Charitable Gifts of Retirement Plan Assets

Timothy J. Prosser, JD Director - Institutional Trust Consulting TIAA-CREF Trust Company, FSB Charitable Gifts of Retirement Plan Assets June 14 & 15, 2007 C38818 0

TODAY S S DISCUSSION Lifetime gifts of retirement plan assets IRA Charitable Rollover under PPA 2006 Testamentary gifts of retirement plan assets Growing importance of retirement plan accumulations Plan statistics Recent legal developments Donor Considerations Tax aspects of retirement plans and gifts to charity Plan-specific issues Planned giving techniques for retirement assets 1

LIFETIME GIFTS OF RETIREMENT PLAN ASSETS (Including IRA Rollover Under PPA 2006) 2

LIFETIME GIFTS OF RETIREMENT PLAN ASSETS? Often not practical because lifetime withdrawal from qualified plan or IRA produces taxable income for the donor Large gifts exceed AGI limits Non-itemizers recognize income, but get no deduction Increased AGI from withdrawals reduces other deductions No direct transfer from retirement plan account to charity possible under prior law 3

LIFETIME GIFTS OF RETIREMENT PLAN ASSETS? Examples of recent legislative attempts to enact comprehensive IRA Charitable Rollover Tax Relief Act of 2005 (S. 2020) Public Good IRA Rollover Act (H.R. 1607; S. 1366) Charitable Aid, Recovery, and Empowerment Act of 2005 (S. 1780, CARE Act) Charitable Giving Act of 2005 (H.R. 3908) 4

PENSION PROTECTION ACT (PPA 2006) Creates Limited IRA Charitable Rollover Qualified charitable distributions ( QCD ) excluded from donor s taxable income IRA and Roth IRA accounts, only During 2006 and 2007, only Up to $100,000 per year per taxpayer Account owner age 70½ or older on the date of contribution Distribution directly from IRA account to charity 5

PENSION PROTECTION ACT (PPA 2006) Creates Limited IRA Charitable Rollover Qualified charitable distributions ( QCD ) excluded from donor s taxable income To public charity ( 170(b)(1)(A)) not to donor-advised fund not to private foundation (non-operating) not to supporting organization Outright, fully charitable gift, only no split-interest gift/no quid pro quo donor must obtain written acknowledgement QCD counts toward donor s Required Minimum Distribution from IRA Account 6

WHAT IS THE REQUIRED MINIMUM DISTRIBUTION? Beginning the calendar year following the year in which the participant reaches 70½, must begin to withdraw required minimum distribution (RMD) RMD = Account Balance divided by distribution period (life expectancy) associated with account holder s age Example: Maria has $500,000 in her IRA account on December 31, 2006. She will be 80 at the end of 2007. She must receive at least $26,738 during 2007 ($500,000 divided by 18.7 year distribution period for an 80 year old) 7

WHAT IS THE REQUIRED MINIMUM DISTRIBUTION? Uniform Life Table (excerpt) Applies to all unless sole beneficiary is a spouse who is more than 10 years younger. Treas. Regs. 1.401(a)(9)-9 Q&A 2. Account Owner s Age Distribution Period Account Owner s Age Distribution Period Account Owner s Age Distribution Period 70 27.4 80 18.7 90 11.4 71 26.5 81 17.9 91 10.8 72 25.6 82 17.1 92 10.2 73 24.7 83 16.3 93 9.6 74 23.8 84 15.5 94 9.1 75 22.9 85 14.8 95 8.6 76 22 86 14.1 96 8.1 77 21.2 87 13.4 97 7.6 78 20.3 88 12.7 98 7.1 79 19.5 89 12 99 6.7 8

WHICH DONORS BENEFIT THE MOST FROM PPA 2006? Donors who do not itemize Donors subject to AGI limitations Donors in states with no or limited charitable deduction Donors who want to make very large gifts and don t have other assets to give 9

RECENT IRS GUIDANCE Notice 2007-7; 2007-5 IRB 1 (January 10, 2007) Inherited IRAs are eligible for QCD, so long as beneficiary is age 70½ QCD to satisfy outstanding pledge is not a prohibited transaction QCD is not subject to withholding (QCD request is deemed election not to withhold) 2006 Form 1040 Instructions Custodian reports all IRA distributions on 1099 to donor & IRS Donor reports QCD and taxable IRA distributions on Form 1040 10

ADMINISTRATIVE ISSUES Not all providers may be ready to accommodate donors Administrators have varying policies, procedures Request form/payment by check or EFT Limits on number of requests/minimum size 11

TIAA-CREF PROCEDURES FOR IRA CHARITABLE ROLLOVER TIAA-CREF Traditional IRAs * Signed letter from client (or form available on website): Contract number $ amount of request Account(s)/investment(s) where funds should come from (stock, money market, etc.) Name and address of the charitable organization (s) Minimum distribution of $1,000 per charity (no fee charged) No tax withholding (unless directed by client) Payments by check only No cover letter sent to charity * TIAA-CREF Traditional IRA s can be either annuity IRA s or mutual fund IRA s. 12

TIAA-CREF PROCEDURES FOR IRA CHARITABLE ROLLOVER TIAA-CREF Trust Company IRAs Request must be in writing (no special form; same info as parent company) $1,000 minimum (no fee charged) Cover letter for distribution to charity, identifying account owner Form acknowledgement for charity to send to account owner 13

WHAT ABOUT QUALIFIED PLAN e.g., 403(b), 401(k) to IRA Rollovers? May be time-consuming end of year gifts could be an issue! Two-step process: 1) Submit plan withdrawal and IRA account opening paperwork to provider(s) 2) Submit request for IRA charitable distribution 14

NCPG RESOURCES ON THE IRA Charitable Rollover NCPG PPA 2006 Resource Center (www.ncpg.org) Links to legislation; IRS publications; commentary; analysis NCPG Survey of IRA Rollover Gifts to Charity (www.ncpg.org) As of 5-7-07: 3719 distributions; total QCD value of $69M QCD values range from $25 to $100,000 $100,000 is most popular QCD amount $18,600 is average QCD size Most major financial services firms are represented in the survey data 15

TIAA-CREF Statistics 2006 / YTD 2007 Parent Company: 2006 YTD 2007 Number of QCDs processed: 266 93 Total distributions: $3,670,232 $1,350,782 Average QCD size: $ 13,798 $ 14,525 Trust Company: Number of QCDs processed: 51 5 Total distributions: $570,950 $51,687 Average QCD size: $ 11,195 $10,337 16

PUBLIC GOOD IRA ROLLOVER ACT OF 2007 (S. 819, H.R. 1419) Would Broaden Opportunity Qualified charitable distributions ( QCD ) would be excluded from donor s taxable income Tax years beginning after 12/31/2006 (no expiration date) No dollar amount cap Outright gifts AND split-interest gifts (CRT, PIF, CGA) Age 70½ for outright gift / Age 59½ for split-interest gift Distribution directly from IRA account to charity 17

TESTAMENTARY CHARITABLE GIFTS OF RETIREMENT PLAN ASSETS 18

THE GROWING IMPORTANCE OF RETIREMENT ASSETS Plan statistics Recent legal developments 19

PLAN STATISTICS $14.5 Trillion in U.S. Retirement Accounts in 2005 20

PLAN STATISTICS Assets by Plan Type Plan Type Defined Benefit Defined Contribution Private Insured Federal Government State & Local Government IRA & Keogh Total % of Total 14.2 19.5 13.5 7.8 19.6 25.4 100 Source: Employee Benefit Research Institute - 2004 21

PLAN STATISTICS Growth in Plan Accumulations from 1985 to 2005 Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division 22

RECENT LEGAL DEVELOPMENTS EGGTRA increases in plan funding limits Required minimum distribution rules 23

EGTRRA INCREASES IN PLAN FUNDING LIMITS Traditional IRA s 5000 4000 3000 2000 1000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Contribution Limit 24

EGTRRA INCREASES IN PLAN FUNDING LIMITS IRA Catch-up Provisions Available to taxpayers age 50 and older Potentially accumulate greater amounts for retirement at an accelerated schedule Contribute catch-up amounts in addition to the regular IRA contribution limits $500 (tax years 2002-2005) $1000 (tax years 2006 and thereafter) 25

EGTRRA INCREASES IN PLAN FUNDING LIMITS 401(k), 403(b) & 457 Plan Limits $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Contribution Limit 26

EGTRRA INCREASES IN PLAN FUNDING LIMITS 401(k), 403(b) and 457 Catch-Up Limits 2002....$1,000 2003....$2,000 2004...$3,000 2005...$4,000 2006 & thereafter $5,000 (Available to taxpayers age 50 and older) 27

REQUIRED MINIMUM DISTRIBUTION RULES April 16, 2002: A kinder, gentler IRS IRS issued new final regulations under Code 401(a)(9) for distributions from a retirement plan: Lifetime distributions calculated under one Uniform Table for nearly everyone Designated beneficiary determined as of September 30 of year following year of death (not RBD) Charitable gifts of retirement assets at death made easier 28

DONOR CONSIDERATIONS Tax aspects of retirement plans and gifts to charity Plan-Specific Issues (i.e., which plan should fund the gift?) ERISA vs. Non-ERISA Plan document issues Actions taken by account owner 29

TAX ON RETIREMENT PLAN ASSETS Retirement assets (IRAs, qualified plan accounts, tax-deferred annuities) are Income in Respect of a Decedent (IRD) IRD is taxable income to which the decedent was entitled at death but which was not included in any previous income tax return (Other IRD: wages, accounts receivable, untaxed interest on bonds, etc.) 30

TAX ON RETIREMENT PLAN ASSETS Retirement assets and other IRD are: Included in the decedent s taxable estate and Subject to income tax in the hands of the recipient Double taxation can reduce assets to beneficiaries by nearly two-thirds 31

TAX ON RETIREMENT PLAN ASSETS Gift of retirement assets to charity can be a solution to double taxation Estate tax charitable deduction is unlimited Charity is income tax-exempt (Uncle Sam pays 66 of every dollar to charity) 32

PLAN-SPECIFIC ISSUES Plan Type ERISA 401(a) plans 401(k) plans Some 403(b) plans NON-ERISA IRAs 457 plans Some 403(b) plans Waiver of spousal rights with ERISA plan Creditor protection varies by plan & state law 33

PLAN-SPECIFIC ISSUES Plan Document Restrictions? Does Plan permit a life-expectancy payout? A lump sum payout may leave nothing for charity at owner s death Does Plan require annuitized distribution? A guarantee period may preserve something for charity Waiver of spousal rights with ERISA plan Creditor protection varies by plan & state law 34

PLAN-SPECIFIC ISSUES Participant Action? Election to annuitize (over life or lives) is irrevocable May prevent designation of charity as beneficiary Participant may elect guarantee period for annuity payout Death of annuitant(s) prior to expiration of guarantee may preserve something for charity (as contingent beneficiary) Waiver of spousal rights with ERISA plan Charity may take commuted value of remainder Creditor protection varies by plan & state law 35

PLANNED GIVING TECHNIQUES FOR RETIREMENT ASSETS Outright gift at death Transfer at death to CRT Waiver of spousal rights with ERISA plan Creditor protection varies by plan & state law 36

OUTRIGHT GIFT TO CHARITY AT DEATH Advantages Beneficiary Designation Form is mechanism for gift (non-probate) Convenient, comfortable way to make large gift Charity receives immediate benefit No estate tax on gifted assets Disadvantage No retained benefits for family 37

OUTRIGHT GIFT OF RETIREMENT ASSETS Beneficiary designation names charity as a primary or contingent beneficiary of IRA or retirement account at participant s death Benefits Estate receives estate tax charitable deduction for value of assets distributed to charity Tax-exempt status of charity means no income tax on distribution to charity 38

BENEFICIARY DESIGNATION If to charity and spouse Primary beneficiary: $XXX,000 to my favorite charity and the balance to my spouse, or XX% to my favorite charity and YY% to my spouse NOTE: Usually a bad idea (from income tax perspective) to name the donor s estate as beneficiary, even if Will provides for charitable gift 39

BENEFICIARY DESIGNATION Plan Administrator requires Amount or percentage of benefit stated clearly Sufficient information to identify and locate the charity NOTE: Designation may name a particular fund or purpose. However, plan administrator cannot police use of assets after distribution is made. 40

GIFT OF RETIREMENT PLAN ASSETS TO CRT Participant Individual $500,000 Retirement $500,000 Gifts Under Will or Trust 500,000 Annual payments from CRT to individual beneficiary CRT $500,000 1 2 By Beneficiary Designation Remainder to charity 41

GIFT OF RETIREMENT PLAN ASSETS TO CRT Retirement assets fund CRT Estate receives estate tax charitable deduction for remainder value of CRT CRT can provide for stream of annuity or unitrust payments to desired individual beneficiaries for life (subject to 10% minimum remainder interest rule) CRT Payments are based on 100% of CRT value (no diminution for income tax) All income tax on assets are deferred until CRT payments are distributed 42

EXAMPLE OF RETIREMENT ASSETS FUNDING CRT Professor Jones names his CRUT as primary beneficiary of $500,000 of retirement assets at his death. The CRUT provides for payments to his daughter for 10 years of 7% of the CRUT s market value, with the remainder to his favorite charity. Prof. Jones IRA 1 CRUT $500,000 Prof. Jones Estate 2 Estate Tax Charitable Deduction $248,770 Annual Payments (7% of Trust) ($35,000) 4 Remainder to Favorite Charity Daughter 3 These amounts are calculated using 6.2% as the assumed applicable federal rate for purposes of calculating the value of the remainder interest 43

RETIREMENT ASSETS TO A CRT Cautions Is planner competent in relevant areas of the law? (Estate tax, Income tax, ERISA, Retirement distributions, and CRTs) No marital deduction if non-spouse income beneficiary No discretionary access to trust property (Shouldn t be sole source of family support) In large estate subject to estate tax, stretch IRA may produce better tax result (691(c) deduction) 44

Charitable Gifts of Retirement Plan Assets Timothy J. Prosser, JD Director - Institutional Trust Consulting TIAA-CREF Trust Company, FSB June 14 & 15, 2007 TIAA-CREF Trust Company, FSB provides trust services. Investment products are not insured by the FDIC; are not deposits or other obligations of TIAA-CREF Trust Company, FSB; are not guaranteed by TIAA-CREF Trust Company, FSB; and are subject to investment risks, including possible loss of principal invested. Neither TIAA-CREF nor its affiliates provide legal or tax advice. This presentation is for educational purposes only and addresses a complex topic. Because it does not address many of the nuances of estate and tax law - both federal and state - and because these laws are continually being revised, we urge you to seek the advice of your own attorney, tax advisor, or accountant regarding your particular situation. 2007 TIAA-CREF Trust Company, FSB, One Metropolitan Square, 211 North Broadway, St. Louis, Missouri 63102 C38818 45