education among women
entering the 55-65 age group
over the next decade will be
substantially higher
After making their plan, charitable estate donors grew their estates 50%-100% faster than did others with
same initial wealth
Big trend “take-aways”• Don’t recruit estate givers
just by giving level, also know your childless donors
• After making their intention, charitable estate donors grew their estates 50%-100% faster than did others
• Future demographics are positive based on population, childlessness, and education
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Russell James, J.D., Ph.D., CFP®, Associate Professor, Texas Tech University