“Update on Planned Giving Tax Strategies” Hampton Roads Gift Planning Council January 9, 2014 Mike Kirkman, Partner National Leader - Estate, Gift and Trust Services Items to cover Top Planned Giving Techniques – 2013 Charitable Stats from 2012 Impact of “NEW” tax law on Planned Giving Charitable Trusts – What to do when they have run their course? Planned Giving Techniques Outright Gifts Life Insurance Proceeds Retention of a Life Interest Donor Advised Fund Charitable Gift Annuity Charitable Lead Trusts Charitable Remainder Trusts Charitable Giving 2012 (billions) Individuals Foundations Bequests Corporations - $228.93 45.74 23.41 18.15 Total - $316.23 100% Source: IRS & Giving USA Foundation 72% 14% 7% 6% Charitable Giving 2012 – Change over 2011 Individuals Foundations Bequests Corporations Overall - 3.9% - 4.4% - (7.0)% ** - 12.2% 3.5% Source: IRS & Giving USA Foundation ** I will comment later on this. Charitable Giving Sectors (Billions) - 2012 Religion$101.54 [32%] Education$41.33 [13%] Human Services$40.40 [13%] Public Society/Benefit$21.63 [7%] Health$28.12 [9%] Arts, Culture, and Humanities- $14.44 [5%] International Affairs$19.11 [6%] Environment/Animals$ 8.30 [3%] Individual Giving – % of Disposable Income (40 years) Disposable Income – As defined by Bureau of Economic Analysis (US Department of Commerce) 1972 - 2.2% 1982 - 2.0% 1992 - 1.8% 2002 - 2.2% 2012 - 1.9% Source: Giving USA Foundation 2012 Itemized Deductions - Virginia # of Returns - 3,801,986 # Itemized - 1,513,949 # Claiming Charitable - 1,236,419 Value of Charitable Deduction- $5,351,793,000 Source: IRS Charitable Receipt Changes Percentage of responding organizations reporting change in charitable receipts by year, 2001 through 2012 Source: Nonprofit Research Collaborative Charitable Receipts – 2013 projected Anticipated direction of change in charitable receipts, 2013 compared with 2012 Source: Nonprofit Research Collaborative Impact of New Tax Law on Charitable Giving 3.8% surtax –Net Investment Income Tax (NIIT) Taxpayers seek deferral techniques Fiduciaries face dilemmas Charitable Trusts – Opportunity Impact of Charitable Giving - Estate & Gift Tax Exemption $5 million (indexed to inflation) $5.34 million for 2014 Top Rate 40% Portability Allows Surviving Spouse to use Deceased Spouse Unused Exemption Individuals New 39.6% rate applies… MFJ > $450k AGI Singles > $400k AGI HH > $425k AGI MFS > $225k AGI Medicare 3.8% Surtax * applies… Taxpayers MAGI > $200k/$250k Net Investment Income Supplemental Medicare Tax * .9% applies… Taxpayers MAGI > $200k/$250k Part of FICA (Hospital Insurance Tax) * The Patient Protection and Affordable Care Act Individuals- cont. “High Income” taxpayers $400k/450k Capital Gain/Qualified Dividends – 20% vs. 15% Results – 23.8% tax on LTCG/QD Personal Exemption Phase-out/Pease Limitation Limits deduction for personal exemption and itemized deductions • • • • MFJ > $300k AGI Single > $250k AGI HH > $275k AGI MFS > $150k AGI Individuals – cont. Pease Limitation Couple has $670,000 AGI & $45,000 itemized deductions Thresholds - $250K (single) & $300K (MFJ) Itemized deductions reduced to $33,000 Mortgage interest - $5,000 Property taxes - $5,000 State income taxes - $20,000 Charitable deduction - $15,000 Reduced by lesser of: 3% x $400K ($700K - $300K) = $12K 80% x $45K = $36K Tax Rate Changes Since 1913 – How many rate changes have we had? Hint: Avg. of more than one every 3 years How many changes were increases/deceases? Do rate increases follow decreases? Economists – 60% probability of change in same direction 2 periods of steeply declining rates 1942 – Executive Order – 100% tax on salaries > ? Tax Rate Changes – Impact on Charitable Giving Discretionary Trusts Top Rate 39.6% - > $11,950 Taxable Income Net Investment Income Tax – 3.8% 65 Day Rule Mitigating the 3.8% Surtax Charitable Trust Avoiding the Surtax – 3.8% Pre 2013 - Charitable Remainder Trust 2013 Charitable Trust Why It Works… • Let’s look at an example…. Mitigating the 3.8% Surtax Charitable Trust (cont.) Donors – Couple age 65/64 Contribution - $1 million Term – Life Jan 2014 AFR – 2.2% (higher the better) Annuity payout - 5% ($50,000 per year) Charitable deduction - $108,111 What if…annuity could be pushed out? Mitigating the 3.8% Surtax Charitable Trust (cont.) Charitable Remainder Trust – Net Income Make-Up NIMCRUT Distribution Required - 5% of trust assets FMV If trust accounting income < 5%...then… Deficit is accumulated for future years Why is this a good thing? Charitable Trust – End of the Road Facts: In 1990 Tom (72) and Betty (68) established a CRAT. $1 million @ 6% annuity, lifetime Now in 2014 – Tom and Betty don’t need annuity income. What options are available? Charitable Trust – End of the Road (cont.) Terminate The CRT Assign the income interest Divide up CRT assets Caution! – Must follow rules (Tax and Legal) Any other options? Charitable Trust – End of the Road (cont.) Consider a “Sale of Income Interest” Is there a Market? Income beneficiary has “capital gain” Trust typically continues Risk is shifted to buyer Conclusion Tax law does impacts charitable giving Planning for the 3.8% CRTs are not bad options Charitable trusts DO have an exit strategy Happy New Year! Thank You!