2011 charitable taxes & trends

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