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Bolton Global Capital

Basic Estate Planning

June 12, 2014 of 7, see disclaimer on final page

Estate Planning--An IntroductionBy definition, estate planning is a processdesigned to help you manage and preserveyour assets while you are alive, and toconserve and control their distribution afteryour death according to your goals andobjectives. But what estate planning means toyou specifically depends on who you are. Yourage, health, wealth, lifestyle, life stage, goals,and many other factors determine yourparticular estate planning needs. For example,you may have a small estate and may beconcerned only that certain people receiveparticular things. A simple will is probably allyou'll need. Or, you may have a large estate,and minimizing any potential estate tax impactis your foremost goal. Here, you'll need to usemore sophisticated techniques in your estateplan, such as a trust.

To help you understand what estate planningmeans to you, the following sections addresssome estate planning needs that are commonamong some very broad groups of individuals.Think of these suggestions as simply a pointin the right direction, and then seekprofessional advice to implement the right planfor you.

Over 18

Since incapacity can strike anyone at anytime,all adults over 18 should consider having:

• A durable power of attorney: Thisdocument lets you name someone tomanage your property for you in case youbecome incapacitated and cannot do so.

• An advanced medical directive: The threemain types of advanced medical directivesare (1) a living will, (2) a durable power ofattorney for health care (also known as ahealth-care proxy), and (3) a Do NotResuscitate order. Be aware that not allstates allow each kind of medical directive,so make sure you execute one that will beeffective for you.

Young and single

If you're young and single, you may not needmuch estate planning. But if you have somematerial possessions, you should at least writea will. If you don't, the wealth you leave behindif you die will likely go to your parents, andthat might not be what you would want. A willlets you leave your possessions to anyoneyou choose (e.g., your significant other,siblings, other relatives, or favorite charity).

Unmarried couples

You've committed to a life partner but aren'tlegally married. For you, a will is essential ifyou want your property to pass to your partnerat your death. Without a will, state law directsthat only your closest relatives will inherit yourproperty, and your partner may get nothing. Ifyou share certain property, such as a house orcar, you might consider owning the propertyas joint tenants with rights of survivorship.That way, when one of you dies, the jointlyheld property will pass to the surviving partnerautomatically.

Married couples

For many years, married couples had to docareful estate planning, such as the creationof a credit shelter trust, in order to takeadvantage of their combined federal estate taxexclusions. A new law passed in 2010 allowsthe executor of a deceased spouse's estate totransfer any unused estate tax exclusionamount to the surviving spouse without suchplanning. This provision is effective for estatesof decedents dying in 2011 and later years.

You may be inclined to rely on theseportability rules for estate tax avoidance, usingoutright bequests to your spouse instead oftraditional trust planning. However, portabilityshould not be relied upon solely for utilizationof the first to die's estate tax exemption, and acredit shelter trust created at the first spouse'sdeath may still be advantageous for severalreasons:

• Portability may be lost if the survivingspouse remarries and is later widowedagain

• The trust can protect any appreciation ofassets from estate tax at the secondspouse's death

• The trust can provide protection of assetsfrom the reach of the surviving spouse'screditors

• Portability does not apply to thegeneration-skipping transfer (GST) tax, sothe trust may be needed to fully leveragethe GST exemptions of both spouses

Married couples where one spouse is not aU.S. citizen have special planning concerns.The marital deduction is not allowed if therecipient spouse is a non-citizen spouse, but a$145,000 (in 2014, $143,000 in 2013) annualexclusion is allowed. If certain requirements

By definition, estateplanning is a processdesigned to help youmanage and preserve yourassets while you are alive,and to conserve and controltheir distribution after yourdeath according to yourgoals and objectives.

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are met, however, a transfer to a qualifieddomestic trust (QDOT) will qualify for themarital deduction.

Married with children

If you're married and have children, you andyour spouse should each have your own will.For you, wills are vital because you can namea guardian for your minor children in case bothof you die simultaneously. If you fail to name aguardian in your will, a court may appointsomeone you might not have chosen.Furthermore, without a will, some statesdictate that at your death some of yourproperty goes to your children and not to yourspouse. If minor children inherit directly, thesurviving parent will need court permission tomanage the money for them. You may alsowant to consult an attorney about establishinga trust to manage your children's assets.

You may also need life insurance. Yoursurviving spouse may not be able to supportthe family on his or her own and may need toreplace your earnings to maintain the family.

Comfortable and lookingforward to retirement

You've accumulated some wealth and you'rethinking about retirement. Here's where estateplanning overlaps with retirement planning. It'sjust as important to plan to care for yourselfduring your retirement as it is to plan toprovide for your beneficiaries after your death.You should keep in mind that even thoughSocial Security may be around when youretire, those benefits alone may not provideenough income for your retirement years.

Wealthy and worried

Depending on the size of your estate, you mayneed to be concerned about estate taxes.

Estates of $5,340,000 (in 2014, $5,250,000 in2013) are effectively exempt from the federalgift and estate tax. Estates over that amountmay be subject to the tax at a top rate of 40percent.

Similarly, there is another tax, called thegeneration-skipping transfer (GST) tax, that isimposed on transfers of wealth that are madeto grandchildren (and lower generations). TheGST tax exemption is $5,340,000 (in 2014,$5,250,000 in 2013) and the GST tax rate is40 percent.

Whether your estate will be subject to statedeath taxes depends on the size of yourestate and the tax laws in effect in the state inwhich you are domiciled.

Elderly or ill

If you're elderly or ill, you'll want to write a willor update your existing one, consider arevocable living trust, and make sure you havea durable power of attorney and a health-caredirective. Talk with your family about yourwishes, and make sure they have copies ofyour important papers or know where to locatethem.

Consider saving some of your accumulatedwealth using other retirement and deferredvehicles, such as an individual retirementaccount (IRA).


Steps to Estate Planning Success

Estate Planning Pyramid


Advantages of Trusts

Why you might considerdiscussing trusts with yourattorney

• Trusts may be used to minimize estatetaxes for married individuals withsubstantial assets.

• Trusts provide management assistance foryour heirs.*

• Contingent trusts for minors (which takeeffect in the event that both parents die)may be used to avoid the costs of having acourt-appointed guardian to manage yourchildren's assets.

• Properly funded trusts avoid many of theadministrative costs of probate (e.g.,attorney fees, document filing fees).

• Generally, revocable living trusts will keepthe distribution of your estate private.

• Trusts can be used to dispense income to

• Trusts can ensure that assets go to yourintended beneficiaries. For example, if youhave children from a prior marriage youcan make sure that they, as well as acurrent spouse, are provided for.

• Trusts can minimize income taxes byallowing the shifting of income amongbeneficiaries.

• Properly structured irrevocable lifeinsurance trusts can provide liquidity forestate settlement needs while removing thepolicy proceeds from estate taxation at thedeath of the insured.

*This is particularly important for minors andincapacitated adults who may need support,maintenance, and/or education over a longperiod of time, or for adults who have difficultymanaging money.

intermediate beneficiaries (e.g., children,elderly parents) before final propertydistribution.

Conducting a Periodic Review of Your Estate PlanWith your estate plan successfullyimplemented, one final but critical stepremains: carrying out a periodic review andupdate.

Imagine this: since you implemented yourestate plan five years ago, you got divorcedand remarried, sold your house and bought aboat to live on, sold your legal practice andinvested the money that provides you withenough income so you no longer have towork, and reconciled with your estrangeddaughter. This scenario may look more likefantasy than reality, but imagine how thesemajor changes over a five-year period mayaffect your estate. And that's withoutconsidering changes in tax laws, the stockmarket, the economic climate, or otherexternal factors. After all, if the only constantis change, it isn't unreasonable to speculatethat your wishes have changed, theadvantages you sought have eroded orvanished, or even that new opportunities nowexist that could offer a better value for yourestate. A periodic review can give you peaceof mind.

When should you conduct areview of your estate plan?

Every year for large estates

Those of you with large estates (i.e., morethan the federal or your state's exemption

amount, whichever is smaller) should reviewyour plan annually or at certain life events thatare suggested in the following paragraphs.Not a year goes by without significant changesin the tax laws. You need to stay on top ofthese to get the best results.

Every five years for small estates

Those of you with smaller estates (under theapplicable exclusion amount) need onlyreview every five years or following changes inyour life events. Your estate will not be asaffected by economic factors and changes inthe tax laws as a larger estate might be.However, your personal situation is bound tochange, and reviewing every five years willbring your plan up to date with your currentsituation.

Upon changes in estate valuation

If the value of your estate has changed morethan 20 percent over the last two years, youmay need to update your estate plan.

Upon economic changes

You need to review your estate plan if therehas been a change in the value of your assetsor your income level or requirements, or if youare retiring.

What is a trust?

A trust is a legal entity that iscreated for the purpose oftransferring property to atrustee for the benefit of a thirdperson (beneficiary). Thetrustee manages the propertyfor the beneficiary according tothe terms specified in the trust

With your estate plansuccessfully implemented,one final but critical stepremains: carrying out aperiodic review and update.


Upon changes in occupation oremployment

If you or your spouse changed jobs, you mayneed to make revisions in your estate plan.

Upon changes in family situations

You need to update your plan if: (1) your (oryour children's or grandchildren's) maritalstatus has changed, (2) a child (or grandchild)has been born or adopted, (3) your spouse,child, or grandchild has died, (4) you or aclose family member has become ill orincapacitated, or (5) other individuals (e.g.,your parents) have become dependent onyou.

Upon changes in your closely heldbusiness interest

A review is in order if you have: (1) formed,purchased, or sold a closely held business, (2)reorganized or liquidated a closely heldbusiness, (3) instituted a pension plan, (4)executed a buy-sell agreement, (5) deferredcompensation, or (6) changed employeebenefits.

Upon changes in the estate plan

Of course, if you make a change in part ofyour estate plan (e.g., create a trust, executea codicil, etc.), you should review the estateplan as a whole to ensure that it remainscohesive and effective.

Upon major transactions

Be sure to check your plan if you have: (1)

Upon changes in insurance coverage

Making changes in your insurance coveragemay change your estate planning needs ormay make changes necessary. Therefore,inform your estate planning advisor if youmake any change to life insurance, healthinsurance, disability insurance, medicalinsurance, liability insurance, or beneficiarydesignations.

Upon death of trustee/executor/guardian

If a designated trustee, executor, or guardiandies or changes his or her mind about serving,you need to revise the parts of your estateplan affected (e.g., the trust agreement andyour will) to replace that individual.

Upon other important changes

None of us has a crystal ball. We can't think ofall the conditions that should prompt us toreview and revise our estate plans. Use yourcommon sense. Have your feelings aboutcharity changed? Has your son finally becomefinancially responsible? Has your spouse'shealth been declining? Are your childrenthrough college now? All you need to do isgive it a little thought from time to time, andtake action when necessary.

received a sizable inheritance, bequest, orsimilar disposition, (2) made or receivedsubstantial gifts, (3) borrowed or lentsubstantial amounts of money, (4) purchased,leased, or sold material assets or investments,(5) changed residences, (6) changedsignificant property ownership, or (7) becomeinvolved in a lawsuit.


Disclosure Information -- Important -- Please Review


June 12, 2014Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. Theinformation presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot beused, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer shouldseek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publiclyavailable information from sources believed to be reliable—we cannot assure the accuracy or completenessof these materials. The information in these materials may change at any time and without notice.

Bolton Global Capital579 Main Street, Bolton, MA 01740(978) 779 5361www.boltonglobal.com

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http://www.boltonglobal.com


Charitable Giving

June 12, 2014Page 1 of 7, see disclaimer on final page

Charitable GivingWhen developing your estate plan, you can dowell by doing good. Leaving money to charityrewards you in many ways. It gives you asense of personal satisfaction, and it can saveyou money in transfer taxes.

A few words about transfertaxes

The federal government taxes transfers ofwealth you make to others, both during yourlife and at your death. Generally, the federalgift and estate tax is imposed on transfers inexcess of $5,340,000 (in 2014, $5,250,000 in2013) and at a top rate of 40 percent. There isalso a separate generation-skipping transfer(GST) tax that is imposed on transfers madeto grandchildren and lower generations. Thereis a $5,340,000 (in 2014, $5,250,000 in 2013)GST tax exemption and the GST tax rate is 40percent.

You may also be subject to state transfertaxes.

Careful planning is needed to minimizetransfer taxes, and charitable giving can playan important role in your estate plan. Byleaving money to charity, the full amount ofyour charitable gift may be deducted from thevalue of your gift or taxable estate.

Make an outright bequest inyour will

The easiest and most direct way to make acharitable gift is by an outright bequest of cashin your will. Making an outright bequestrequires only a short paragraph in your willthat names the charitable beneficiary andstates the amount of your gift. The outrightbequest is especially appropriate when theamount of your gift is relatively small, or whenyou want the funds to go to the charity withoutstrings attached.

Make a charity the beneficiary ofan IRA or retirement plan

If you have funds in an IRA oremployer-sponsored retirement plan, you canname your favorite charity as a beneficiary.Naming a charity as beneficiary can providedouble tax savings. First, the charitable gift willbe deductible for estate tax purposes. Second,the charity will not have to pay any income taxon the funds it receives. This double benefitcan save combined taxes that otherwise could

eat up a substantial portion of your retirementaccount.

Use a charitable trust

Another way for you to make charitable gifts isto create a charitable trust. There are manytypes of charitable trusts, the most common ofwhich include the charitable lead trust and thecharitable remainder trust.

A charitable lead trust pays income to yourchosen charity for a certain period of yearsafter your death. Once that period is up, thetrust principal passes to your family membersor other heirs. The trust is known as acharitable lead trust because the charity getsthe first, or lead, interest.

A charitable remainder trust is the mirrorimage of the charitable lead trust. Trustincome is payable to your family members orother heirs for a period of years after yourdeath or for the lifetime of one or morebeneficiaries. Then, the principal goes to yourfavorite charity. The trust is known as acharitable remainder trust because the charitygets the remainder interest. Depending onwhich type of trust you use, the dollar value ofthe lead (income) interest or the remainderinterest produces the estate tax charitablededuction.

Why use a charitable lead trust?

The charitable lead trust is an excellent estateplanning vehicle if you are optimistic about thefuture performance of the investments in thetrust. If created properly, a charitable leadtrust allows you to keep an asset in the familywhile being an effective tax-minimizationdevice.

For example, you create a $1 millioncharitable lead trust. The trust provides forfixed annual payments of $50,000 (or 5percent of the initial $1 million value of thetrust) to ABC Charity for 25 years. At the endof the 25-year period, the entire trust principalgoes outright to your beneficiaries. To figurethe amount of the charitable deduction, youhave to value the 25-year income interestgoing to ABC Charity. To do this, you use IRStables. Based on these tables, the value of theincome interest can be high--for example,$900,000. This means that your estate gets a$900,000 charitable deduction when you die,and only $100,000 of the $1 million gift issubject to estate tax.

By leaving money to charitywhen you die, the fullamount of your charitablegift may be deducted fromthe value of your taxableestate.

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Why use a charitable remaindertrust?

A charitable remainder trust takes advantageof the fact that lifetime charitable givinggenerally results in tax savings whencompared to testamentary charitable giving. Adonation to a charitable remainder trust hasthe same estate tax effect as a bequestbecause, at your death, the donated asset hasbeen removed from your estate. Be aware,however, that a portion of the donation isbrought back into your estate through thecharitable income tax deduction.

Also, a charitable remainder trust can bebeneficial because it provides your familymembers with a stream of current income--a

For example, you create a $1 millioncharitable remainder trust. The trust providesthat a fixed annual payment be paid to yourbeneficiaries for a period not to exceed 20years. At the end of that period, the entire trustprincipal goes outright to ABC Charity. Tofigure the amount of the charitable deduction,you have to value the remainder interest goingto ABC Charity, using IRS tables. This is acomplicated numbers game. Trialcomputations are needed to see whatcombination of the annual payment amountand the duration of annual payments willproduce the desired charitable deduction andincome stream to the family.

desirable feature if your family members won'thave enough income from other sources.

Charitable Lead Trust

Definition

A charitable lead trust is a trust with bothcharitable and noncharitable beneficiaries. It iscalled a lead trust because it is the charity thatis entitled to the lead interest in the trustproperty. After a specified term, the remainingtrust property passes to you or anothernoncharitable beneficiary you designate.

Prerequisites

• A desire to donate to charity• A substantial asset to donate to charity

Key strengths

• Provides a gift and estate tax haven forassets expected to appreciate in value

• Allows you to donate to charity and keeptrust assets within the family

• Allows you to postpone the noncharitablebeneficiary's receipt of the trust assets

• Allows you to choose the payment methodto charity

• Does not require any minimum percentagepayout to charity

• Reduces potential federal estate tax liability

Key tradeoffs

• No income tax deduction unless you arealso the "owner" of the charitable lead trust

• Requires an irrevocable commitment• Requires the charitable payment to be

made each year, regardless of whetherthere is sufficient trust income available

Variations from state to state

• Community property states may affect anygift tax due

• In certain instances (when the trustdocument is silent), state law maydetermine the source of payments madefrom the trust to charity and the order theyare to be used

How is it implemented?

• Consult a legal professional to draft thecharitable lead trust document

• Select a noncharitable beneficiary, acharitable beneficiary, and a trustee

• Select the assets you want to use to fundthe charitable lead trust

• Select an appraiser or other professional tovalue unmarketable assets

• Select the term of the trust and thepayment method (annuity or unitrust)

How a Charitable Lead Trust Works


Charitable Remainder Trusts

Charitable remainder annuitytrust (CRAT)

A charitable remainder annuity trust, or CRAT,is a trust with both charitable andnoncharitable beneficiaries. Every year for theterm of the CRAT, the noncharitablebeneficiary receives a payment (the annuityamount) from the trust property. At the end ofthe trust term, the remaining property passesto the charity. For this reason, the charity'sinterest is described as a remainder interest.

Unique strengths

• Pays out fixed income every year• Exists with fairly simple administration

Unique tradeoffs

• Requires the annuity to be paid each year,regardless of whether there is sufficienttrust income available

• Inflation may cause CRAT to lose some ofits value

• Prohibits the additional contribution ofassets

Charitable remainder unitrust(CRUT)

A charitable remainder unitrust, or CRUT, is atrust with both charitable and noncharitablebeneficiaries. Every year for the term of theCRUT, the noncharitable beneficiary receivesa payment (the unitrust amount) from the trustproperty, which is based on the value of thetrust assets each year. At the end of the trustterm, the remaining property passes to thecharity. For this reason, the charity's interest isdescribed as a remainder interest.

Unique strengths

• Allows for the additional contribution ofassets

• Allows annual payment to increase whenvalue of trust property increases

Unique tradeoffs

• Involves more complicated administration• Annual payment may decrease when value

of trust property decreases

How a Charitable Remainder Trust Works

Prerequisites

• A desire to donate to charity• A substantial asset to donate to charity

Key strengths

• Provides income tax deduction• Provides an income tax haven for assets

that have appreciated substantially• Reduces potential federal estate tax liability

Key tradeoffs

• Requires an irrevocable commitment

Variations from state to state

• Community property states may affect anygift tax due

How are they implemented?

• Consult a legal professional to draft thetrust

• Select a noncharitable beneficiary, acharitable beneficiary, and a trustee

• Select the assets you want to use to fundthe trust

• Set the term of the trust and establish theannual payment amount for CRATs or thepercentage of trust assets that are to bepaid out every year for CRUTs

• Select an appraiser to value unmarketableassets


The Best Property to Give to CharityGiving to charity is not only personally satisfying, the IRS (and possibly your state) also rewardsyou with generous tax breaks.

• Current income tax deduction if you itemize, subject to certain percentage limitations for anyone year

• Tax benefit received reduces the cost of the donation (e.g., a $100 donation from someone ina 30 percent tax bracket has a net cost of $70)

• Reduces or eliminates capital gains tax if appreciated property is given• No transfer (gift and estate) taxes imposed• Removes any future appreciation of the donated property from your taxable estate

Types of property

Highly appreciated or rapidly appreciating property, such as:

• Intangible personal and real property (e.g., stock or real estate)• Tangible personal property (e.g., art, jewelry)

Cash

• Easy to give--the type of donation most charities like best• Be sure to get a receipt or keep a bank record, regardless of the amount

Income-producing property, such as:

• Artwork (if given by the artist)• Inventory• Section 306 stock (stock acquired in a nontaxable corporate transaction)

Tangible personal property, such as:

• Cars• Jewelry• Paintings

Remainder interests in property

• Lets you use the property, or income from the property, until a later date. Gift and estate taxdeductions are not allowed unless a trust is used. You may only take the income tax deductionin the year that the gift is actually conveyed.

Caution: You may need to have certain types of property appraised.


Life Insurance and Charitable GivingLife insurance can be an excellent tool forcharitable giving. Not only does life insuranceallow you to make a substantial gift to charityat relatively little cost to you, but you may alsobenefit from tax rules that apply to gifts of lifeinsurance.

Why use life insurance forcharitable giving?

Life insurance allows you to make a muchlarger gift to charity than you might otherwisebe able to afford. Although the cost to you(your premiums) is relatively small, theamount the charity will receive (the deathbenefit) can be quite substantial. As long asyou continue to pay the premiums on the lifeinsurance policy, the charity is guaranteed toreceive the proceeds of the policy when youdie. (Guarantees are subject to theclaims-paying ability of the issuing insurancecompany.) Since life insurance proceeds paidto a charity are not subject to income andestate taxes, probate costs, and otherexpenses, the charity can count on receiving100 percent of your gift.

Giving life insurance to charity also has certainincome tax benefits. Depending on how youstructure your gift, you may be able to take anincome tax deduction equal to your basis inthe policy or its fair market value (FMV), andyou may be able to deduct the premiums youpay for the policy on your annual income taxreturn. When an insurance contract istransferred to a charity, the donor's income taxcharitable deduction is based on the lesser ofFMV or adjusted cost basis.

What are the disadvantages?

Donating a life insurance policy to charity (ornaming the charity as beneficiary on thepolicy) means that you have less wealth todistribute among your heirs when you die.This may discourage you from making gifts tocharity. However, this problem is relativelysimple to solve. Buy another life insurancepolicy that will benefit your heirs instead of acharity.

Ways to give life insurance tocharity

The simplest way to use life insurance to giveto a charity is to name a charity to receive thebenefits of your life insurance policy. You, asowner of the policy, simply designate thecharity as beneficiary. Designating the charity

as beneficiary may allow you to make a largergift than you could otherwise afford. If thepolicy is a form of cash value life insurance,you still have access to the cash value of thepolicy during your lifetime. However, this typeof charitable gift does not provide many of theincome tax benefits of charitable giving,because you retain control of the policy duringyour life. When you die, the proceeds areincluded in your gross estate, although the fullamount of the proceeds payable to the charitycan be deducted from your gross estate.

Another alternative is to donate an existing lifeinsurance policy to charity. To do this, youmust assign all rights in the policy to thecharity. You must also deliver the policy itselfto the charity. By doing this, you give up allcontrol of the life insurance policy forever. Thisstrategy provides the full tax advantages ofcharitable giving because the transfer ofownership is irrevocable. You may be able totake an income tax deduction equal to thelesser of your adjusted cost basis or FMV. Thepolicy is not included in your gross estatewhen you die, unless you die within threeyears of the transfer. In this case, your estatewould get an offsetting charitable deduction.

A creative way to use life insurance to donateto a charity is simply for the charity to insureyou. To use this strategy, you would allow thecharity to purchase an insurance policy onyour life. You would make annualtax-deductible gifts to the charity in an amountequal to the premium, and the charity wouldpay the premium to the insurance company.

One final method is to use a life insurancepolicy in conjunction with a charitableremainder trust. This strategy is relativelycomplex (it will require an attorney to set up),but it provides greater advantages than other,simpler methods. You set up a charitableremainder trust and transfer ownership ofother, income-producing assets to the trust.The income beneficiary of the trust (you orwhomever you designate) will get the incomefrom the assets in the trust. At the end of thetrust term (which might be a certain number ofyears or upon the occurrence of a certainevent, such as your death), the property in thetrust would pass to the charity. You'll receive acurrent tax deduction when you establish thetrust for the FMV of the gifted assets, reducedaccording to a formula determined by the IRS.Life insurance can then be purchased (usuallyinside an irrevocable life insurance trust tokeep the proceeds out of your estate) toreplace the assets that went to the charityinstead of to your heirs.

Life insurance can be anexcellent tool for charitablegiving.










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Private Family Foundations


Private Family FoundationsSummary:A private family foundation is a legal entitycreated, funded, and operated by a singlefamily for the primary purpose of makinggrants to charities. Because of its charitablemission, a private family foundation is giventax-exempt status, like a public charity, andcontributions to the foundation by familymembers are tax deductible, but to a lesserextent than contributions to a public charity.

Private family foundations are typicallyfounded by high net worth individuals andfamilies who want to maintain a high degree ofcontrol over their charitable legacies, and arewilling to assume significant costs andresponsibilities, and adhere to strict rules andrequirements.

Typically, private family foundations arenamed to honor the founders (e.g., the FordFoundation), and their charitable grantprograms continue for many years after theirfounders' deaths.

Private Family Foundation Illustration

What is a private familyfoundation?Defined for tax purposes, a private familyfoundation is a charitable organization that isnot a public charity. It is a separate legalentity, organized as a nonprofit corporation ora trust, created by a single individual or family(donors). Private family foundations do notreceive donations from the public, but arefunded by family members and relatedpersons or entities only.

A private family foundation's primary purposeis to make grants to charities, and usuallydoes not engage in charitable services itself(those that do are called private operatingfoundations). Because of its charitablepurpose, the foundation is given the sametax-exempt status as Section 501©)(3) publiccharities. Donors receive an immediateincome tax deduction in the year theycontribute property to the foundation (subjectto the usual limitations), avoid capital gains tax


on contributions of appreciated property, andreduce their taxable estates. The foundation,however, must pay excise tax on netinvestment income.

The main advantage of a private familyfoundation is that the donors control howcontributions are invested, and how grants tocharities are made. Typically, grants aredirected to the donor's community or areas ofinterest (e.g., medical research, conservation).

Though a private family foundation canprovide great personal satisfaction and taxbenefits, there is a significant downside.Foundations must be organized and operatedaccording to specific sections of the InternalRevenue Code, follow special rules andrequirements, and maintain manyadministrative functions. Violations can resultin taxes and harsh penalties against thefoundation, its donors, and others.

Getting startedSetting up a private family foundation iscomplex and the assistance of an attorney isessential right from the start. The assistanceof a tax professional experienced in handlingnonprofit tax matters, and other consultants,managers, and staff members may also berequired.

Developing mission andguidelinesThe donors must clearly define thefoundation's charitable purpose, whichtypically reflects the donors' values. A missionstatement and guidelines for making grantsshould be published. This will help direct thefoundation's activities and inform the publicabout the foundation.

FormalizingThe foundation can be set up as a trust or anonprofit corporation. A corporation requiresmore paperwork and formalities but canprovide greater personal liability protection tothe donors.

If a corporation is created, a board of directorsis required and officers must be elected tocarry out the foundation's activities. Articles ofincorporation and bylaws must be filed withthe IRS and the state in which the foundationwill operate. If a trust is created, a trustagreement must be executed and trusteesmust be named. Typically, board membersand officers, or trustees, are family membersbut non-family members and professionalscan also serve.

Caution: The foundation's charitable purposeis generally set forth in its charter or trustagreement. As a trust agreement is moredifficult to change, donors who want flexibility

regarding the foundation's charitable purposeshould choose the corporate form.

Obtaining tax-exempt statusTo obtain tax-exempt status, Form 1023,Application for Recognition of ExemptionUnder Section 501(c)(3) of the InternalRevenue Code must be filed with the IRS.

The foundation may also have to apply fortax-exempt status from state income, sales,and property taxes.

FundingThough there is no legal requirement, a rule ofthumb suggests that donors contribute enoughcapital to generate a minimum of $25,000annually for grants. The types of propertycontributed will determine the allowable taxdeductions (discussed further below).

Funding can be made all at once (endowing),over a period of time, or annually.

Caution: The foundation may not hold morethan 20% of the voting stock of any private orpublic corporation. Failure to comply will resultin an excise tax equal to 10% of such totalbusiness holdings, which will increase to200% if the excess holdings are not disposedof promptly. If a third party, other than thefoundation and its disqualified persons(explained further below), controls thebusiness enterprise, then the percentage ofpermissible ownership is increased from 20%to 35%.

InvestingThe foundation must invest contributions in aprudent manner, and should not, for example,invest in highly speculative securities orfutures. The IRS levies a 10% tax on thefoundation and a 10% tax on a foundationmanager for any investment that jeopardizesthe foundation's charitable purpose if there isa failure to exercise ordinary business careand prudence under the facts andcircumstances prevailing at the time of theinvestment. If the problem is not promptlycorrected, an additional 25% tax is imposedon the foundation and an additional 5% tax onthe foundation manager.

The IRS levies a tax equal to 2% of a privatefamily foundation's net investment income,including interest, dividends, capital gains,rents and royalties, reduced by applicableexpenses. The tax may be reduced to 1% ifthe foundation spends enough of its resourcesfor charitable purposes. Quarterly estimatedtax payments must be made by the foundationif this tax equals or exceeds $500 a year.

Making grantsThe foundation must make annual


distributions in an amount equal to 5% of thefoundation's net assets that are not used tooperate the foundation.

Grants can be made to a single charity orvarious charities according to the foundation'sexpress purpose, and the foundation can seekapplications for grants or simply channelgrants to appropriate recipients.

Grants to individuals must be made in anobjective and nondiscriminatory basisaccording to procedures that have beenpreapproved by the IRS.

Caution: Failure to distribute the 5% minimumamount will result in a tax of 30% of thatamount. After the initial tax is imposed, thepenalty will increase to 100% of theundistributed amount if the error is notcorrected promptly.

Recordkeeping, reporting, andpublic disclosureThe foundation should maintain separate bankaccounts, books, and records, includingminutes of board of directors meetings, andmust otherwise respect the foundation's legalform.

The foundation may be required to file normalpayroll tax withholding and reporting forms if ithas employees and pays wages.

The foundation must file a federal income taxreturn, Form 990PF, annually with the IRS.The foundation may also be required to file acopy of Form 990PF, and/or other reports withthe state.

The foundation must also provide copies ofForm 990PF to anyone who requests them,and other forms of disclosure may berequired.

Self-dealingSelf-dealing is strictly prohibited. Acts ofself-dealing include any transactions, such asselling, exchanging, or leasing property,between the foundation and substantialcontributors or other disqualified persons.

Disqualified persons include the donors,foundation managers, owners of more than20% of a corporation, trust, or partnership thatis a substantial contributor, and certaingovernment officials. The foundation alsocannot deal with any corporation, trust, orpartnership in which a disqualified personowns an interest of 35% or more.

Other types of self-dealing transactionsinclude lending money and extending credit.Certain transactions are exempt from theself-dealing rules such as the payment ofreasonable compensation and reimbursementof reasonable expenses to foundationmanagers and directors.

Acts of self-dealing are heavily taxed andpenalized. A tax of 10% of the amount of thetransaction involved is imposed on thedisqualified person and a tax of 5% of theamount of the transaction is imposed on thefoundation manager involved. Once the tax isimposed, if the transaction is not quicklycorrected, additional penalty taxes at the rateof 200% are imposed on the disqualifiedperson and 50% on the foundation manager.Continued non-compliance could result in lossof the foundation's exempt status.

Other prohibitionsPrivate family foundations are prohibited fromlobbying or attempting to influence legislation,or attempting to influence the outcome of anelection.

Private foundations may also incur penaltiesfor expenditures that do not further thefoundation's charitable purposes.

Income taxesA donor can generally take an immediateincome tax deduction for contributions ofmoney or property to a private familyfoundation if the donor itemizes deductions onhis or her federal income tax return. Theamount of the deduction depends on severalfactors, including the amount of thecontribution, the type of property donated, thedonor's basis in the property, and the donor'sAGI. Generally, for contributions of cash andnon-appreciated property, deductions arelimited to 30% of the donor's AGI. If the donormakes a gift of tangible personal property orlong-term capital gain property, the deductionis limited to 20% of the donor's AGI. Anyamount that cannot be deducted in the currentyear can be carried over and deducted for upto five succeeding years.

Caution: Donations of tangible personalproperty (not related to the charitable purposeof the foundation) or appreciated property(except stock and mutual funds that do notexceed 10% of a corporation's outstandingstock) allow the donor a deduction of basisonly, not fair market value.

Gift and estate taxesThere are no federal gift tax consequencesbecause of the charitable gift tax deduction,and federal estate tax liability is minimizedwith every contribution since donated assetsare removed from the donor's taxable estate.

Suitable clients• High-net-worth individuals who can make

contributions that are large enough tojustify the costs

• Individuals who want to leave long-termlegacies and/or achieve influence or stature


Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014

in their communities or charitableorganizations

• Individuals who want maximum controlover their charitable dollars and do notneed maximum tax deductibility

• Individuals who want to be activelyinvolved in the ongoing operations oftheir charitable plan

• Individuals who want family members tobe involved in a charitable plan

• Individuals with highly appreciatedassets

ExampleHarry and Wilma met and married in the1960's. During that decade, Harry andWilma were actively involved in manycauses, especially those related to savingthe environment. Together, they createdand patented a bag that is as strong asplastic but breaks down quickly like paper.What began as a small operation in theirbasement has, over time, turned into anenormously successful multinationalcompany. Today, Harry, Wilma, and theirchildren run the company, which generatesmillions of dollars in revenue each year.

Harry and Wilma are grateful they wereable to make the world a better place inwhich to live, and also provide well forthemselves and their family, but they wantto do more. Their children can now run thecompany on their own, and are evengrooming Harry and Wilma's grandchildrento take over one day.

Harry and Wilma decide to step away fromcompany business and devote themselvesto some of the causes they cared about somuch years ago. They found the HWFamily Foundation, a nonprofit corporationthat will seek, through grantmaking, tosupport and enhance conservation effortsaround the world. They file for and receivetax-exempt status from the IRS and their

Advantages• Personal satisfaction of giving• Can help cement family ties• Donors and family members control

investments and grants• Can identify and preserve family name far

into the future• Donors may receive immediate income tax

deductions• Can reduce or eliminate capital gains, gift,

and estate taxes• Can provide continuing employment and

activity to donors and family members

Disadvantages• Upfront legal fees can be substantial• 2% annual excise tax imposed on net

investment income• Lower deductions allowed than for other

charitable donations• Mandatory annual 5% payout requirement• Rigorous reporting requirements• IRS imposed limitations (e.g., self-dealing,

excess business holdings)• Taxes and penalties for violations of IRS

limitations, even if inadvertent, can besevere

• Public disclosure required

state. Harry and Wilma contribute $5million in cash to the foundation. Theyname themselves and their children asdirectors and officers of the foundation, andtogether will be paid salaries that total$55,000 annually. The initial endowment isinvested to yield 5.5% annually in revenue,or $275,000. Salaries, taxes, and otherexpenses total $93,700. The foundationmakes grants of approximately $181,300each year. Annual expenses and grantsequal revenues, so the foundation'sendowment does not grow or diminish.




These materials are provided for general information and educational purposes based upon publicly availableinformation from sources believed to be reliable—we cannot assure the accuracy or completeness of thesematerials. The information in these materials may change at any time and without notice.


Page 5 of 5



529 Plans and Estate Planning


529 Plans and Estate PlanningAs the cost of a college education continues toclimb out of reach for many parents,grandparents are stepping in to help. Thistrend is expected to accelerate in the comingyears as the baby boomers start gifting what isexpected to be trillions of dollars over the nextfew decades.

Many grandparents may use a 529 plan tohelp save for their grandchildren's collegeeducation. Since their creation in 1996, 529plans have become to college savings what401(k) plans are to retirement savings--anindispensable tool for helping amass moneyfor college. That's because 529 plans offer aunique combination of benefits unmatched inthe college savings world: availability topeople of all income levels, professionalmoney management, high maximumcontribution limits, and generous taxadvantages.

Yet 529 plans are increasingly being used foranother purpose--estate planning. That'sbecause the special tax rules that govern 529plans allow grandparents to save for theirgrandchild's college education in a way thatsimultaneously pares down their estate andminimizes potential gift and estate taxes.

Estate planning framework

How does this work? To fully appreciate howthe gift and estate tax laws favor 529 plans,it's helpful to first understand how these lawsapply to other assets. For 2014, everyindividual has a $5,340,000 basic exclusionamount (plus any unused exclusion amount ofa deceased spouse) from federal gift andestate tax. This means that if the total amountof your lifetime gifts and the value of yourestate is less than $5,340,000 at the time ofyour death, no federal gift or estate tax will beowed.

In addition to this basic exclusion amount,individuals get an annual exclusion from thefederal gift tax, which is currently $14,000.This means you can gift up to $14,000 perrecipient per year gift tax free. And, a marriedcouple who elects to "split" gifts can give up to$28,000 per recipient per year gift tax free.

Finally, gifts made to grandchildren (or anyonewho is more than one generation below you)have special tax rules. These gifts are subjectto both federal gift tax and an additional taxknown as the federal generation-skippingtransfer tax (GSTT). However, there areexceptions for this tax too: a lifetime

exemption of $5,340,000 in 2014 and anannual exclusion that's the same as for federalgift tax--$14,000 or $28,000 for marriedcouples.

Special gifting feature of 529plans

Under special rules unique to 529 plans, youcan make a lump-sum contribution to a 529plan in an amount equal to five times thefederal annual gift tax exclusion ($70,000 or$140,000 for a married couple) per recipient,as long as you make a special election onyour federal gift tax return that effectivelyspreads the lump-sum gift evenly over fiveyears, and provided you do not make anyother gifts to the same recipient during thefive-year period.

Example: Mr. and Mrs. Brady make alump-sum contribution of $140,000 to theirgrandchild's 529 plan in Year 1, electing tospread the gift over five years. The result isthey are considered to have made annual giftsof $28,000 ($14,000 each) in Years 1 through5 ($140,000/5 years). Because the amountgifted by each spouse is within the annual gifttax exclusion, the Bradys won't owe any gifttax (assuming they don't make any other giftsto their grandchild during the five-year period).In Year 6, they can make another lump-sumcontribution and repeat the process. In Year11, they can do so again.

Thus, 529 plans offer an opportunity forwealthy parents and grandparents to puthundreds of thousands of dollars away gift taxfree to help their children and grandchildrenwith college costs, while paring down theirestates and reducing potential estate taxliabilities.

There is a caveat, however. If the donor wereto die during the five-year period, then aprorated portion of the contribution would be"recaptured" into the estate for estate taxpurposes.

Example: In the previous example, assumeMr. Brady dies in Year 2. The result is that histotal Year 1 and 2 contributions ($28,000) arenot included in his estate. But the remainingportion attributed to him in Years 3, 4, and 5($42,000) would be included in his estate.However, the contributions attributed to Mrs.Brady ($14,000 per year) would not berecaptured into the estate.

529 plans and estateplanning

The use of 529 plans for estateplanning purposes hasemerged thanks to special taxrules surrounding lump sumcontributions to 529 planscombined with theconvergence of two powerfultrends--boomer grandparentsand soaring college tuition.


529 Plan BasicsSection 529 plans are governed by federal law(section 529 of the Internal Revenue Code)but are sponsored by states and, lesscommonly, colleges. Each plan may haveslightly different features, but each mustconform to the federal framework. There aretwo types of 529 plans--college savings plansand prepaid tuition plans.

Each type of 529 plan has an account owner,who is the person who opens the account, anda beneficiary, who is the person for whomcontributions are being made. The accountowner has the flexibility to make contributionsto the account, request withdrawals from theaccount, change the investment selections forthe account (for college savings plans only),and change the beneficiary of the account.

Grandparents can open a 529 account andname their grandchild as beneficiary (only oneperson can be listed as account owner), orthey can contribute to an already established529 account.

College savings plans

College savings plans are the more populartype; nearly all states offer one or more ofthese plans. A college savings plan functionslike an individual investment-type account.You select one or more of a plan's investmentportfolios, and you either gain or lose money,depending on how those portfolios perform(similar to a 401(k) plan). College savingsplans typically accept over $300,000 inmaximum lifetime contributions, and thesefunds can be used for tuition, fees, room andboard, books, and equipment at anyaccredited college in the United States orabroad.

Prepaid tuition plans

By contrast, a prepaid tuition plan pools yourcontributions with the contributions of others,and in return you get a predetermined numberof units or credits that are guaranteed to beworth a certain percentage of college tuition inthe future (in effect, you are paying futuretuition with today's dollars). Funds in a prepaidtuition plan can only be used to cover tuitionand fees at the limited group of colleges(typically in-state public colleges) thatparticipate in the plan. Prepaid tuition plansare generally limited to state residents,whereas college savings plans are open toresidents of any state.

Grandparent as 529 accountowner

A grandparent isn't required to be the accountowner of his or her grandchild's 529 plan tomake contributions to the account. But if thegrandparent is the account owner, there aresome additional considerations.

First, as account owner, a grandparent canretain some measure of control over his or hercontributions by changing investmentselections, authorizing account withdrawals forboth education and non-education purposes,or even closing the account. A grandparentwill have this control over these contributionseven though they generally aren't consideredpart of his or her estate for tax purposes--arare advantage in the estate planning world.However, funds in a grandparent-owned 529plan can still be factored in when determiningMedicaid eligibility, unless these funds arespecifically exempted by state law.

Second, regarding financial aid, agrandparent-owned 529 account does notneed to be listed as an asset on the federalgovernment's aid application, the FAFSA.However, distributions (withdrawals) from agrandparent-owned 529 plan are reported asuntaxed income to the beneficiary(grandchild), and this income is assessed at50% by the FAFSA. By contrast, aparent-owned 529 plan is reported as a parentasset on the FAFSA (parent assets areassessed at 5.6%) but distributions from aparent-owned 529 plan aren't counted asstudent income.

To avoid having a distribution from agrandparent-owned 529 account count asstudent income, one option is for thegrandparent to delay taking a distribution fromthe 529 plan until anytime after January 1 ofthe grandchild's junior year of college(because there will be no more FAFSAs to fillout). Another option is for the grandparent tochange the owner of the 529 plan account tothe parent.

Colleges have their own rules whendistributing their own financial aid. Mostcolleges require a student to list any 529 planfor which he or she is the named beneficiary,so grandparent-owned 529 accounts would betreated the same as parent-owned accounts.

Did you know ...

• If your grandchild doesn'tgo to college or gets ascholarship, you can nameanother grandchild asbeneficiary of your 529account with no penalty.

• Many states offer incometax deductions forcontributions to their 529plan.

• According to the CollegeBoard, as of June 2013,assets in 529 plans totaled$205.7 billion, with 89% incollege savings plans and11% in prepaid tuitionplans.

Note

Investors should consider theinvestment objectives, risks,charges, and expensesassociated with 529 plansbefore investing. Moreinformation about specific 529plans is available in eachissuer's official statement,which should be read carefullybefore investing. Also, beforeinvesting, consider whetheryour state offers a 529 planthat provides residents withfavorable state tax benefits.


Tax Consequences of 529 PlansThe following chart summarizes the federal tax consequences of gifting to a 529 plan.

Gift Tax All contributions to a 529 plan qualify for the annual federal gift taxexclusion--$14,000 ($28,000 for joint gifts).A special election for gifts up to $70,000 ($140,000 for joint gifts) can bemade where the gift is spread evenly over a five-year period and no gift taxwill be owed.Grandparents are subject to the generation-skipping transfer tax (GSTT) inaddition to federal gift tax. Gifts of $14,000 or less ($28,000 for joint gifts) areexcluded for purposes of the GSTT. Only the portion of the gift that results infederal gift tax will also result in GSTT.

Estate Tax Contributions made to a 529 plan generally aren't considered part of yourestate for federal estate tax purposes when you die, even though you mightretain control of the funds in the account (as 529 plan account owner) duringyour lifetime. Instead, the value of the account will be included in thebeneficiary's estate.The exception to this general rule occurs when you elect to spread a giftover five years and you die during this five-year period. In this case, theportion of the contribution allocated to the years after your death would beincluded in your gross estate for tax purposes.

Income Tax Contributions grow tax deferred.Withdrawals from a 529 plan used to pay the beneficiary's qualifiededucation expenses are completely tax free at the federal level.Withdrawals from a 529 plan that aren't used to pay the beneficiary'squalified education expenses (called a nonqualified distribution) face adouble consequence--the earnings portion is subject to a 10% penalty and istaxed at the recipient's rate (in other words, the person who receives thedistribution--either the account owner or the beneficiary--is taxed on it).

Estate Tax RatesThe following chart summarizes federal estate tax rates and exemptions.

2013 2014

Top gift and estate tax rate 40% 40%

Gift and estate tax applicableexclusion amount

$5,250,000 + DSUEA1 $5,340,000 + DSUEA1

Generation-skipping transfertax (GSTT) exemption

$5,250,000 $5,340,000

1 Basic exclusion amount plus deceased spousal unused exclusion amount (DSUEA)










Page 5 of 5


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