Charitable Legacy Planning

For producer use only. Not for presentation to the public.OLA 1907 1208

CharitableLegacy Planning

1-Hour CE Seminar | November 2008

For producer use only. Not for presentation to the public.2

This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.


Identifying the Client’s Legacy

Leaving a lasting legacy

Family

Charity

Tax deductions

Leveraging a life insurance policy

Split-interest gifts

Other charitable giving strategies


Charitable Tax Deductions

Charitable income tax deduction factorsPublic or private charityPresent interest or future interestType of assetOrdinary income property or capital gain propertyEntire asset or split-interest asset

Income deduction limits of 50%, 30% or 20% of donor’s AGI 5-year carryforward Some deductions limited to cost basis Dollar-for-dollar charitable deduction for estate taxes

and gift taxes


Charitable Legacy Life Insurance Planning

“I have an old policy that I no longer need.Can I give it to charity?”

“I would like to leave something to charitable cause or my alma mater. How can I leave a significant bequest to charity without

depleting the legacy leave for my loved ones?”

Designating charity as policy’s beneficiary

Gifting old policy to charity

Purchasing life insurance policy for charity


Split-Interest Gifts

“I want to benefit a charity, but I am not ready or able to part with the entire asset.”

Split ownership of asset into two parts: Income interest Remainder interest

Gift to charity of one interest

Donor

Trust Income Payments

Irrevocable Gift of Assets to Trust

RemainingTrust Principal


Understanding the Different Types of Charitable Remainder Trusts

“I would like to donate an asset to charity, but I need a stream of income from the asset during my life.”

“I have an asset with a low basis. How can I sellthe asset and minimize the tax consequences?”

Charitable Remainder Annuity Trust (CRAT)

Charitable Remainder Unitrust (CRUT)

Net Income Charitable Remainder Unitrust (NICRUT)

Net Income Make-up Charitable Remainder Unitrust (NIMCRUT)


Charitable Remainder Annuity Trust

Established and funded with single contribution

One-time valuation of trust— initial fair market value

Specified annuity benefit paid at least annually

Fixed amount, or

Fixed percentage based on initial fair market value

Annuity must be between 5% and 50% of the trust’s initial fair market value

5% probability test


Charitable Remainder Annuity Trust

Income payout will not vary with trust investment performance

Must make payments to beneficiaries whether or not there is enough trust income

Trustee can deplete trust principal to make income payments to income beneficiaries

Payout period not to exceed 20 years or life/lives of income beneficiary(ies)

At trust term, remaining trust principal passes to charity(ies)


Charitable RemainderUnitrust (CRUT) Features

Can accept multiple contributions

Trust valued annually

Pays specified fixed percentage of trust valuebased on annual valuation of trust

Payout must be between 5% and 50% of trust value

NICRUT (Net Income CRUT)

NIMCRUT (Net Income Make-up CRUT)


Asset Replacement: Life Insurance and CRTs

What is asset replacement?

Gifts to a CRT are irrevocable

Loved ones do not have claim to donated assets

Benefits of using life insurance

Life insurance provides way to “replace” what loved ones would have received

Potential payment of insurance premiums with CRT income distributions

Removal of life insurance death benefit from donor’s estate if held within an asset replacement trust


Taxation of CRT Income

“Four-tiered” tax system of CRT income:

Ordinary income

Capital gains

Tax-free income

Return of cost basis

Factors affecting charitable deduction:

Duration of the payment

Initial value of the asset contributed to CRT

Payout rate and frequency

Section 7520 rate


CRUT Example – Background Facts

John Startup, 47 years old

John is ready to sell his business

Started business with $100,000 investment 10 years ago

Approximate current value is $5 million

He wants to provide a large donation to charity

John doesn’t want to deplete his estate that he plans to pass on to his children


How a CRUT Works

(1) John contributes $5 million business to CRT

(2) John receives tax deduction of $1.2 million and an annual

income equal to 5% of the trust’s value

(3) Annual income from trust goes to pay

premiums

Donor CRUT

CharityLife Insurance

(4) Upon John’s death, trust remainder

goes to charity


Charitable Lead Trusts

“I would like to benefit a charity, but I want my loved ones to receive the asset.” “I don’t need the income from this asset.

Can I give the income to charity but keep the rest for my loved ones?”

CLT – opposite of CRT

Charity receives stream of income

Grantor’s loved ones get remainder interest

Two types:

CLAT – fixed dollar amount

CLUT – percentage of trust value


Tax Consequences of CLTs

Gift Taxes – only on remainder interest

Income Tax Deduction – Two types of trusts

Grantor Trust:

Charitable income tax deduction at creation

Trust income taxable to grantor

Non-Grantor Trust:

No charitable income tax deduction

Non-taxable trust income

For producer use only. Not for presentation to the public.17 For producer use only. Not for presentation to the public.

How the CLT Works

Mr. Michaels, age 68$1 million contribution to CLAT5% payout to charity§ 7520 rate = 3.8%Trust asset growth rate 5%

Charitable gift tax deduction = $584,758Gift taxable amount = $415,242After 15 years,Charity received $750,000Loved ones receive $946,054

Mr. Johns

Charity

Beneficiaries

CLAT

RemainderInterest

TaxDeduction

AssetsAnnualPayout


Enhanced Charitable Trust

“I don’t need this asset and I would like to receive a charitable income tax deduction for my gift. Can I leverage his asset to provide a benefit to a

charity and my loved ones?”

Deferred charitable lead annuity trust (CLAT)

Small annual lead payout to charity

Enhanced final payout to charity and trust beneficiary through use of life insurance


A New Approach to an Old Challenge

Challenge Provide client with income tax deduction to offset

significant non-recurring taxable event Large bonus or commission Sale of real estate Sale of business

Opportunity Leverage donated assets through purchase of life

insurance policy Provide current income tax deduction Make meaningful contribution to charity Pass on significant wealth to loved ones


Enhanced CLAT: Donor’s View

(1) Individual gifts asset to

CLAT

(3) CLAT uses donated asset to purchase life

insurance

* Gift tax based on original gift amount less charitable income tax deduction

Non-recurring Taxable Item Charitable

Deduction

CharityBeneficiaries

CLAT

LifeInsurance

(2) Grantor receives

charitable deduction to help

offset income taxes due

(4a) Upon death ofinsured, a portion of

death benefit is paid to charity

(4b) Remainder of death benefit paid to non-charitable trust

beneficiary (subject to gift tax), plus

remaining trust assets*


Enhanced CLAT: Charity’s View

Charity

CLAT

LifeInsurance

Policy

Fixed Income Option(Municipal bonds)

Small annual leadpayments to charity

Majority of contribution to

the charity stems

from the life

insurance proceeds

CLAT purchases fixed income vehicle to provide annual income

to charity


Client Profile

Individual with significant taxable non-recurring income

Considerable commission or bonus

Sale of business or real estate

Highly appreciated asset with no/low basis (IRA or annuity)

Aged 60 or older

Desires large tax deduction

Wants to create legacy for spouse or future generation

Charitably inclined


Enhanced Charitable TrustExample – Background Facts

60-year-old male executive:

Receiving a bonus of $1,000,000

Goals:

Maximize wealth transfer to loved ones

Minimize impact of taxes due to bonus

Provide benefit to charity

Current and future tax implications:

45% income tax rate

55% estate tax rate

3.8% Section 7520 rate


Option 1: No Planning

$1,000,000 bonus

Immediately reduced by 45% income tax

$550,000

Assuming 5% after-tax growth...

In 20 Years…

$1,459,314


Option 2: CRT

Current Income Tax Deduction: $331,270Assumes:

• Annual CRT payout of 5% • 7520 rate of 3.8%

CRT

$1,726,000 life insurancedeath benefit

$50,000annual income to grantor

$22,500income taxes

$1,000,000 bonus

$1 million giftedto CRT

Annual 5% payout

Remaining proceedsof $27,500 purchase

a universal lifeinsurance policy

Grantor pays taxes on CRT income of 45%


Option 3: Enhanced CLAT

Current charitable income tax deduction: $300,000

*$700,000 subject to gift tax

$1,000,000 bonusCLAT

Universal lifeinsurance

policy $3,801,000death benefit

Charity

Muni bondsearning 4%

Non-charitable Trust Beneficiaries

$1M bonus gifted to CLAT*

$900,000 purchasessingle premium

universal lifeinsurance policy

$100,000purchases muni bonds

$4,000 annual income generated for charity

Upon grantor’s death charity receives

$500,000

Upon grantor’s death

non-charitable trustbeneficiaries receive

$3,301,000*

For producer use only. Not for presentation to the public.27 For producer use only. Not for presentation to the public.

Comparing the Three Options…MaximizingWealth to Loved Ones–20 Years Later

$0

No Planning

$3,301,000$1,726,000Amount to loved ones

$500,000$1,000,000 (assuming 5% annual return)

Amount to charity

$700,000$0*$459,314Subject to gift/estate tax

$0$50,000$0Annual income to grantor

$4,000$0$0Annual income to charity

$300,000$331,270$0Income tax deduction

$3,801,000 universal life insurance policy

$2,726,000(includes universal life

insurance policy in ILIT)$1,459,314Value of asset

With ECLATWith CRT

$1,206,691

*Assumes no gift taxes due to Crummey powers


Comparing the Three Options…Maximizing Gift to Charity–20 Years Later

$0

No Planning

$1,651,000$1,726,000Amount to loved ones

$2,150,000$1,000,000(assuming 5% annual return)

Amount to charity

$100,000$0*$459,314Subject to gift/estate tax

$0$50,000$0Annual income to grantor

$4,000$0$0Annual income to charity

$900,000$331,270$0Income tax deduction

$3,801,000universal life insurance policy

$2,726,000(includes universal life

insurance policy in ILIT)$1,459,314Value of asset

With ECLATWith CRT

$1,206,691


Flexible Design

Ability to customize a strategy tailored to meet client’s specific goals/needs

Amount passed on to charity

Amount passed on to loved ones (subject to gift tax)

Amount of income tax deduction desired

Charity/ Deduction

Loved Ones

Loved Ones

Charity/ Deduction


Other Charitable Gifting Strategies

Pooled Income Funds

Charitable Gift Annuities

Private Foundations

Donor-Advised Funds


Pooled Income Fund

“I don’t have enough assets to set up a CRT, however I would still like to contribute an asset to charity, but retain a

stream of income.”

Annual PaymentsIncome Tax Deduction

Assets PIF

Donor

Charity


Charitable Gift Annuity

“I don’t have enough assets to set up a CRT, however I would still like to contribute an asset to charity, but retain a

stream of income.”

Asset

Donor

Charity

Annual PaymentsIncome Tax Deduction


Private Foundations

“I want to do more than just give to a charity. How do I create a charitable entity that my loved ones can carry on after

I pass away?”

“I want to benefit a charity, but I do not want to lose control over the money I donate and the ability to decide what charitable causes it will

benefit.”

Created as either a corporation or trust

Run by family members

Deductions depend upon property given and whether given during life or at death


Donor-Advised Funds

“I want to retain some control over the assets I donate, but private foundations are too complicated.”

Contribution to a fund run by a charity

Donor makes recommendations as to distributions

Less administrative cost and exposure to excise taxes for donor

Income tax deduction similar to contributions to public charities


Benefits of Charitable Legacy Planning

Support a cause or charity one believes in

Advantageous tax planning

Share one’s wealth with family or others


Transamerica Insurance & Investment Group (“Transamerica”) and its representatives do not give tax or legal advice. This presentation is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here.

Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of this presentation. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica’s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects.

Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of November 2008.

Transamerica Insurance & Investment Group is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN 37219-2417. Web site: www.nasba.org.

In the state of New York, Transamerica Life Insurance Company is an approved provider of continuing education courses (Provider Organization Approval Number NYPO-100366).

For producer use only. Not for presentation to the public.OLA 1907 1208

CharitableLegacy Planning

1-Hour CE Seminar | November 2008

Documents

Charitable Legacy Planning