CHARITABLE REMAINDER AND LEAD TRUSTS

Transcription

1 CHARITABLE REMAINDER AND LEAD TRUSTS The Underused and Underappreciated Special Ops Charitable Team - Tara Mattessich Larkin, Hoffman Daly & Lindgren - Gary Hargroves Thompson & Associates Minnesota Planned Giving Council

2 CHARITABLE REMAINDER TRUSTS

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5 CHARITABLE REMAINDER TRUSTS Defined in IRC 664 May be created during lifetime or at death Provides for a specified payment, at least annually, to one or more persons at least one of which is not a charity Person may be a trust (but only if trust beneficiary is incompetent or to a living trust for a term of years), estate, partnership, association, corporation (but not a pet)

6 CHARITABLE REMAINDER TRUSTS Payment period must be for a term of years (not to exceed 20) or for the life or lives of an individual or individuals If payment is for the life/lives of individual(s), all individuals must be alive when the trust is created (but not so for term of years)

7 CHARITABLE REMAINDER TRUSTS At the end of the payment period, the remainder must either be held in trust for charitable purposes or paid outright to charity

8 CHARITABLE REMAINDER TRUSTS Payout limitations: Annual payout cannot exceed 50% of the fair market value of the trust s assets, and the charitable remainder to the charity must be at least 10% of the net fair market value of the property transferred on the date of the contribution

9 CHARITABLE REMAINDER TRUSTS Charitable remainder annuity trust (CRAT) A set dollar amount or a fixed percentage (not less than 5% nor more than 50%) of the initial principal amount of the trust Must prohibit additional contributions after the initial contribution Charitable deduction is the fair market value of the property less the value of the annuity

10 CHARITABLE REMAINDER TRUSTS Charitable remainder annuity trust (CRAT) For CRAT s based on measuring lives, no charitable deduction is allowed if there is more than a 5% chance that CRAT assets will be depleted so that the nonprofit remainderman(en) will receive nothing

11 CHARITABLE REMAINDER TRUSTS Charitable remainder annuity trust (CRAT) More risk for the charity/beneficiary because payment amount is fixed Trustee may need to invade principal to make annual payment Not as attractive in current environment of low discount rate

12 CHARITABLE REMAINDER TRUSTS Charitable remainder unitrust (CRUT) Pays a set percentage (not less than 5% nor more than 50%) of the net fair market value of the trust s assets, valued annually Additional contributions are permitted if governing instrument permits them Charitable deduction for value of the charitable remainder interest

13 CHARITABLE REMAINDER TRUSTS Types of charitable remainder unitrusts Standard form CRUT Net income-only CRUT (NICRUT) Net income with makeup CRUT (NIMCRUT) Flip unitrust

14 CHARITABLE REMAINDER TRUSTS Standard form CRUT pays a fixed percentage of assets annually Net income-only CRUT (NICRUT) pays the recipient the lesser of the trust s net income or the stated percentage Net income with makeup CRUT (NIMCRUT) provides if income exceeds the unitrust amount for the year, excess income is paid to make up for any shortfalls in prior years

15 CHARITABLE REMAINDER TRUSTS The flip unitrust uses the net income method at the beginning of the trust term, then flips to the stated percentage method on the conversion date expressed in the trust document (such as the sale of unmarketable assets) Any makeup account is forfeited when the trust flips Only flips once cannot change again

16 CHARITABLE REMAINDER TRUSTS At least 90% of FMV of assets before the flip must be unmarketable assets (not cash or assets that can be readily sold or exchanged)

17 CHARITABLE REMAINDER TRUSTS The trustee may not have any obligation express or implied to sell the contributed property or to invest proceeds in a certain manner

18 Choosing between Annuity Trust or Unitrust Depends on the contributed property, trust terms, donor s financial needs and risk tolerance, whether additional contributions are contemplated

19 CHARITABLE REMAINDER TRUSTS A qualifying charity is one defined in Section 170(c) of the IRC (but to qualify for maximum charitable deduction, should require charity to be 170(b)(1)(A)) Must have alternative remainder beneficiary if primary beneficiary doesn t qualify under 170 (c)

20 CHARITABLE REMAINDER TRUSTS May give donor, trustee or income beneficiary the power to remove a designated remainder beneficiary and name another (but if donor is the sole noncharitable beneficiary, no completed gift) May name multiple charities Charities interest may be concurrent or consecutive

21 PRESENT VALUE OF REMAINDER INTEREST The donor s income, gift and estate tax deductions are based on the present value of the remainder interest. Based on IRS actuarial tables, applicable federal rate, payout rate Generally, the lower the payout rate or the shorter the term, the greater the charitable deduction (and vice versa)

22 CHARITABLE DEDUCTION For CRAT s, the present value of the remainder interest is equal to the net value of the property contributed to the trust less the present value of the annuity interest based on the Section 7520 rate for the month of the transfer or either of the two months preceding the transfer

23 CHARITABLE DEDUCTION For CRUT s, the present value of the remainder interest is based on an adjusted payout rate as the discount rate

24 Year Minnesota Estate Tax Exemption Federal Estate Tax Exemption Federal Gift Tax Exemption Federal Gift and Estate Tax Rate 2011 $1 million $5 million $5 million 35% 2012 $1 million $5.12 million 2013 and forward (indexed) $1 million $5.25 million (indexed going forward) $5.12 million (indexed) $5.25 million (indexed going forward) 35% 40%

25 GIFT TAX ISSUES A contribution to charity is generally not subject to gift tax A gift of the income interest in a CRT to someone other than donor, donor s spouse or charity may be subject to gift tax The donor may reserve the power exercisable by will to revoke the income interest, resulting in taxable gift when income paid, not when trust created Minnesota Planned Giving Council

26 GIFT TAX ISSUES If the donor doesn t reserve the right to revoke the income interest by will, the gift to the non-donor income beneficiary is complete when the trust is created, and the amount of the income interest in excess of annual exclusion (currently $14,000) per recipient is reportable by the donor on a gift tax return. Minnesota Planned Giving Council

27 GIFT TAX ISSUES The donor s lifetime gift tax exemption (currently $5.25 million) applies to the reportable portion of the gift. Minnesota Planned Giving Council

28 ESTATE TAX ISSUES If donor reserves the right to revoke but fails to do so, the present value of the remainder interest qualifies for the estate tax charitable deduction If donor doesn t reserve the right to revoke, the reported taxable gift is credited against available federal estate tax exemption (currently $5.25 million) Minnesota Planned Giving Council

29 ESTATE TAX ISSUES Federal law prohibits the payment of federal estate tax attributable to a charitable remainder trust from trust principal May specify that taxes are paid off the top May allocate a specific $$ amount to the CRT and require taxes to be paid from other assets Minnesota Planned Giving Council

30 CHARITABLE REMAINDER TRUSTS Income tax consequences to income beneficiary(ies): Tier system 1. Ordinary income 2. Capital gain income 3. Other income 4. Trust corpus

31 VALUATION AND APPRAISAL REQUIREMENTS Donor to a CRT must have an appraisal to substantiate the charitable deduction for noncash property and hard to value assets if the claimed deduction is $5,000 or more An appraisal may also be required to determine the proper sale price for assets Ongoing valuation of a unitrust interest involving unmarketable interests may be done by appraisal or an independent trustee (but appraisal is required if donor is trustee)

32 PRIVATE FOUNDATION RULES CRT s are subject to many of the private foundation rules, including: 4941 (tax on self-dealing) 4943 (tax on excess business holdings) 4944 (jeopardizing investments) 4945 (taxable expenditures)

33 SELECTING A TRUSTEE The Internal Revenue Code doesn t limit who may serve as trustee of a CRT, although state law generally requires it be an individual, a corporation with trust powers, or a charitable remainderman. The choice of trustee must be made after careful consideration.

34 SELECTING A PAYOUT PERCENTAGE WHAT IS REASONABLE?

35 Other issues Unwinding CRT s in divorce Terminating CRT

36 CHARITABLE GIFT ANNUITY Donor transfers property directly to the charity in exchange for an annuity interest Technically, charity has immediate use of property - No trust is created to hold the assets. However, best practice is to segregate contributed amount to be used for payout. Annuity is paid from the charity s general assets As with CRAT, not as appealing with low discount rate

37 NOW THAT YOU HAVE THE BASICS

38 The Underused and Underappreciated Special Ops Charitable Team CRT & CLT Minnesota Planned Giving Council

39 110,000 CRT S $87 Billion Thompson & Associates

40 ASSUME A CHARITABLE SPIRIT For the charitable person Goal is to realize their goals and values Goal is not to get maximum dollars to heirs For the NOT charitable person There are other alternative Will likely result in somewhat greater financial benefit for heirs and/or government Minnesota Planned Giving Council

41 SPECIAL OPS Flexible Unlimited Applications Tax savings, but not the key driver Huge untapped potential Implement during or after life Donors need time to see the benefits Minnesota Planned Giving Council

42 SPECIAL OPS ASSETS Highly appreciated (almost anything) IRA / IRD Stocks & other equities Cash Real Estate Rental / commercial property Farmland, lake or vacation properties Minnesota Planned Giving Council

43 SPECIAL OPS Age 55+ & Net Worth $500,000+ Unusual needs wishes challenges Unusual assets Second marriages or relationships Dysfunctional families Planning issue problems More income / less income Minnesota Planned Giving Council

44 VALUES

45 GOALS

46 FEARS - DISAPOINTMENTS

47 CHANGING CIRCUMSTANCES

48 THREE BIG QUESTIONS Minnesota Planned Giving Council

49 Question # 1 Do I have enough to live on for the rest of my life? Minnesota Planned Giving Council

50 Question # 2 How much should I leave my heirs and when and how? Minnesota Planned Giving Council

51 Question #2 Common answer to when 20% now or at death 40% across time 40% future date How CRT & CLT Minnesota Planned Giving Council

52 What Should I Do With What Is Left? Gifts 3 Taxes Family Legacy Financial Independence Minnesota Planned Giving Council

53 CRT s CAN ADDRESS What if I am are not here Monday? What if I live longer than my life expectancy? How do I prepare for Death Taxes Changing Circumstances Minnesota Planned Giving Council

54 Question #4 Is a Charitable Remainder Trust part of the answer for this person or couple? Minnesota Planned Giving Council

55 WHO HAS A CRT Self Family Donors you have worked with Your Charitable Organization Minnesota Planned Giving Council

56 ILLUSTRATION ASSUMPTIONS Trust earnings = 6% Trust payments = 5% Minnesota Planned Giving Council

57 ROSE S RETIREMENT Rose is 82, worked MN; retired - WI She would like to set up a CGA She would like to benefit herself and one or two of her siblings 80 & 78 She would like to benefit her favorite Minnesota Charity Will Rose be able to do this? Minnesota Planned Giving Council

58 Charitable Annuity Trust Rose Age 82 - Age 82 John (47) - Age 80 Property $100,000 5% Annuity Trust Principal $100,000 Two Lives Charity $119, Transfer asset into trust. Trustee is responsible for asset management. Income tax deduction of $48,919 may save $13, Annuity Income $5,000. Increased income $3,000 over prior $2,000 income. Estimated income in 13.1 years $65,500. Effective return rate 5.79%. 3. If trust earns 6%, pays 5% annuity, trust value increases. After two lives, trust passes without probate to charity.

59 $1,000,000 Minnesota Planned Giving Council

60 GIVE IT TWICE WIN WIN Minnesota Planned Giving Council

61 TERM OF YEARS UNITRUST Prepared for Give It Twice (p42) Property $1,000,000 5% Unitrust Principal $1,000,000 Term of 20 Years Charity $1,000, Transfer asset to trust. Trustee is responsible for management. Income tax deduction $362,336 may save taxes of $101, Unitrust Income of $50,000. Increased income $00 over prior $50,000 income. Estimated income in 20 years $1,000,000. Effective return rate 5.56%. 3. If trust earns 5%, pays 5%, then grows by 0%. After the term of 20 years, trust assets pass without probate to charity.

62 MID-AGE COUPLE, CHILDREN, CHARITABLE Parents: 51 & 37; modest income Three children: 7 to 14 Assets Retirement 140,000 Life Insurance 335,000 Non-Retirement 320,000 Total 795,000 Minnesota Planned Giving Council

63 CONSIDERATIONS Provide for children Like protections that come with CRT Secure income for 20 years Believe $655,000 is adequate for children 100% of IRA assets to CRT ($140,000) Charitable giving very important Like the idea of Giving It Twice Minnesota Planned Giving Council

64 CRT PROTECTIONS Stable income across time Irrevocable Immune from lawsuits mostly Subject to legal oversight Avoids possible incompetence issues Secures their charitable wishes Minnesota Planned Giving Council

65 TESTAMENTARY UNITRUST Mid-Age Couple, Young Children (p57) children $655,000 Estate Value $795,000 5% Unitrust $140,000 Charity $170,827 Term of 20 Years 1. Part of estate to unitrust with balance, after taxes and costs, to children. Charitable tax deduction of $50,727 may save estate taxes of $ Trust income of 5% paid for 20 years. First year income $7,000. Estimated total income of $154,133. Estate costs are $00 and taxes are $ If unitrust earns 6%, pays 5%, then grows 1%. After income payments for 20 years, unitrust to charity.

66 UT vs. MAXIMUM TAX PLAN Mid-Age Couple, Young Children (p57) IRA/Pension Other Prop. Total Taxes/Costs Principal UT Income (pre-tax) IRA/Unitrust Estate Family $140,000 $655,000 $795,000 Bequest Total Family: $809,133 $655,000 $154,133 Total Charity: $170,827 Maximum Tax Plan IRA/Pension Other Prop. Total Taxes Estate Family $140,000 $655,000 $795,000 Costs Principal $755,800 Total Charity: $00 1. The estate includes the IRA or Pension plan plus other property. 2. After costs, the taxes are paid from residue. With the IRA to Unitrust, no income tax and reduced estate tax. 3. In the Unitrust plan, family receives part principal plus the trust income. With the maximum tax plan, family receives principal after payment of estate and income taxes. 4. With the Unitrust, family receives income, then major gift to charity. Maximum tax plan has no unitrust gift to charity.

67 MR.: TIRED OF WORKING, READY TO PLAY; MRS.: IT S ABOUT TIME AND I AM TOO! Accumulated considerable rental real estate Part-time, 40 years, buying and fixing Managing and planning takes time & energy Tired of dealing with renters & people Have lost the love of property Zero 0 cost basis, standard depreciation Market value, $2,000,000 Minnesota Planned Giving Council

68 FLIP UNITRUST ired of Working, Ready to Play - Age 70 Its About Time and I Am Too (p44) - Age 65 FLIP Sale on January 1, % Unitrust Initial Amount $2,000,000 Principal $2,000,000 Charity $2,352,193 Two Lives 1. Transfer and sell tax-free. Bypass up to $2,000,000 gain may save $400,000. Income tax deduction of $734,040 may save $205, Unitrust Income up to 5% to donors for two lives. Annual income at payout $100,000. If trust earns 6.00%, pays 5% income during two lives, total lifetime income is $1,878, Income for estimated period of 24.3 years. After two lives, trust principal paid to charity.

69 WHAT IF The prospective donors wants A significant lump sum of cash now Attractive income on the balance Pay no tax Make charitable gifts Get rid of management issues Minnesota Planned Giving Council

70 SALE AND UNITRUST Tired of Working, Ready to Play - Age 70 Mrs.: It's about time, I am too! (p45) - Age 6 Property $2,000, Gift $1,250,000 to trust. Bypass up to $1,250,000 gain may save $250,000. Tax deduction $460,488. Taxable gain $750,000 on cash part. Net Cash to donors $751,961. Cash Received $750,000 5% Unitrust $1,250,000 Two Lives 2. Unitrust Income of $62,500. Increased income $00 over prior $62,500 income. Estimated income in 24.3 years $1,709,649. Effective return rate 5.69%. Charity $1,591, If trust earns 6%, pays 5%, then grows by 1%. After two lives, trust passes without probate to charity.

71 SEEMS TOO GOOD TO BE TRUE Minnesota Planned Giving Council

72 Susan Dunlop A Personal CRT Story Minnesota Planned Giving Council

73 OTHER CRT STORIES Unusual or special CRT s Minnesota Planned Giving Council

74 LATE IN LIFE, SECOND WIFE & GRANDCHILDREN He: age 75, wife deceased, 3 grandchildren ages 5 10 Career, working for a charity and is charitable She: age 55, never married, still working Each: total assets of $500,000 He, by bequest, leave $200,000 to CRT For new wife + 20 years Minnesota Planned Giving Council

75 LATE IN LIFE SECOND WIFE CRT BENEFITS Not a tax driven decision Provide income for new wife for her life Wants to benefit grandchildren Wants to make charitable gifts Likes security provided by CRT A legacy he can feel good about Minnesota Planned Giving Council

76 Unitrust Plus Term Late in Life (75), Second Wife & Grandchildren; Wife Age 55 Property $200,000 5% Unitrust Principal $200,000 One Life and 20 Years Charity $327, Transfer and sell Tax-Free. Bypass up to $200,000 gain may save $0. Income tax deduction of $37,928 may save $ Unitrust income of $10,000. Increased income $10,000 over prior $00 income. Estimated income in 49.6 years $638,118. Effective return rate 5.00%. 3. If trust earns 6%, pays 5%, then grows by 1%. After one life plus term, trust passes to charity. Partial estate tax deduction.

77 WEDDING BELLS Headline News IRA weds CRT Until death do us part Married couples live longer In sickness and in health Together, we take care of the family Models charitable values to family Minnesota Planned Giving Council

78 An Arranged Marriage Minnesota Planned Giving Council

79 I Love You, the Kids and Charity Too! Couple in 40 s Three Children ages 3 to 14 Net Worth - $5,500,000 Husband s IRA - $1,000,000 Personal History Minnesota Planned Giving Council

80 BYPASS IRA UNITRUST I Love You, the Kids & Charity Too (p57) Spouse $4,500,000 Estate Value $5,500,000 5% Unitrust $1,000,000 Charity $1,721,679 Life Plus 11 Years Gift In Estate Plan Estate Tax Deduction Income To Spouse/Family Remainder To Charity

81 BYPASS IRA UNITRUST I Love You, the Kids & Charity Too (p57) Spouse $4,500,000 Estate Value $5,500,000 5% Unitrust $1,000,000 Charity $1,721,679 Life Plus 11 Years 1. Part of estate to unitrust with balance, after paying estate costs, to spouse. Charitable tax deduction of $101,630 may save substantial estate taxes. 2. Trust income of 5% paid for life plus 11 years First year income $50,000. Estimated total income of $3,608,395. Estate costs are $00 and estate taxes are $0. 3. If unitrust earns 6%, pays 5%, then grows 1%. After income payments for life plus term, unitrust to charity.

82 UT vs. MAXIMUM TAX PLAN I Love You, the Kids & Charity Too (p57) IRA/Pension Other Prop. Total Taxes/Costs Principal UT Income (pre-tax) IRA/Unitrust Estate Family $1,000,000 $4,500,000 $5,500,000 Bequest $4,500,000 $3,608,395 Total Family: $8,108,395 Total Charity: $1,721,679 Maximum Tax Plan IRA/Pension Estate Family $1,000,000 Other Prop. $4,500,000 Total $5,500,000 Taxes Costs Principal $5,148,000 Total Charity: $00 1. The estate includes the IRA or Pension plan plus other property. 2. After costs, the taxes are paid from residue. With the IRA to Unitrust, no income tax and reduced estate tax. 3. In the Unitrust plan, family receives part principal plus the trust income. With the maximum tax plan, family receives principal after payment of estate and income taxes. 4. With the Unitrust, family receives income, then major gift to charity. Maximum tax plan has no unitrust gift to charity.

83 SUPPLEMENTAL NEEDS CRT Establish Supplemental Needs Trust No tax deduction for assets to traditional Supplemental Needs Trust Supplemental Needs CRT Tax deduction can be based on age of beneficiary or years CRT distributions to Supplemental Needs Trust Supplemental Needs Trust makes payments Minnesota Planned Giving Council

84 CHARITABLE UNITRUST Special Needs Trust (p40) - Age 31 Property $1,000,000 5% Unitrust Principal $1,000,000 One Life Charity $1,684, Give asset, sell Tax-Free. Bypass up to $500,000 gain may save $100,000. Income tax deduction of $120,690 may save $33, UT annual income $50,000. Increased income $00 over prior $50,000 income. Estimated income in 52.4 years $3,421,998. Effective pretax rate 5.17%. 3. If trust earns 6%, pays 5%, then grows by 1%. After one life, trust passes without probate to charity.

85 YOU RE GONNA GET IT ANYWAY Generous estate donor Asset rich, cash poor Owns highly appreciated property No current income 20% capital gains if sold CRT bypasses capital gains tax Income for 100% of asset value Minnesota Planned Giving Council

86 CHARITABLE UNITRUST You're Gonna Get It Anyway - Age 70 Property $100,000 5% Unitrust Principal $100,000 One Life Charity $118, Give asset, sell Tax-Free. Bypass up to $80,000 gain may save $12,000. Income tax deduction of $52,220 may save $14, UT annual income $5,000. Increased income $5,000 over prior $00 income. Estimated income in 17.0 years $92,152. Effective pretax rate 5.86%. 3. If trust earns 6%, pays 5%, then grows by 1%. After one life, trust passes without probate to charity.

87 $1,000,000 Minnesota Planned Giving Council

88 GIVE IT THREE TIMES WIN WIN - WIN Minnesota Planned Giving Council

89 WEALTH REPLACEMENT TRUST Highly Appreciated Stock to CRT Use part of income from CRT to purchase life insurance Place insurance in an Irrevocable Life Insurance Trust (ILIT) Pay premiums with annual exclusion dollars. $14,000 in 2013 Minnesota Planned Giving Council

90 Unitrust/Insurance Trust Wealth Replacement Trust (p41) - Age 55 Funded with CRT - Age 55 Property $1,000,000 5% Unitrust $1,000,000 Charity $1,425,102 Two Lives Bypass Capital Gain Income Tax Deduction Increased Income Remainder To Charity Gift to Trust Ins. Trust $1,082,626 Family $4,206,413

91 Unitrust/Insurance Trust Wealth Replacement Trust (p41) - Age 55 Funded with CRT - Age 55 Property $1,000,000 5% Unitrust $1,000,000 Charity $1,425,102 Two Lives 1. Transfer assets, sell tax-free. Bypass up to $900,000 gain. May save $180,000. Deduction of $219,260 may save taxes of $61, Unitrust Income of 5% to donors for two lives. First year income $50,000. From income, donors pay $25,000 annual premium for 12 years to trustee of insurance trust. 3. Estimated 35.6 years income, less premium, is $1,825,512. Effective return rate 5.33%. After two lives, insurance to family, trust to charity. Gift to Trust Ins. Trust $1,082,626 Family $4,206,413

92 Sale vs. Unitrust/Insurance Wealth Replacement Trust (p41) - Age 55 Funded with CRT - Age 55 Property $1,000,000 Tax $180,000 Net $820,000 Family $1,354,955 I. Sell and Pay Tax Spend $17,712 After-tax Income Property $1,000,000 5% Unitrust $1,000,000 Charity $1,425,102 II. Unitrust and Insurance Trust Spend $17,712 After-tax Income Ins. Trust Family $1,082,626 $4,885, Comparison of sell and pay tax vs. unitrust and insurance trust. Same tax, investment and spending assumptions % of after-tax income spent in Option I. Same amount plus insurance premiums spent in Option II from UT after-tax income. 3. Opt. I -- Estate Tax 40%. After two lives, unitrust to charity and insurance plus extra income to family in II.

93 DON T TALK TO ME ABOUT SAVING OR INVESTING Parent (s) age 70; children 45 & 40 Estate: $1,000,000 Home $300,000 Stocks $200,000 IRA $500,000 Modest Income ($35 50,000 Range) No Retirement Savings or Investments Minnesota Planned Giving Council

94 TESTAMENTARY UNITRUST Single Parent Age 70; Children 45 & 40 (p57) Family $500,000 Estate Value $1,000,000 5% Unitrust $500,000 Charity $806,919 Two Lives Gift In Estate Plan Estate Tax Deduction Income To Family Remainder To Charity

95 UT vs. MAXIMUM TAX PLAN Single Parent Age 70; Children 45 & 40 (p57) IRA/Pension Other Prop. Total Taxes/Costs Principal UT Income (pre-tax) IRA/Unitrust Estate Family $500,000 $500,000 $1,000,000 Bequest $500,000 $1,534,596 Total Family: $2,034,596 Total Charity: $806,919 Maximum Tax Plan IRA/Pension Other Prop. Total Taxes Estate Family $500,000 $500,000 $1,000,000 Costs Principal $850,000 Total Charity: $00 1. The estate includes the IRA or Pension plan plus other property. 2. After costs, the taxes are paid from residue. With the IRA to Unitrust, no income tax and reduced estate tax. 3. In the Unitrust plan, family receives part principal plus the trust income. With the maximum tax plan, family receives principal after payment of estate and income taxes. 4. With the Unitrust, family receives income, then major gift to charity. Maximum tax plan has no unitrust gift to charity.

96 82 YEAR-OLD WIDOW THREE FARMS No Children One Nephew Farms worth $2,400,000 Modest savings Minnesota Planned Giving Council

97 CURRENT INCOME CHALLENGES CRUT $47,000 Farm Lease 7,500 Social Security 12,000 $66,500 Minnesota Planned Giving Council

98 PROBLEMS Facing nursing home care, $60,000 annually Leasing farm to nephew for $7,500 per year Advanced nephew $22,000 for a truck Insecure income Little cash left to help her charities Minnesota Planned Giving Council

99 GOALS Increase her income Secure her future Not incur a large tax liability Help her nephew continue farming Help her three charities Minnesota Planned Giving Council

100 Solution: Charitable Remainder Trust for Her Life Increased income Increased cash on hand Minimize her taxes Leave cash for nephew to continue farming Help her three charities Minnesota Planned Giving Council

101 CURRENT INCOME CURRENT GROSS INCOME: Husband s CRUT $47,000 Wife s CRUT 90,000 Social Security 12,000 Total $149,000 Minnesota Planned Giving Council

102 RESULTS Increased income from $66,500 to $149,000 Has $900,000 in cash Gives $14,000 per year to nephew Now back to giving at previous levels to charity Lives in a nice retirement center Leaving her nephew the rest of her estate Minnesota Planned Giving Council

103 SALE AND UNITRUST Widow - 81, No Children (p45) - Age 81 Property $2,400, Gift $1,500,000 to trust. Bypass up to $1,000,000 gain may save $200,000. Tax deduction $968,985. Taxable gain $600,000 on cash part. Net Cash to donor $1,051,316. Cash Received $900,000 6% Unitrust $1,500,000 One Life 2. Unitrust Income of $90,000. Increased income $82,500 over prior $7,500 income. Estimated income in 9.7 years $873,000. Effective return rate 7.32%. Charity $1,500, If trust earns 6%, pays 6%, then decreases by 0%. After one life, trust passes without probate to charity.

104 Sale & UT Benefits Prepared For Widow - 81, No Children (p45) Capital Gain If Sold Capital Gain If UT/Sale Net Cash to Donor Income Tax Deduction Unitrust Income Total UT Income $320,000 $120,000 $1,051,316 $968,985 $90,000 $873,000

105 Unitrust Benefits Single Parent Age 70; Children 45 & 40 (p57) Estate Value Charitable Deduction Estate Tax Savings Principal to Income To Remainder to Charity $1,000,000 $60,620 $00 $500,000 $1,534,596 $806,919

106 WEALTH BUILDER Donor is a skilled, successful investor First wife died, second marriage years later No children On the investment committee of a charity Minnesota Planned Giving Council

107 ASSUMPTIONS Could earn 15% annually on investments Capital gains tax 20% Earnings after capital gains tax 12% Minnesota Planned Giving Council

108 CHARITABLE UNITRUST Investor - 15% in CRUT 9p40) - Age 55 Property $1,000,000 5% Unitrust Principal $1,000,000 One Life Charity $16,814, Give asset, sell Tax-Free. Bypass up to $1,000,000 gain may save $200,000. Income tax deduction of $317,810 may save $104, UT annual income $50,000. Increased income $00 over prior $50,000 income. Estimated income in 29.6 years $7,907,439. Effective pretax rate 5.59%. 3. If trust earns 15%, pays 5%, then grows by 10%. After one life, trust passes without probate to charity.

109 CHARITABLE UNITRUST Investor - 12% Not in CRUT (p40) - Age 55 Property $1,000,000 5% Unitrust Principal $1,000,000 One Life Charity $7,413, Give asset, sell Tax-Free. Bypass up to $1,000,000 gain may save $200,000. Income tax deduction of $317,810 may save $104, UT annual income $50,000. Increased income $00 over prior $50,000 income. Estimated income in 29.6 years $4,580,754. Effective pretax rate 5.59%. 3. If trust earns 12%, pays 5%, then grows by 7%. After one life, trust passes without probate to charity.

110 WEALTH BUILDER VS BROKERAGE ACCT Income from wealth builder $7,907,439 Income from brokerage $4,580,754 Difference in income $3,328,685 To Charity $16,814,879 Minnesota Planned Giving Council

111 HAVE SHOES, WILL TRAVEL Couple, both age 65 Estate - $8,000,000 High income Four adult children, young grandchildren Due to health, husband not able to travel Assuming husband dies first Wife says she has shoes and wants to travel Minnesota Planned Giving Council

112 TESTAMENTARY UNITRUST Prepared for Have Shoes, Will Travel (57) Spouse $6,500,000 Estate Value $8,000,000 5% Unitrust $1,500,000 Charity $1,848,588 One Life Gift In Estate Plan Estate Tax Deduction Income To Spouse Remainder To Charity

113 TESTAMENTARY UNITRUST Prepared for Have Shoes, Will Travel (57) Spouse $6,500,000 Estate Value $8,000,000 5% Unitrust $1,500,000 Charity $1,848, Part of estate to unitrust with balance, after paying estate costs, to spouse. Marital estate tax deduction could save substantial estate taxes. One Life 2. Trust income of 5% paid for life of recipient. First year income $75,000. Estimated total income of $1,742,940. Estate costs are $00 and estate taxes are $0. 3. If unitrust earns 6%, pays 5%, then grows 1%. After income payments for one life, unitrust to charity.

114 UT vs. MAXIMUM TAX PLAN Prepared for Have Shoes, Will Travel (57) IRA/Pension Other Prop. Total Taxes/Costs Principal UT Income (pre-tax) IRA/Unitrust Estate Family $1,500,000 $6,500,000 $8,000,000 Bequest $6,500,000 $1,742,940 Total Family: $8,242,940 Total Charity: $1,848,588 Maximum Tax Plan IRA/Pension Estate Family $1,500,000 Other Prop. $6,500,000 Total $8,000,000 Taxes Costs Principal $6,603,000 Total Charity: $00 1. The estate includes the IRA or Pension plan plus other property. 2. After costs, the taxes are paid from residue. With the IRA to Unitrust, no income tax and reduced estate tax. 3. In the Unitrust plan, family receives part principal plus the trust income. With the maximum tax plan, family receives principal after payment of estate and income taxes. 4. With the Unitrust, family receives income, then major gift to charity. Maximum tax plan has no unitrust gift to charity.

115 Unitrust Benefits Prepared for Have Shoes, Will Travel (57) Estate Value Charitable Deduction Estate Tax Savings Principal to Income To Remainder to Charity $8,000,000 $671,775 $3,180,800 $6,500,000 $1,742,940 $1,848,588

116 The Underused and Underappreciated Special Ops Charitable Team Minnesota Planned Giving Council

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118 CHARITABLE LEAD TRUSTS Minnesota Planned Giving Council

119 CHARITABLE LEAD TRUSTS May be created during lifetime or at death Gives the charity(ies) the income interest and individual beneficiaries receive the remainder Annual payment of guaranteed annuity (CLAT) or unitrust amount (CLUT) There is no minimum or maximum annuity or unitrust payment

120 CHARITABLE LEAD TRUSTS Term of trust may be a term of years or for the life or lives of an individual or individuals who are living at the time the trust is created. There is no 20-year limitation on CLT s established for a term of years.

121 CHARITABLE LEAD TRUSTS Charitable Lead Trusts are subject to the private foundation excise taxes under IRC

122 CHARITABLE LEAD TRUSTS More attractive with low discount rate Charitable income, estate or gift tax deduction is based on the fair market value of the annuity or unitrust interest paid to charity The longer the term, the higher the deduction

123 INTER VIVOS, NONGRANTOR CHARITABLE LEAD TRUSTS Inter vivos, nongrantor Charitable Lead Trusts are subject to income tax, but the trust may claim a charitable deduction for amount paid to charity by a nongrantor CLT Donor may claim gift tax charitable deduction for the present value of payments to charity Gift to remainder beneficiaries may be subject to gift tax and no annual exclusion is available

124 INTER VIVOS, GRANTOR CHARITABLE LEAD TRUSTS The donor to a grantor charitable lead trust may claim an income tax charitable deduction for the amount paid to charity The donor is taxed on all income earned by the trust

125 TESTAMENTARY CHARITABLE LEAD TRUSTS For testamentary Charitable Lead Trusts, the estate is entitled to an estate tax charitable deduction equal to the present value of the income interest to charity.

126 CHARITABLE LEAD TRUSTS Minimum contribution? As with CRT s, care must be taken in choosing a trustee

127 SPECIAL OPS High net worth Already made significant gifts to children Traditional wealth transfer lead trust Minnesota Planned Giving Council

128 WEALTH TRANSFER TRUST Donors, age 70 Small business owners Net worth, $40,000,000 Two Children ages 30 & 35 Net Worth, $15,000,000 each Doesn t want to give more to children now Wants to save taxes Minnesota Planned Giving Council

129 Annuity Lead Trust Prepared for High Net Worth, Already Made Gifts to Children; 7% Growth (p51) Original Property $10,000, % Lead Trust Trust Principal $10,000,000 Term of 23 Years Trust to Family $20,687,228 Transfer Asset to Trust Gift Tax Deduction Income to Charity Property to Family

130 Annuity Lead Trust Prepared for High Net Worth, Already Made Gifts to Children; 7% Growth (p51) Original Property $10,000, % Lead Trust Trust Principal $10,000,000 Term of 23 Years Trust to Family $20,687, Gift asset to lead trust, charitable gift tax deduction of $10,000,000. Deduction reduces taxable gift from $10,000,000 to $0. 2. Income of 5.00% to charity for 23 years. No income tax. First year income $500,000. Total charitable payments in 23 years $11,500, After term of years, trust distributed to family. Passing $10,687,228 growth to family saves $4,274,891 in gift or estate taxes.

131 Retain Asset vs. Lead Trust Prepared for High Net Worth, Already Made Gifts to Children; 7% Growth (p51) I. Retain Property During Life and Pay Estate Tax Original Property $10,000,000 Property Growth In Term of 23 Years $32,230,040 Value Estate Tax $32,230,040 $12,892,016 Family $19,338,024 II. Fund Lead Trust Property$10,000,000 Trust Principal Principal to Family Gift Tax $0 $10,000,000 $20,687,228 Term of 23 Years 1. Gift asset to lead trust, charitable gift tax deduction of $10,000,000. Deduction reduces taxable gift from $10,000,000 to $0. 2. Income 5.00% for 23 years; charity paid $11,500,000. In hold asset illustration, property value grows until value is $32,230, After term, in Opt. I estate tax paid, leaving $19,338,024 to family. In Opt. II no tax paid, leaving $20,687,228 for the family.

132 Lead Trust Benefits d For High Net Worth, Already Made Gifts to Children; 7% Growth (p5 Charitable Trust Value Gift Tax Deduction Taxable Gift Total to Charity Appreciation of Asset Total To Family $10,000,000 $10,000,000 $0 $11,500,000 $10,687,228 $20,687,228

133 Annuity Lead Trust Prepared for High Net Worth, Already Made Gifts to Children; 15% Growth (p51) Original Property $10,000, % Lead Trust Trust Principal $10,000,000 Term of 23 Years Trust to Family $134,599, Gift asset to lead trust, charitable gift tax deduction of $10,000,000. Deduction reduces taxable gift from $10,000,000 to $0. 2. Income of 5.00% to charity for 23 years. First year income $500,000. Total charitable payments in 23 years $11,500, After term of years, trust distributed to family. Passing $124,599,013 growth to family saves $49,839,605 in gift or estate taxes.

134 Retain Asset vs. Lead Trust Prepared for High Net Worth, Already Made Gifts to Children; 15% Growth (p51) I. Retain Property During Life and Pay Estate Tax Original Property $10,000,000 Property Growth In Term of 23 Years $136,921,863 Value Estate Tax $136,921,863 $54,768,745 Family $82,153,118 II. Fund Lead Trust Property$10,000,000 Trust Principal Principal to Family Gift Tax $0 $10,000,000 $134,599,013 Term of 23 Years 1. Gift asset to lead trust, charitable gift tax deduction of $10,000,000. Deduction reduces taxable gift from $10,000,000 to $0. 2. Income 5.00% for 23 years; charity paid $11,500,000. In hold asset illustration, property value grows until value is $136,921, After term, in Opt. I estate tax paid, leaving $82,153,118 to family. In Opt. II no tax paid, leaving $134,599,013 for the family.

135 Lead Trust Benefits For High Net Worth, Already Made Gifts to Children; 15% Growth (p51) Charitable Trust Value Gift Tax Deduction Taxable Gift Total to Charity Appreciation of Asset Total To Family $10,000,000 $10,000,000 $0 $11,500,000 $124,599,013 $134,599,013

136 MODEST ESTATE, YOUNG CHILDREN Couple ages, 45 Business (or assets) $5,000,000 10% Growth Could grow to a taxable estate Charitable, strong annual giving program Want to pass assets to children in future Children ages, 19 & 21 Minnesota Planned Giving Council

137 Annuity Lead Trust Prepared for Modest Estate, Young Children; 10% Growth (p51) Original Property $1,000, % Lead Trust Trust Principal Term of $1,000, Years Trust to Family $4,920,639 Transfer Asset to Trust Gift Tax Deduction Income to Charity Property to Family

138 Annuity Lead Trust Prepared for Modest Estate, Young Children; 10% Growth (p51) Original Property $1,000, % Lead Trust Trust Principal Term of $1,000, Years Trust to Family $4,920, Gift asset to lead trust, charitable gift tax deduction of $1,000,000. Deduction reduces taxable gift from $1,000,000 to $0. 2. Income of 5.00% to charity for 23 years. First year income $50,000. Total charitable payments in 23 years $1,150, After term of years, trust distributed to family. Passing $3,920,639 growth to family saves $1,568,256 in gift or estate taxes.

139 Retain Asset vs. Lead Trust Prepared for Modest Estate, Young Children; 10% Growth (p51) I. Retain Property During Life and Pay Estate Tax Original Property $1,000,000 Property Growth In Term of 23 Years $6,152,805 Value Estate Tax $6,152,805 $2,461,122 Family $3,691,683 II. Fund Lead Trust Property $1,000,000 Trust Principal Principal to Family Gift Tax $0 $1,000,000 $4,920,639 Term of 23 Years 1. Gift asset to lead trust, charitable gift tax deduction of $1,000,000. Deduction reduces taxable gift from $1,000,000 to $0. 2. Income 5.00% for 23 years; charity paid $1,150,000. In hold asset illustration, property value grows until value is $6,152, After term, in Opt. I estate tax paid, leaving $3,691,683 to family. In Opt. II no tax paid, leaving $4,920,639 for the family.

140 Lead Trust Benefits Prepared For Modest Estate, Young Children; 10% Growth (p51) Charitable Trust Value Gift Tax Deduction Taxable Gift Total to Charity Appreciation of Asset Total To Family $1,000,000 $1,000,000 $0 $1,150,000 $3,920,639 $4,920,639

141 Husband 58 / Wife 44 $7,400,000 Before Planning: Heirs $4,637,000 Charity $0 Taxes $2,763,000 CRUT $3,000,000 $210,000 -$11,000 $199,000 QPRT $4,400,000 After Planning: Heirs $7,819,777 Charity $5,938,440 Taxes $0 $500,000 ILIT $3,900,000 $3,000,000 Government CST $1,500,000 $2,763,000 Heirs $5,000,000 $4,637,000 $2,819,777 $2,400,000 5 years 10 years 18 years 30 years Minnesota Planned Giving Council CHARITY $2,938,440

142 Questions? Minnesota Planned Giving Council