Estate Planning: MCLE BasicsPlus! Charitable Planning May 10,
Estate Planning: MCLE BasicsPlus! Charitable Planning May 10, 2016 Laura T. Godine, Esq. Senior Director of Professional Advisor Relations The Boston Foundation Overview Charitable Planning: Why bring it up? The Charitable Deduction Deduction Limitations
Value How much of the value can I deduct? Other considerations Quick Reference Chart Charitable Giving Options What is it? What does it get me? No-gos Direct Service Public Charities Double click on Donor Advised Funds and Private Foundations Split-Interest Trusts Quick Reference: Other Options Resources 2
Charitable Planning: Why bring it up? Advisors who raise the philanthropic question do so because: Clients expect it as part of a complete wealth/estate plan It often leads to deeper, richer client relationships Client loyalty is strengthened as a consequence of enhanced services It helps position the practice as civically-engaged They know if they dont, someone else will The nature of the advisor/client relationship sets the stage for transformational conversations Together for key transitions and transactions Intimate knowledge of values and goals Tough questions can be raised 3 The Charitable Deduction: What is it? What constitutes a charitable gift? Charitable contribution: a transfer of money or property to a permissible donee that is both voluntary and without receipt of economic consideration or benefit and is in the
proper form Permissible donee: any organization described in Internal Revenue Code Section 170(c) qualifies as a permissible donee for income tax purposes 4 The Charitable Deduction: What does it get me? Income Tax Under 170 federal income tax charitable deduction available as an itemized deduction subject to certain limits Estate/Gift Tax If an organization qualifies for income tax deduction under 170(c), it also qualifies for gift and estate tax deduction Foreign charities qualify for estate and gift (but not income) tax deduction Estate/gift tax charitable deduction unlimited except that it cannot exceed amount included in estate 5 The Charitable Deduction: No-gos No charitable deduction allowed for: Contributions to individuals Portion of contribution for which donor receives a benefit (i.e. dinner, art exhibit, thank you gift, etc.)
Value of donors time or services Nonqualified Organizations Partial Interest Rule Generally, cannot deduct a charitable contribution of less than ones entire interest in property 6 Deduction Limitations: Value Fair Market Value vs. Cost Basis Determined by (1) type of property being contributed and (2) type of charitable organization benefitted (more on this in a moment) Tangible Personal Property related vs. unrelated use Property to be used in furtherance of organizations charitable purpose fair market value Property use unrelated to organizations charitable purpose cost basis
Generally unrelated assets sold by charity Art, collections, other tangibles 7 Deduction Limitations: How much of the value can I deduct? For income tax purposes, amount of deduction allowed is limited to a certain percentage of Adjusted Gross Income (AGI). Applicable percentage depends on (1) type of property contributed and (2) type of charitable organization benefitted. 50% limitation Public Charities and Private Operating Foundations Property: Cash
Ordinary income property (i.e. inventory) Cost basis deduction Short-term capital gain property Cost basis deduction Property not related to charitys purpose Cost basis deduction Under 170(b)(1)(C)(iii) can elect to reduce deduction to cost basis (rather than FMV) for certain 30% property to qualify for 50% limitation 8 Deduction Limitations: How much of the value can I deduct? 30% limitation Public charity that does not qualify for 50% limit-- Most non-operating private foundations and veterans organizations, fraternal societies, and non-profit cemeteries Property-- For the use of the charity; Long-term capital gain property
to a 50% charity Eg., Publicly traded stock contributed to a public charity or donor advised fund 20% limitation Capital gain property contributed to an organization not qualified for the 50% limitation Deduction limited to basis for any contribution other than publicly traded securities Eg., Privately held business interests contributed to a private nonoperating foundation 9 Deduction Limitations: Other Considerations Carry forward of excess contributions 5 year carry forward Retains character as 50/30/20% limitation property in carry forward year(s)
Current year gifts factored before carry-over amounts Excess carry-forward expires upon death of the taxpayer Pease limitation For high income taxpayers, the Pease limitation (revived under the American Tax Relief Act of 2012) reduces the amount of itemized deductions a taxpayer can take Limited to the lesser of 3% of AGI for deductions exceeding the threshold or 80% of the itemized deductions allowed for the year Valuation Considerations Publicly traded securities valued at mean high and low on date of transfer Appraisal requirements (Form 8283) Partnerships or privately held securities $5,000 or more, written appraisal must accompany signed 8283 10 Cost of appraisal deductible as a miscellaneous itemized deduction Quick Reference: Deduction Limitations
*Cost basis for short-term capital gain property and tangible personal property not related to donees charitable purpose. 11 Charitable Giving Options: Direct Service Public Charities Community Foundation (Public Charity) General Fund or Endowment (e.g. The Permanent Fund for Boston) Designated Fund Field of Interest Fund Donor Advised Fund Features: Anonymity Legacy/Perpetuity Philanthropy support services
Community expertise Highest deductions Complex assets 12 Charitable Giving Options: Direct Service Public Charities Charitable Gift Fund Several financial services companies offer Donor Advised Fund option Anonymity Highest Deductions Some legacy options Complex Assets Private Foundation
Total Control of Investments and Grants Legacy/Perpetuity Subject to: Excise Tax Payout Requirement Tax Filings 13 Charitable Giving Options: Double Click on Donor Advised Funds and Private Foundations Donor Advised Funds Private Foundation Start-up Costs None Legal fees and start-up
costs can be substantial; takes several weeks, and often months to create Ongoing Administrative and Management Fees Varies with sponsoring charity and level of services; typically less than supporting organizations or private foundations Varies with choice of board and level of service; Must file tax returns, conduct independent audit, administer all functions Excise Tax None Excise tax of 1% to 2% of
net investment income annually Payout requirements None Must expend 5% of net assets value annually 14 Charitable Giving Options: Triple Click on Donor Advised Funds and Private Foundations Donor Advised Funds Private Foundation Control of grants and Investments Donor may recommend grants and investments Donor family has complete control of all grantmaking and investment decisions,
subject to self-dealing rules Grantmaking Support/Staffing Varies with sponsoring charity Must hire staff or consultant Tax Status Shares the public charity tax exempt status of the supporting charity Applies for private foundation tax exempt status from IRS 15 Charitable Giving Options: Split-Interest Trusts Charitable Remainder Trust: Donor contributes cash or other property to
irrevocable trust for term of years or for life, two distinct interests created: (1) income interest for donor and/or others for life or term of years (not to exceed 20 years); and (2) remainder interest to charity(ies) Two forms: charitable remainder unitrust (CRUT) and charitable remainder annuity trust (CRAT) Trust must pay out 5% Value of charitable remainder must be 10% of assets contributed CRATs: must have 5% probability that the trust assets will be exhausted Charitable Lead Trust: Donor contributes cash or other property to irrevocable trust, two distinct interests created: (1) income lead interest to one or more qualified charitable organizations; and (2) remainder interest to non-charitable beneficiaries when trust terminates Grantor vs. Non-Grantor CLT
Note on Interest Rate Environment: 7520 prescribes the value of an annuity, interest for life or for a term of years, or remainder or reversionary interest For charitable lead annuity trusts, the 7520 rate is used as the discount rate for the purpose of determining the present value of the annuity interest The lower the 7520 rate, the lower the present value of the remainder interest (i.e., 16 the taxable transfer) and the higher the relative income, gift, and estate tax charitable deductions Quick Reference: Other Charitable Giving Options Charitable Bequest (Devise): Specific; contingent; residuary Retirement plans Name charity as beneficiary of IRAs and qualified retirement plans to go into effect at death without any income tax consequences to plan participant or his/her estate Spousal waiver required Planning point taxable vs tax-exempt income Life Insurance
Name charity as beneficiary of life insurance policy Estate may receive charitable deduction for death benefit Name charity as both irrevocable owner and beneficiary of a paid up policy Donor will receive an income tax charitable deduction in the amount of the replacement value of paid up policy (i.e., cost of an identical policy, given donors age and medical condition) Charitable QTIP Trust: Provides all trust income for surviving spouse for life with remainder interest passing to charity 17 Even Quicker Reference: Other Charitable Giving Options Bargain Sale: Sale of appreciated property to charity for less than FMV, resulting in partial charitable contribution for seller, seller pays tax on portion of gain attributable to sale Pooled Income Fund: Fund maintained by a charity; many donors make gifts, each retains a right to a certain amount of income, with principal outright to the charity at death Charitable Gift Annuity: Contractual transaction in which an individual transfers cash or property to a charity in exchange for charity's promise to make
fixed annuity payments to one or two life annuitants Conservation Easement: Gift in perpetuity of a partial interest in an open space designated for specific types of preservations (e.g., public use, natural habitat, historic, etc.) Less Common: Vehicles: If claimed FMV > $500, you can deduct the smaller of (i) gross proceeds of sale by organization or (2) FMV on date of the contribution, attach Form 1098-C-Contributions of Motor Vehicles, Boats and Airplanes to your tax return to support deduction Self-created works of art: Deduction limited to basis/cost (paint, canvas); Step-up in value at death 18 Resources IRS Publication 526 - Explains how to claim a deduction for charitable contributions, including qualified organizations, types of deductible contributions, record keeping and reporting
Guidestar.org - Gathers and disseminates information about every IRSregistered nonprofit organization, some information available for free, more detailed information requires membership Planned Giving Design Center http://www.pgdc.com/- online network for charitable organizations and professional advisors, providing charitable planning content, commentary and planning tools The U.S. Trust Study of The Philanthropic Discussion, 2013: Understanding Advisor Approaches & Client Expectations, conducted in partnership with The Philanthropic Initiative http://www.tpi.org/ 19 Resources No need to go it alone. Opening the conversation is just the start Professional advisors of all types turn to us: For information, tools and connections that help them support their clients philanthropic goals
To work directly with their clients We advise you to seek your own legal, tax and financial advice in connection with gift and planning matters. The Boston Foundation and its staff do not provide legal, tax or financial advice. 20 Thank you. Laura T. Godine, Esq. Senior Director of Professional Advisor Relations The Boston Foundation (617) 338-1218 [email protected] 21
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