CASE District IV Conference Fort Worth, Texas. March 25, What true assets does your family possess?

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1 HOW TO INITIATE GIFT PLANNING DISCUSSIONS WITH DONORS The Charitable Planning Process CASE District IV Conference Fort Worth, Texas March 25, 2013 Laura Hansen Dean, J.D. Attorney at Law (Texas, Indiana) Executive Director of Gift Planning The University of Texas at Austin Key Questions for Donors, Couples and Families What is really important to you and to your family? What true assets does your family possess? How wealthy do you want your children, grandchildren, and heirs to be? Do you own more wealth than you want to leave to them? What is the purpose and meaning of your family s wealth? To spend it? To provide a higher standard of living for your family s heirs? To enable family members to choose a career or vocation without concern about income? To fund a new family business? To support philanthropic causes? Do you and your family have a responsibility to society? Characteristics of Successful Families from Wealth in Families by Charles Collier, Harvard University, 2 nd edition, They focus on the human, intellectual, and social capital of their family. 2. They stress the priority of each family member s individual pursuit of happiness. 3. They work on enhancing intra- family communication. 4. Their timeframe for determining success is long- term. 5. They tell and retell the family s most important stories. 1

2 6. They create mentor- like relationships when establishing family trusts. 7. There is a collaboratively defined family vision statement (the Shared Dream). 8. They teach children and grandchildren the competencies and responsibilities that come with financial wealth. 9. They work at getting to really know each family member. 10. They give their younger family members as much responsibility as they can manage as soon as possible. Structuring the Charitable Giving Plan What impact does the donor, couple or family want their money to have? Simple, outright gifts of cash or assets or annual distributions from charitable lead trusts made directly to the charitable organization are best suited when the donor wants to make annual, general support gifts, or wants to have an immediate impact on an aspect of the organization s mission. Current or future gifts of cash or assets to establish or add to an endowment fund (only a portion of the earnings are expended annually) made to a charitable organization are best suited when the donor wants to perpetuate lifetime annual giving or wants to provide a permanent source or funding for a program or aspect of the organization s mission. Current or future gifts of cash or assets to a permanent donor advised fund (DAF) or to a private foundation are best suited when the donor, or couple, or family wants to be able to make annual decisions about which charitable organizations to support and the size of the distribution to those organizations. The founding generation can provide in the organizing document that a specified percentage of the annual grants made from the DAF or private foundation must be made to one or more identified publicly- supported charitable organizations and give future Fund Advisors or members of the board of directors of the private foundation discretion over the rest of the annual grants. The answer to this question will help determine: 1. The recipient(s) of the gift One or more publicly supported charitable organizations? A permanent or temporary donor advised fund held at a community foundation, a mutual fund company or brokerage firm DAF? A private family foundation? 2

3 2. The timing of the gift Some or all of outright gifts; pledges; irrevocable split- interest gifts; testamentary gifts after the death of the individual, the survivor of a couple, or after the death of one or more survivors? 3. What assets will be used to fund the gift Gifts of highly appreciated, publicly- traded securities can provide the largest value to the recipient charity at the low out- of- pocket cost for the donor due to the relatively low sales costs for the recipient charity. Gifts of highly- appreciated closely- held securities or real property can also provide significant value to the recipient charity at very low out- of- pocket cost for the donor but can be difficult or expensive for the charity to liquidate and can bring financial and reputational risks to the charity. Gifts of cash are usually the most expensive way for donors to make gifts to charity so donors may give significantly less value than they could have given. The average millionaire in the US has only about 10% of their wealth in cash. There are no liquidation costs for the charity, so 100% of the gift value can be used. Integrating Charitable Giving with Retirement Planning, Special Needs Planning, Lifetime and Estate Planning for Loved Ones The best charitable giving plan is one that helps to address the donor s, couple s or family s other financial and personal goals. In order to accomplish this, the charitable planner needs to know: 1. The donor s pre- retirement needs and goals for him or her and for loved ones. Do they need to increase current income? Are they providing financial assistance to a loved one now or do they expect to do so in the future? Charitable gift annuities and charitable remainder trusts can provide lifetime income while making a future gift to one or more charities. 2. Is special needs planning needed or has it been done for a loved one? Charitable gift annuities and charitable remainder trusts established during lifetime or as part of the donor s estate plan can make distributions to the Trustee of a special needs trust to avoid disqualification of government benefits that outright gifts or inheritances to the special needs person may cause. 3

4 3. How will the donor or couple pay for long- term care expenses if needed? Studies indicate that 75% of women and more than 50% of men will need some type of long- term care assistance. Major giving to charity may need to be delayed until after death to be sure that sufficient assets are retained for the lifetime financial needs of the donor or couple. 4. What retirement planning has been done and what type of retirement accounts are owned by the donor or will benefit the donor? Do they need to increase retirement income for selves or survivors? Charitable gift annuities provide a fixed income that can be 2 to 4 times larger than the interest being paid on CDs and money market funds. Charitable gift annuities, charitable remainder trusts, and non- qualified charitable life income plans (for non- taxable estates) can be included in estate planning to provide income for survivors. Many baby boomer donors have more value in retirement plans than in all their other assets and don t realize that federal income taxes (and state income taxes where applicable) will be due on the balance in the plans. One of the easiest testamentary charitable gifts is to name a charity as a partial or 100% beneficiary of an IRA or qualified retirement plan if their spouse agrees. The challenge is to be sure that beneficiary changes don t conflict with other aspects of their estate plan or other documents. 5. Is the donor or couple the sole or majority owner of a closely- held or family business? There are some times during the ownership of a closely- held business that can provide strategic philanthropic opportunities, for example: formation organizational documents can provide for charitable limited partnership units that exempt the charitable limited partners from any financial liability or capital calls, and that can be gifted without prior approval of the general partner and can be transferred to other charitable entities; corporate organizational documents can provide that one or more classes of shares of stock can be gifted to charitable organizations without prior approval or without being offered to other shareholders first. earnings bailout most of a donor s wealth may be in their business ownership so an outright gift of closely- held shares or limited partnership units may be the most strategic charitable gift if there is significant appreciation over adjusted tax basis. Shares or units gifted to a publicly- supported charitable organization can be redeemed by the corporation or partnership and so long as the recipient charity is not legally obligated to sell the shares or units back to the business entity, then no dividend treatment on business cash used to buy back the shares or units; the donor can claim an income tax charitable deduction for the full fair market value (so long as owned long- term before contribution) as established by 4

5 appraisal; and the redeemed shares of units can be retired by the business entity so no significant change in the donor s ownership share of the business. retirement planning funding a charitable remainder trust with closely- held shares or units can avoid all the long- term capital gain that would have been due from an outright sale so that most of the sale proceeds can be invested to produce retirement income for the life of one or more people and then distributing the remainder to one or more charitable organizations. A flip charitable remainder unitrust is usually the preferred version to allow time for the Trustee to liquidate the contributed shares or units. lifetime gifts to heirs commentators have suggested that making charitable gifts of shares or units at the same time that shares or units are given to private individuals may encourage the IRS to be reasonable about valuation discounts. The IRS usually wants the valuation discount to be much higher for charitable gifts than for private gifts, but that s difficult to argue when both types of transfers occur close together. Note: the Petter and Christiansen cases, originally decided by the US Tax Court and affirmed on appeal by two different US circuit appeals courts, approved the use of a defined value clause that provides that if the value of closely- held shares of stock or partnership units, as finally determined for gift or estate tax purposes, exceeds the amount that can be gifted or bequeathed to individuals gift- tax or estate- tax free, then shares or units that caused the excess valuation are transferred to one or charitable organizations. sale of interests or business charitable contributions of shares or units before the realization of capital gain has been triggered (acceptance of an offer, adoption of a plan of sale, or when the purchaser can force specific performance) can allow a donor to transfer significant value to charity at very low out- of- pocket cost. Charity can t be legally bound to sell the contributed shares or units. Note: while sub- S shares of stock can be gifted to charitable organizations (but not to charitable trusts) many charitable organizations are hesitant to accept these gifts because the charity s share of the corporate earnings plus the gain that charity receives when the shares are sold is Unrelated Business Taxable Income (UBTI) which can, but does not always, result in the payment of Unrelated Business Income Tax (UBIT). 6. What estate planning has been done? Is there a need to reduce future federal estate taxes? Lifetime and testamentary charitable lead trusts can avoid or reduce FET and generation skipping transfer taxes. Outright testamentary gifts to charity are exempt from FET; testamentary gifts that benefit a surviving spouse and then charity are exempt 5

6 from FET; and qualified charitable life income plans for survivors other than spouses are partially exempt from FET. Non- qualified testamentary charitable planning that leaves assets that will benefit both private individuals and charitable organizations offers much greater flexibility than the qualified split interest charitable vehicles. Since it is estimated that less than 5% of Americans have estates with value that exceeds $5.25 million (2013) non- qualified testamentary charitable planning can be appropriate for estates where the estate tax charitable deduction is not needed. What Donors Say About Why They Can t Make a Gift That Can Lead to Gift Planning Discussions 1. All My Assets Are Tied Up Giving options include giving something other than cash, such as stocks and bonds, real estate, business interests, collectibles, mineral interests, intellectual property, and partial interests in annuities and trusts. 2. All My Planning is Done Giving options include naming charity as a beneficiary of a retirement plan, an insurance policy, a bank or brokerage account; and amending a will or trust (can be simple and cost significantly less than preparing the original documents). 3. I m Retired or Living on a Fixed Income Giving options include: Charitable Gift Annuity. At age 70, current fixed payout rate is 5.1% for life. Older when gift made, payout rate is higher, up to 9.0% at age 90 and over. Making a gift after lifetime by a beneficiary designation or will or trust gift so that the donor retains total control of their assets until their passing. 4. I m Saving for Retirement Giving options include: Deferred payment Charitable Gift Annuities with payments starting on a specific date in the future or within a range of dates to supplement future retirement income 6

7 Charitable Remainder Unitrusts with minimal income until sometime in the future. 5. I m Providing Financial Support to a Loved One Giving options include: creating a Charitable Gift Annuity for them or naming them as a beneficiary of a Charitable Remainder Trust. The donor avoids paying income tax on the income their loved one receives. The donor can be named as a survivor beneficiary. 6. I Want to Leave as Much as Possible to My Heirs Giving options include leaving heavily taxed assets, like retirement plans, to charity which doesn t pay the taxes. Charity will receive 100% while heirs might receive less than 50% after the payment of taxes. With careful planning charity can receive the amount heirs will lose due to estate and income taxes. Gifts to charity can reduce the tax bill, not the amount heirs receive. 7. I Will Make a Nice Gift After I Sell My Business, My Land, Etc. Giving options include giving shares of stock or partnership units in the business to charity before the sale plan is adopted or the offer to sell the land is accepted. Then the donor and the charity sell the shares/units or the land to the buyer. The donor receives a tax deduction at the time of the gift for the value of the donated shares/ units or the land and avoids ALL capital gains on the sale of the gifted shares of stock or partnership units or land. 7