charitable legacy planning
DESCRIPTION
Charitable Legacy Planning. 1-Hour CE Seminar | November 2008. - PowerPoint PPT PresentationTRANSCRIPT
For producer use only. Not for presentation to the public.OLA 1907 1208
CharitableLegacy Planning
1-Hour CE Seminar | November 2008
For producer use only. Not for presentation to the public.2
This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.
For producer use only. Not for presentation to the public.3
Identifying the Client’s Legacy
Leaving a lasting legacy
Family
Charity
Tax deductions
Leveraging a life insurance policy
Split-interest gifts
Other charitable giving strategies
For producer use only. Not for presentation to the public.4
Charitable Tax Deductions
Charitable income tax deduction factorsPublic or private charityPresent interest or future interestType of assetOrdinary income property or capital gain propertyEntire asset or split-interest asset
Income deduction limits of 50%, 30% or 20% of donor’s AGI 5-year carryforward Some deductions limited to cost basis Dollar-for-dollar charitable deduction for estate taxes
and gift taxes
For producer use only. Not for presentation to the public.5
Charitable Legacy Life Insurance Planning
“I have an old policy that I no longer need.Can I give it to charity?”
“I would like to leave something to charitable cause or my alma mater. How can I leave a significant bequest to charity without
depleting the legacy leave for my loved ones?”
Designating charity as policy’s beneficiary
Gifting old policy to charity
Purchasing life insurance policy for charity
For producer use only. Not for presentation to the public.6
Split-Interest Gifts
“I want to benefit a charity, but I am not ready or able to part with the entire asset.”
Split ownership of asset into two parts: Income interest Remainder interest
Gift to charity of one interest
Donor
Trust Income Payments
Irrevocable Gift of Assets to Trust
RemainingTrust Principal
For producer use only. Not for presentation to the public.7
Understanding the Different Types of Charitable Remainder Trusts
“I would like to donate an asset to charity, but I need a stream of income from the asset during my life.”
“I have an asset with a low basis. How can I sellthe asset and minimize the tax consequences?”
Charitable Remainder Annuity Trust (CRAT)
Charitable Remainder Unitrust (CRUT)
Net Income Charitable Remainder Unitrust (NICRUT)
Net Income Make-up Charitable Remainder Unitrust (NIMCRUT)
For producer use only. Not for presentation to the public.8
Charitable Remainder Annuity Trust
Established and funded with single contribution
One-time valuation of trust— initial fair market value
Specified annuity benefit paid at least annually
Fixed amount, or
Fixed percentage based on initial fair market value
Annuity must be between 5% and 50% of the trust’s initial fair market value
5% probability test
For producer use only. Not for presentation to the public.9
Charitable Remainder Annuity Trust
Income payout will not vary with trust investment performance
Must make payments to beneficiaries whether or not there is enough trust income
Trustee can deplete trust principal to make income payments to income beneficiaries
Payout period not to exceed 20 years or life/lives of income beneficiary(ies)
At trust term, remaining trust principal passes to charity(ies)
For producer use only. Not for presentation to the public.10
Charitable RemainderUnitrust (CRUT) Features
Can accept multiple contributions
Trust valued annually
Pays specified fixed percentage of trust valuebased on annual valuation of trust
Payout must be between 5% and 50% of trust value
NICRUT (Net Income CRUT)
NIMCRUT (Net Income Make-up CRUT)
For producer use only. Not for presentation to the public.11
Asset Replacement: Life Insurance and CRTs
What is asset replacement?
Gifts to a CRT are irrevocable
Loved ones do not have claim to donated assets
Benefits of using life insurance
Life insurance provides way to “replace” what loved ones would have received
Potential payment of insurance premiums with CRT income distributions
Removal of life insurance death benefit from donor’s estate if held within an asset replacement trust
For producer use only. Not for presentation to the public.12
Taxation of CRT Income
“Four-tiered” tax system of CRT income:
Ordinary income
Capital gains
Tax-free income
Return of cost basis
Factors affecting charitable deduction:
Duration of the payment
Initial value of the asset contributed to CRT
Payout rate and frequency
Section 7520 rate
For producer use only. Not for presentation to the public.13
CRUT Example – Background Facts
John Startup, 47 years old
John is ready to sell his business
Started business with $100,000 investment 10 years ago
Approximate current value is $5 million
He wants to provide a large donation to charity
John doesn’t want to deplete his estate that he plans to pass on to his children
For producer use only. Not for presentation to the public.14
How a CRUT Works
(1) John contributes $5 million business to CRT
(2) John receives tax deduction of $1.2 million and an annual
income equal to 5% of the trust’s value
(3) Annual income from trust goes to pay
premiums
Donor CRUT
CharityLife Insurance
(4) Upon John’s death, trust remainder
goes to charity
For producer use only. Not for presentation to the public.15
Charitable Lead Trusts
“I would like to benefit a charity, but I want my loved ones to receive the asset.” “I don’t need the income from this asset.
Can I give the income to charity but keep the rest for my loved ones?”
CLT – opposite of CRT
Charity receives stream of income
Grantor’s loved ones get remainder interest
Two types:
CLAT – fixed dollar amount
CLUT – percentage of trust value
For producer use only. Not for presentation to the public.16
Tax Consequences of CLTs
Gift Taxes – only on remainder interest
Income Tax Deduction – Two types of trusts
Grantor Trust:
Charitable income tax deduction at creation
Trust income taxable to grantor
Non-Grantor Trust:
No charitable income tax deduction
Non-taxable trust income
For producer use only. Not for presentation to the public.17 For producer use only. Not for presentation to the public.
How the CLT Works
Mr. Michaels, age 68$1 million contribution to CLAT5% payout to charity§ 7520 rate = 3.8%Trust asset growth rate 5%
Charitable gift tax deduction = $584,758Gift taxable amount = $415,242After 15 years,Charity received $750,000Loved ones receive $946,054
Mr. Johns
Charity
Beneficiaries
CLAT
RemainderInterest
TaxDeduction
AssetsAnnualPayout
For producer use only. Not for presentation to the public.18
Enhanced Charitable Trust
“I don’t need this asset and I would like to receive a charitable income tax deduction for my gift. Can I leverage his asset to provide a benefit to a
charity and my loved ones?”
Deferred charitable lead annuity trust (CLAT)
Small annual lead payout to charity
Enhanced final payout to charity and trust beneficiary through use of life insurance
For producer use only. Not for presentation to the public.19
A New Approach to an Old Challenge
Challenge Provide client with income tax deduction to offset
significant non-recurring taxable event Large bonus or commission Sale of real estate Sale of business
Opportunity Leverage donated assets through purchase of life
insurance policy Provide current income tax deduction Make meaningful contribution to charity Pass on significant wealth to loved ones
For producer use only. Not for presentation to the public.20
Enhanced CLAT: Donor’s View
(1) Individual gifts asset to
CLAT
(3) CLAT uses donated asset to purchase life
insurance
* Gift tax based on original gift amount less charitable income tax deduction
Non-recurring Taxable Item Charitable
Deduction
CharityBeneficiaries
CLAT
LifeInsurance
(2) Grantor receives
charitable deduction to help
offset income taxes due
(4a) Upon death ofinsured, a portion of
death benefit is paid to charity
(4b) Remainder of death benefit paid to non-charitable trust
beneficiary (subject to gift tax), plus
remaining trust assets*
For producer use only. Not for presentation to the public.21
Enhanced CLAT: Charity’s View
Charity
CLAT
LifeInsurance
Policy
Fixed Income Option(Municipal bonds)
Small annual leadpayments to charity
Majority of contribution to
the charity stems
from the life
insurance proceeds
CLAT purchases fixed income vehicle to provide annual income
to charity
For producer use only. Not for presentation to the public.22
Client Profile
Individual with significant taxable non-recurring income
Considerable commission or bonus
Sale of business or real estate
Highly appreciated asset with no/low basis (IRA or annuity)
Aged 60 or older
Desires large tax deduction
Wants to create legacy for spouse or future generation
Charitably inclined
For producer use only. Not for presentation to the public.23
Enhanced Charitable TrustExample – Background Facts
60-year-old male executive:
Receiving a bonus of $1,000,000
Goals:
Maximize wealth transfer to loved ones
Minimize impact of taxes due to bonus
Provide benefit to charity
Current and future tax implications:
45% income tax rate
55% estate tax rate
3.8% Section 7520 rate
For producer use only. Not for presentation to the public.24
Option 1: No Planning
$1,000,000 bonus
Immediately reduced by 45% income tax
$550,000
Assuming 5% after-tax growth...
In 20 Years…
$1,459,314
For producer use only. Not for presentation to the public.25
Option 2: CRT
Current Income Tax Deduction: $331,270Assumes:
• Annual CRT payout of 5% • 7520 rate of 3.8%
CRT
$1,726,000 life insurancedeath benefit
$50,000annual income to grantor
$22,500income taxes
$1,000,000 bonus
$1 million giftedto CRT
Annual 5% payout
Remaining proceedsof $27,500 purchase
a universal lifeinsurance policy
Grantor pays taxes on CRT income of 45%
For producer use only. Not for presentation to the public.26
Option 3: Enhanced CLAT
Current charitable income tax deduction: $300,000
*$700,000 subject to gift tax
$1,000,000 bonusCLAT
Universal lifeinsurance
policy $3,801,000death benefit
Charity
Muni bondsearning 4%
Non-charitable Trust Beneficiaries
$1M bonus gifted to CLAT*
$900,000 purchasessingle premium
universal lifeinsurance policy
$100,000purchases muni bonds
$4,000 annual income generated for charity
Upon grantor’s death charity receives
$500,000
Upon grantor’s death
non-charitable trustbeneficiaries receive
$3,301,000*
For producer use only. Not for presentation to the public.27 For producer use only. Not for presentation to the public.
Comparing the Three Options…MaximizingWealth to Loved Ones–20 Years Later
$0
No Planning
$3,301,000$1,726,000Amount to loved ones
$500,000$1,000,000 (assuming 5% annual return)
Amount to charity
$700,000$0*$459,314Subject to gift/estate tax
$0$50,000$0Annual income to grantor
$4,000$0$0Annual income to charity
$300,000$331,270$0Income tax deduction
$3,801,000 universal life insurance policy
$2,726,000(includes universal life
insurance policy in ILIT)$1,459,314Value of asset
With ECLATWith CRT
$1,206,691
*Assumes no gift taxes due to Crummey powers
For producer use only. Not for presentation to the public.28
Comparing the Three Options…Maximizing Gift to Charity–20 Years Later
$0
No Planning
$1,651,000$1,726,000Amount to loved ones
$2,150,000$1,000,000(assuming 5% annual return)
Amount to charity
$100,000$0*$459,314Subject to gift/estate tax
$0$50,000$0Annual income to grantor
$4,000$0$0Annual income to charity
$900,000$331,270$0Income tax deduction
$3,801,000universal life insurance policy
$2,726,000(includes universal life
insurance policy in ILIT)$1,459,314Value of asset
With ECLATWith CRT
$1,206,691
For producer use only. Not for presentation to the public.29
Flexible Design
Ability to customize a strategy tailored to meet client’s specific goals/needs
Amount passed on to charity
Amount passed on to loved ones (subject to gift tax)
Amount of income tax deduction desired
Charity/ Deduction
Loved Ones
Loved Ones
Charity/ Deduction
For producer use only. Not for presentation to the public.30
Other Charitable Gifting Strategies
Pooled Income Funds
Charitable Gift Annuities
Private Foundations
Donor-Advised Funds
For producer use only. Not for presentation to the public.31
Pooled Income Fund
“I don’t have enough assets to set up a CRT, however I would still like to contribute an asset to charity, but retain a
stream of income.”
Annual PaymentsIncome Tax Deduction
Assets PIF
Donor
Charity
For producer use only. Not for presentation to the public.32
Charitable Gift Annuity
“I don’t have enough assets to set up a CRT, however I would still like to contribute an asset to charity, but retain a
stream of income.”
Asset
Donor
Charity
Annual PaymentsIncome Tax Deduction
For producer use only. Not for presentation to the public.33
Private Foundations
“I want to do more than just give to a charity. How do I create a charitable entity that my loved ones can carry on after
I pass away?”
“I want to benefit a charity, but I do not want to lose control over the money I donate and the ability to decide what charitable causes it will
benefit.”
Created as either a corporation or trust
Run by family members
Deductions depend upon property given and whether given during life or at death
For producer use only. Not for presentation to the public.34
Donor-Advised Funds
“I want to retain some control over the assets I donate, but private foundations are too complicated.”
Contribution to a fund run by a charity
Donor makes recommendations as to distributions
Less administrative cost and exposure to excise taxes for donor
Income tax deduction similar to contributions to public charities
For producer use only. Not for presentation to the public.35
Benefits of Charitable Legacy Planning
Support a cause or charity one believes in
Advantageous tax planning
Share one’s wealth with family or others
For producer use only. Not for presentation to the public.36
Transamerica Insurance & Investment Group (“Transamerica”) and its representatives do not give tax or legal advice. This presentation is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here.
Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of this presentation. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica’s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects.
Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of November 2008.
Transamerica Insurance & Investment Group is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN 37219-2417. Web site: www.nasba.org.
In the state of New York, Transamerica Life Insurance Company is an approved provider of continuing education courses (Provider Organization Approval Number NYPO-100366).
For producer use only. Not for presentation to the public.OLA 1907 1208
CharitableLegacy Planning
1-Hour CE Seminar | November 2008