Creative Charitable Planning Strategies
JACK SAWYER
Charitable Remainder Trust
Donor Spouse Charitable Remainder Trust
Current or Deferred Income Donee Spouse Child or Other Income Beneficiary
Charity
If Donee Spouse is not the sole income beneficiary (other than Donor Spouse), the gift/estate tax marital deduction is not available.
Example of Benefits of Charitable Remainder Trust
Sale of Asset: $1,000,000 Sales proceeds Net after tax proceeds = $865,000 - 100,000 Tax basis Income: $865,000 x 6.5% = $56,225 $900,000 Capital gains x15% $135,000 Capital gains tax
Donor Gift $1,000,000
Spouse
6.5% Charitable Remainder Annuity Trust
$65,000 per year to Donor / Donee Spouses
Charity
Results: Increase in income from $56,225 to $65,000 Income tax savings of $58,000 (from income tax charitable deduction) Capital gains tax savings of $135,000 Estate tax savings of $450,000
• Charitable • Remainder • Annuity
• Trust
CRAT
• Fixed Payment Based On Initial Value • Minimum Of 5% • Maximum Of 50%
• Remainder Value At Least 10%
• Possibility Of Expiry Less Than 5%
• Charitable • Remainder • UNI• Trust
CRUT
• Floating Payment Based On Annual
Value • Minimum Of 5% • Maximum Of 50% • Remainder Value At Least 10%
Term
• Life Or Lives Of Named Individuals • Fixed Term Of Not More Than 20 Years • Combination Of Life And Term
– Cannot Exceed One Or The Other
– Example
Remainder Beneficiary
• Organization Described In 170(c) • Includes Private Foundations • Limit To 170(b)(1)(A) For Public Charity
• Can Revoke One Charity And Appoint
Another
CRUT Variations
• Standard CRUT
– Pays From Income And/Or Principal
• Net Income CRUT
– Pays From Income Only
• NIMCRUT
– Pays From Income Only
– Deficiency Can Be Made Up
Technical Requirements
• Not A Grantor Trust • Private Foundation Restrictions • No Additions -- CRATs Only
Planning Ideas
• Diversification • Supplemental Retirement Plan • As Retirement Beneficiary
– Example
• As CLT Compliment
– Example
Charitable Remainder Unitrust
Planning for Retirement Tax-Free Compounding
Ages 55 to 65
Contribution of $250,000 at age 55
$250,000 Tax-Free Compounding at 10% for 10 years
$650,000 at age 65
6.5%
Magnificent Retirement Income
6.5% x $650,000 = $42,250 per year plus arrearages from previous years
FLIP Unitrusts
• Begins As Net Income CRUT • Triggering Event • Converts To Standard CRUT
• Advantages
Retirement Assets
• The Mother Lode of Planned Giving • Estate Tax • IRD
• How to Avoid Both
Illustration
$2,000,000 IRA
$3,000,000 Other Assets $5,000,000 Total Assets
$2,000,000 IRA
-
900,000 Estate Tax 385,000 Income Tax
$ 715,000 Net to Heirs
Heirs 35.25% Income Tax 19.75%
Estate Taxes 45%
Planning
Defer Income Tax
• Plan requirements
• Minimum distribution rules
• Designated beneficiary
Planning
Charitable Remainder Trust
• Establish unfunded trust
• Designate trust as beneficiary
• Example
Examples
Rich
• Age 60
• $3.5 million probate assets
• $3 million profit sharing plan
Examples
Bud
• Age 37
• Good income
• Spends all of it!
Examples
Options
A. All to Bud
B. Probate assets to Bud & profit sharing plan to CRT
Plan A
Estate Tax = $1,350,000
Income Tax = $577,500
IRS gets $1,927,500
Charitable Remainder Unitrust
Bud Profit Sharing Plan
$193,500 First Year
At Bud’s Death
$3,000,000
CRT 6.45%
Charity
Plan B
Estate Tax = $1,210,396 Income Tax = -0-* *Distributions taxed when received
IRS gets $1,210,396 Tax savings $717,104
What’s in it for Bud?
• Assume 5% income and 5% growth • 1st year $193,500 • 5th year $222,475
• 10th year $264,869
• 20th year $375,433 • Total $20,743,624 to Bud $14,417,033 to
Charity
CRT = MORE BUCKS FOR BUD
Charitable Lead Trusts
• Charitable Lead Annuity Trusts
– CLAT
• Charitable Lead Unitrusts
– CLUT
• Intervivos or Testamentary
The Charitable Lead Trust
Donor
Gift
Income Beneficiary
Final Distribution
Ultimate Beneficiary
Parents
Charitable Lead Trust
Children or Other Descendants
Charities
When parents transfer property to a charitable lead trust, they have made two gifts: (1) a gift to charity of the right to receive income from the property during the term of the trust and (2) a gift to the children of the right to receive the property at the end of the term of the trust. Parents receive a gift tax charitable deduction which will reduce or eliminate gift tax on the gift to the children.
Tax Attributes
• No Income Tax Deduction Unless
“Grantor Trust”
– Grantor Gets Up Front Income Tax
Deduction
– Grantor Liable for Income Tax on Trust’s
Income
• Gift/Estate Tax Deduction for Value of
Charity’s Interest • Can “Zero Out” CLAT
Uses of CLATS
• To Transfer Property to Descendants
During Life
• To Facilitate Testamentary Transfers • Leveraging Valuation Discounts
How to Get Property to the Children Transfer-TaxFree
Income Beneficiary Ultimate Beneficiary
Donor
Parents
Gift $1,000,000
6.85% Charitable Lead Annuity Trust
$2,679,440
Children
$1,370,000 Charity
Gift Tax: $ -0Assumptions: 10% Annual Return 20-Year Term
Leveraging the GST Exemption
Donor
Gift
Income Beneficiary
Ultimate Beneficiary
Parents
$5,000,000
11.5% Charitable Lead Unitrust 6 Year Term
Grandchildren / GST Trust
Charity
Gift: Gift Tax Charitable Deduction: Taxable Gift: Allocation of GST Exemption: $5,000,000 (3,000,000) $2,000,000 (60%)
(2,000,000) -0GST Inclusion Ratio
Combining the Family Limited Partnership and the Charitable
Lead Trust
#1 1% GP 99% LP
Parent
#3 Note
Limited Partnership Note
#2
99% LP
Charitable Lead Trust
#5 Charitable Donations
Charity
#4 Interest Children #6 Note Distributed at Termination
Step 1: Create Family Limited Partnership
#1 1% GP 99% LP
Parent
Limited Partnership
Parent transfers $15,000,000 in stock to family limited partnership, in exchange for which parent receives the entire interest in the partnership (1% general partnership interest, plus 99% limited partnership interest).
Step 2: Sell Partnership Interest to Children for Note
#1 1% GP 99% LP
Parent
Limited Partnership Note
#2
99% LP
Children
Using a conservative 33% valuation discount, parent sells the entire 99% limited partnership interest to the children for $10,000,000. Parent receives from children a promissory note in the face amount of $10,000,000, payable interest only at the rate of 7.1% a year for a term of 20 years. Principal is payable at the end of 20 years.
Step 3: Transfer Note to Charitable Lead Trust
#1 1% GP 99% LP
Parent
#3 Note
Limited Partnership Note
#2
99% LP
Charitable Lead Trust
Children
Parent transfers the children’s $10,000,000 promissory note to a charitable lead trust as a gift. The charitable lead trust has a term of 19 years and an 7.1% annual payout to charity. There are no gift tax consequences because the gift tax charitable deduction equals the full amount of the gift.
Step 4: Children Pay Interest to Trust
#1 1% GP 99% LP
Parent
#3 Note
Limited Partnership Note
#2
99% LP
Charitable Lead Trust
#4 Interest Children
Children pay 7.1% interest ($710,000) each year to the charitable lead trust, which now holds their $10,000,000 promissory note. Interest payments continue for 19 years, the term of the charitable lead trust.
Step 5: Trust Pays Annuity to Charity
#1 1% GP 99% LP
Parent
#3 Note
Limited Partnership Note
#2
99% LP
Charitable Lead Trust
#5 Charitable Donations
Charity
#4 Interest Children
Using the $710,000 interest payment it receives from the children each year, the charitable lead trust distributes $710,000 to charity each year during the 19-year term of the trust.
Step 6: Trust Terminates - Note to Children
#1 1% GP 99% LP
Parent
#3 Note
Limited Partnership Note
#2
99% LP
Charitable Lead Trust
#5 Charitable Donations
Charity
#4 Interest Children #6 Note Distributed at Termination
At the end of the term of the charitable lead trust, the $10,000,000 promissory note is distributed to the children, the makers of the note. The children never have to pay the $10,000,000 principal amount of the note.
FINAL SCORE
CHILDREN -- $55,415,681
LAND TRUST -- $13,490,000 IRS -- 0
COMBINING A CRUT AND A CLAT
WIDOW’S NET WORTH = $20,000,000 SON’S AGE = 19
SOLUTION
• WIDOW’S WILL PROVIDES:
– FORMULA BEQUEST TO 20 YEAR 5% CRUT – RESIDUE TO 20 YEAR ZEROED CLAT
ILLUSTRATION
• DEATH IN OCTOBER 2009
– $9,431,420 TO CRUT
– $10,568,580 TO 6.85% CLAT
– CHARITABLE DEDUCTION = $16,500,000 – TAXABLE ESTATE = $3,500,000
– EXEMPTION = $3,500,000
– ESTATE TAX = $0
RESULTS
• SON GETS (ASSUMING 10% ROI):
– FIRST YEAR INCOME = $471,571
– LAST YEAR INCOME = $1,191,636
– TOTAL INCOME = $15,592,945 – PRINCIPAL DISTRIBUTION YEAR 20 =
$28,168,402
– CONTROL OF $39,500,000 OF CHARITABLE
ASSETS
RECENT DEVELOPMENTS
• IRA Charitable Rollover • Other Charitable Incentives • Substantiation Requirements
• Appraisal Requirements
• Facade Easements • New Rules for Supporting Organizations
and Donor Advised Funds