charitable planned giving strategiespluk.org/.../mna/...planned-giving-presentation(2).pdf · this...

Courtesy of:Yellowstone Boys & Girls Ranch Foundation, Inc.

This presentation was prepared for educational purposes only. It must not be used as a basis for tax or legal advice.Parties must always seek out and rely upon the advice of their own legal and tax advisors.

Charitable Planned Giving

Strategies

KURT G. ALME, J.D. is President and General Counsel of Yellowstone Boys and Girls Ranch Foundation, Billings, Montana.

Kurt is a Montana native and graduate of Harvard Law School. A partner with the Crowley Law Firm in Billings, Kurt’s legal practice developed an emphasis in estate planning and tax law and would eventually lead to his appointment by then Governor Martz as Director of Montana’s Department of Revenue. He next served as an Assistant US Attorney for Montana, prosecuting white-collar crime, eventually becoming First Assistant.

Kurt Alme worked with Yellowstone Foundation and others largely responsible for the passage of Montana’s Qualified Endowment Tax Credit law. He was a Section Leader for the State Bar Committee which revised the Uniform Trust Code for adoption by Montana in 2013.

Presented By:

Purpose of Presentation

To raise awareness of charitable planning concepts for the client/donor.

Benefits of Charitable Planning

1. Avoid or defer capital gains tax and Medicare Surtax.

2. Tax deductions (and credits) to offset other significant

income from the sale of appreciated assets.

3. Reduce income tax and payroll tax.

4. Reduce federal estate tax.

5. Provide consistent lifetime payments.

6. Solve business and estate planning issues.

7. Benefit charitable causes you believe in.

Charitable Planned Gifts

Charitable Remainder TrustCharitable Gift AnnuityCharitable Life Estate

TAX BENEFITSSignificant tax advantages currently exist:

•State endowment income tax credit (40%) up to $10,000

•Federal charitable income tax deduction

•39.6% @ $413,200 (single)

•Subject to Pease ‘haircut’ of 3% of excess of AGI over

$250,000 (single) up to 80% of AGI

•Non-recognition of capital gains tax and Medicare Surtax

•Federal 20% @ $413,200 (single)

•Medicare Surtax 3.8% @ $200,000 (single)

•State 4.9%

TAX BENEFITSSignificant tax advantages currently exist:

•Federal payroll taxes (15.3%)

• 0.9% Medicare Surtax @ $200,000 single

•Federal charitable gift and estate tax credit equivalents (40%

above $5,430,000)

Montana Qualified Endowment Tax Credit

1997 – 2019 (and beyond?)

Sustaining Montana Charitiesthrough Endowment Building

SEE: MCA §§ 15-30-2327-2329MCA §§ 15-31-161, 162 ARM 42.4.2701, 2703-2708


MCA §15-30-2328

Allows an income tax credit of 40% of the present value

of the charitable gift portion of a planned gift to a

qualified endowment up to $10,000 per year ($20,000 for

husband and wife).

Credit is not refundable and cannot be carried forward

Credit reduces income tax deduction (Compare 6.9%

versus 40%)

Credit renewed/extended thru 2019 (Senate Bill 108)

Tax CreditBusiness Entities

MCA §15-31-162

Allows an income tax credit of 20% for an outright

gift to a qualified endowment up to $10,000 per year.

Entities may also make a planned gift.

15-30-2327. (Temporary) Qualified endowments credit -- definitions -- rules. (1) For the purposes of 15-30-2328 and this section, the following definitions apply:

(a) (i) "Permanent, irrevocable fund" means a fund comprising cash, securities, mutual funds, or other investment assets established for a specific charitable, religious, educational, or eleemosynary purpose and managed, invested, and appropriated pursuant to the Uniform Prudent Management of Institutional Funds Act provided for in Title 72, chapter 30.

(ii) The term does not include a fund held by or for a tax-exempt organization to accomplish a charitable, religious, educational, or eleemosynary purpose from which contributions are expended directly for constructing, renovating, or purchasing operational assets, such as buildings or equipment.

(b) Subject to subsection (3), "planned gift" means an irrevocable contribution to a permanent endowment held by or for a tax-exempt organization when the contribution uses any of the following techniques that are authorized under the Internal Revenue Code:

(i) charitable remainder unitrusts, as defined by 26 U.S.C. 664; (ii) charitable remainder annuity trusts, as defined by 26 U.S.C. 664; (iii) pooled income fund trusts, as defined by 26 U.S.C. 642(c)(5); (iv) charitable lead unitrusts qualifying under 26 U.S.C. 170(f)(2)(B); (v) charitable lead annuity trusts qualifying under 26 U.S.C. 170(f)(2)(B); (vi) charitable gift annuities undertaken pursuant to 26 U.S.C. 1011(b); (vii) deferred charitable gift annuities undertaken pursuant to 26 U.S.C. 1011(b); (viii) charitable life estate agreements qualifying under 26 U.S.C. 170(f)(3)(B); (ix) paid-up life insurance policies meeting the requirements of 26 U.S.C. 170. (c) "Qualified endowment" means a permanent, irrevocable fund that is held by a Montana incorporated or established organization

that: (i) is a tax-exempt organization under 26 U.S.C. 501(c)(3); or (ii) is a bank or trust company, as defined in Title 32, chapter 1, part 1, that is holding the fund on behalf of a tax-exempt organization.

MONTANA CODE ANNOTATED 2014:

15-30-2327. (Temporary) Qualified endowments credit -- definitions -- rules. (2) (a) Terms in a document creating a donor restriction, such as those provided for in subsection (2)(b), intending to qualify a gift for the

tax credit referenced in 15-30-2328, 15-30-2329, 15-31-161, 15-31-162, and this section, require that the gift satisfy the current definition of permanent, irrevocable fund and not any previous definition unless other language in the document demonstrates a different intent.

(b) The restrictions referenced in subsection (2)(a) include but are not limited to a requirement that the contribution be held in a "qualified endowment" or "permanent, irrevocable fund" or that the "present value of the fund at the time of the planned gift or outright contribution" not be expendable.

(c) Subsections (2)(a) and (2)(b) apply to funds and terms existing on or established on April 26, 2013. As applied to permanent, irrevocable funds existing on April 26, 2013, this subsection (2) governs only decisions made or actions taken on or after that date.

(3) (a) A contribution using a technique described in subsection (1)(b)(i) or (1)(b)(ii) is not a planned gift unless the trust agreement provides that the trust may not terminate and the beneficiaries' interest in the trust may not be assigned or contributed to the qualified endowment sooner than the earlier of:

(i) the date of death of the beneficiaries; or (ii) 5 years from the date of the contribution. (b) A contribution using the technique described in subsection (1)(b)(vii) is not a planned gift unless the first partial or full-year payment

of the annuity is required to begin within the life expectancy of the annuitant or of the joint life expectancies of the annuitants, if more than one annuitant, as determined using the actuarial tables adopted by rule by the department in effect on the date of the contribution.

(c) A contribution using a technique described in subsection (1)(b)(vi) or (1)(b)(vii) is not a planned gift unless the annuity agreement provides that the interest of the annuitant or annuitants in the gift annuity may not be assigned to the qualified endowment sooner than the earlier of:

(i) the date of death of the annuitant or annuitants; or (ii) 5 years after the date of the contribution. (d) A contribution using a technique described in subsection (1)(b)(vi) or (1)(b)(vii) is not a planned gift unless the annuity is a qualified

charitable gift annuity as defined in 33-20-701. (e) A contribution using a technique described in subsection (1)(b)(vii) is not a planned gift unless the annuity rate to be paid is at least

5%. (4) The department shall adopt rules to prepare life expectancy tables that are derived from the actuarial tables contained in the most

recent Publication 1457 by the internal revenue service. (Terminates December 31, 2019--secs. 2 through 8 and 11, Ch. 317, L. 2013.)

MONTANA CODE ANNOTATED 2014:

MONTANA CODE ANNOTATED 2014:15-30-2328. (Temporary) Credit for contributions to qualified endowment -- recapture of credit --deduction included as income. (1) A taxpayer is allowed a tax credit against the taxes imposed by 15-30-2103 or 15-31-101 in an amount equal to 40% of the present value of the aggregate amount of the charitable gift portion of a planned gift made by the taxpayer during the year to any qualified endowment. The maximum credit that may be claimed by a taxpayer for contributions made from all sources in a year is $10,000. The credit allowed under this section may not exceed the taxpayer's income tax liability.

(2) The credit allowed under this section may not be claimed by an individual taxpayer if the taxpayer has included the full amount of the contribution upon which the amount of the credit was computed as a deduction under 15-30-2131(1) or 15-30-2152(2).

(3) There is no carryback or carryforward of the credit permitted under this section, and the credit must be applied to thetax year in which the contribution is made.

(4) If during any tax year a charitable gift is recovered by the taxpayer, the taxpayer shall: (a) include as income the amount deducted in any prior year that is attributable to the charitable gift to the extent that the

deduction reduced the taxpayer's individual income tax or corporation license tax; and (b) increase the amount of tax due under 15-30-2103 or 15-31-101 by the amount of the credit allowed in the tax year in

which the credit was taken. (Terminates December 31, 2019--secs. 2 through 8, Ch. 317, L. 2013.)


2013 AMENDMENTS:

UPMIFA Start date of Deferred Gift Annuities 5% minimum rate for Deferred Gift Annuities

Charitable Remainder Trust

Gift of property

DonorUnitrust

Remainder toCharity

Income tax deductionVariable payments

Charitable Remainder Trust

HOW IT WORKS:

1. Donor transfers cash, securities, or other property to a trust.

2. Donor receives an income tax deduction and pays no capital gains tax

on the transfer to the trust

3. When the trust ends, the remaining principal passes to Charity.

5 Types of Charitable Remainder Trusts

Annuity (CRAT)

Straight (CRUT)

Net Income (NICRUT)

Net Income with Makeup (NIMCRUT)

“FLIP” (NIMCRUT to Straight)

Some Practical Questions

Who Drafts the Documents?Who Serves as Trustee?Who Handles the Administration?Who Invests the Trust Assets?

MANY ISSUES CLARIFIED IN NEW UNIFORM TRUST CODE

Best Property to Fund a CRT

Appreciated property, except tangible personal

property not used for charitable purposes

Land

Securities

Property subject to self-employment tax

Ordinary income property

Tangible personal property

Meet Mary Randall• Mary Randall is a widow, age 74• Mary’s three daughters are married

and all in their late 40’s– Renee– Rhonda– Rolann

Mary’s Estate Assets• Ranch FMV $2,000,000

– Basis $40,000– Lease income 1% TRR

• Brokerage Account $4,500,000• Other $500,000 mostly liquid assets• Total Estate Value $7,000,000

Mary’s Estate Objectives • “Take care of my girls”• Address Ranch capital gains tax

issue• Reduce Estate Taxes• “Help a couple of charities”

Simple Estate PlanMary’s Estate Today

is worth$7,000,000

MARY

Mary’s Estate on Death after taxes and probate

$8,545,230

MARY’S HEIRS

Simple Estate Plan - ImpactAssumptions:• Assets total $7,000,000• Transfer Tax: top rate 40%• Donor’s life expectancy = 13 years• Total Pre-tax ROR Land = 1%

•All ordinary income (33%)• Total Pre-tax ROR Other = 6%

•Half ordinary income (33%)•Half capital gain (19.2%)

•Estate Settlement Costs 2.5%

Simple Estate Plan:• Assets total: $ 7,000,000• Land 1% ROR 13 yrs: $ 228,985• Other 6% ROR 13 yrs: $ 3,788,502• Estate value in 2023: $11,017,487• Estate settlement costs: ( 275,437)• Taxable Estate: $10,742,050• Federal Estate Tax: ( 2,124,820)• Net Estate to Family: $ 8,617,230

Unitrust & Insurance Trust

CharitableUnitrust

1

Irrevocable Life Insurance

Trust

2

Charity3

Family

3

Unitrust & Insurance TrustAssumptions:• Donor’s life expectancy = 13 years• Orig. principal $2,000,000 • Cost Basis = $40,000• Donor income tax bracket = 33%• Capital Gains tax = 19.2%• Total Pre-tax ROR = 6%

•Half ordinary income•Half capital gain

• Funding and Sale in beginning of first year• 8% Unitrust Payout

Unitrust Cash Flow Comparison:After-Tax

Year Principal Income• 2015 $2,000,000FLIP SALE• 2016 1,960,000 $121,000• 2017 1,920,800 118,580• 2018 1,882,384 116,208• 2019 1,844,736 113,884• 2020 1,807,842 111,607• 2021 1,771,685 109,374• 2022 1,736,251 107,187• 2023 1,701,526 105,043• 2024 1,667,496 102,942• 2025 1,634,146 100,883• 2026 1,601,463 98,866• 2027 1,569,433 96,888• 2028 1,538,045 94,951

• TOTAL: $1,538,045 $1,397,415*

Unitrust

*Income spent on insurance and invested

CRT Estate Plan - ImpactAssumptions:•Non-Trust Asset total $5,000,000•Transfer Tax: top rate 40%•Donor’s life expectancy = 13 years•Use unitrust payments to purchase $2,000,000 life ins. - invest balance•7520 Rate 1.4%•Charitable deduction $884,940•Total Pre-tax ROR Other = 6%

•Half ordinary income (33%)•Half capital gain (19.2%)

• Estate settlement costs = 2.5%

CRT Estate Plan:• Non-Trust Asset total $5,000,000• Other Assets 6% ROR 13 yrs $3,788,502• Income from CRT in excess of

premiums @ 6% ROR 13 yrs $ 155,814• Income from charitable $ 511,515

deduct at 6% ROR 13 yrs• Estate value in 2023 $9,455,831• Estate settlement costs (236,396)• Taxable Estate $9,219,435• Federal Estate Tax (1,515,744)• Net Estate to Family $7,703,661• Life insurance proceeds $2,000,000• Total Assets to Family $9,703,661

CRT Estate PlanMary’s Estate Today

is worth$7,000,000

8%Unitrust

Gift of Real Property to Charitable Trust

$2,000,000

13 year LifeExpectancy

Settlement Costs = $236,346Estate Taxes = $1,515,774

Increased Benefit vs Simple Plan = $1,086,431

Family$9,703,661

Charity$1,538,045

$8,788,502Passes at Death

$2,000,000Life Ins.Policy

$511,515

Tax Savings

Trust Income

$155,814

AdditionalTrust Income

“People always live forever when there’s an annuity involved.”

-Jane Austen, Sense and Sensibility, 1811

When to Use a Gift Annuity:

Typically age 65+ client/donorConsistent payments and no market riskPayments mostly tax-free if funded with cashSpread out capital gain income if funded with appreciated assetsLeave a charitable legacyBonus: Use 40% state credit even without itemizing

ASSETS$250,000

5.3%Charitable Gift

AnnuityTwo Lives

•Fixed income $13,250/year [$10,163 Tax-Free and $3,087 OI]•10.6% taxable equiv. rate of return for donor in 39.6% tax bracket•Total income $198,750 over 15-year remainder life expectancy.

• Federal Income Tax Deduction $97,520 @ 2.2% 7520 Rate (39.6% bracket saves $38,618)• MT Tax Credit saves up to $20,000• MT Tax Deduction $47,520 (6.9% bracket saves $3,279

Charity

•Assets to Charity after two lives.

Donors: Ages 79/75

Charitable Gift Annuity

GIFT ANNUITY RATES

Age 60 = 4.4%Age 65 = 4.7%Age 70 = 5.1%Age 75 = 5.8%Age 80 = 6.8%Age 85 = 7.8%Age 90 = 9.0%

ACGA Suggested Rates effective January, 2012

When to Use a Deferred Gift Annuity:

Any age client/donor Efficiently use the 40% state credit Payments not needed until later (retirement, children’s or grandchildren’s college, etc.)

The Gift That Costs “Little” to GiveCharitable Deferred Payment Gift Annuity


Mr. & Mrs. I.L. Waite - Ages 44/43

Securities$60,000

[$30,000 Basis]

5% DeferredPayment GiftAnnuity

Two Lives

•Fixed Annual Income $3,000 commencing 2057 at ages 86/85

• Federal Income Tax Deduction/Savings $55,974/$22,166• MT Tax CREDIT saves up to $20,000• MT Deduction/Savings $5,974/$412• Federal/MT Capital Gains Tax avoided/deferred $7,470• Medicare Surtax avoided/deferred $1,140

Charity

•Assets available to Charity after two lives

Federal Tax Savings (39.6% x 55,974) $22,166State Tax Credit (max. $10,000/taxpayer) $20,000State Tax Deduction (6.9% x $5,974) $ 412Avoidance of Capital Gain (24.9% x 30,000) $ 7,470Avoidance of Medicare Surtax (3.8% x 30,000) $ 1,140

TOTAL TAX SAVINGS: $51,188

Mr. & Mrs. I.L. Waite - Ages 44/43$60,000 DPGA commencing 2057


CHARITABLE LIFE ESTATE

When to Use a Charitable Life Estate:

Client/Donor wants to continue using house or farm, but needs either:Charitable deduction and credit now, and/orNeeds additional income (combine Life Estate with Gift Annuity)

Generally, a much better income tax result than leaving home or farm to charity in will

• Donor is entitled to a charitable deduction and MT tax credit for value of remainder interest given to charity

• Donor retains a life estate• Property must be personal residence or farm• Amount of deduction increases as Section

7520 decreases

Charitable Life Estate

Mr. & Mrs. Ira Change- Ages 79/75Vacation

Home$200,000 FMV[$50,000 Basis]

Deed to CharityReserve Life Use

$200,000Two Lives

•Donors use home for lives•Donors responsible for insurance, maintenance, taxes, etc.

• Federal Income Tax Deduction $131,436[2.0% 7520 Rate] • Montana Endowment Tax Credit $20,000 and MT Deduction $81,436

Charity

•Property to Charity on death of life tenants without probate or estate taxes


• Frequent Questions: Control During Life, Rent, Current Mortgage, Future Mortgage, Future Sale, Appraisal, and Gift of Undivided Interest

• What to do with such a large income tax deduction – generally limited to 30% of AGI?


Yellowstone Boys & Girls Ranch Foundation Inc.2050 Overland Ave, Billings, Montana

1-800-879-0850www.yellowstonefoundation.org