FAMILY & CHARITABLE ESTATE PLANNING

CHRISTOPHER R. HOYTUniversity of Missouri - Kansas City

School of Law

WEALTH WILL GO EITHER -- TO FAMILY/FRIENDS OR TO SOCIETY--

TaxesCharityFamily

PLANNED GIVING – INCREASE THE SHARE THAT GOES TO FAMILY & CHARITY BY REDUCING AS MUCH AS POSSIBLE THE SHARE THAT GOES TO TAXES

TRANSFER OF WEALTH Family Gift Charity GiftIncome Tax No Deduction Deduct !

Estate Tax Pay Tax Deduct!Gift Tax Pay Tax, Deduct! (if over $14,000/year/person)

PLANNED GIFTSLIFETIME -- Outright-- Deferred – CRT, CGA, CLTAT DEATH-- Outright-- Deferred – CRT, CGA, CLT

IMPACT OF NEW TAX RATES ON CHARITABLE GIVING

INCOME TAX RATES INVEST WAGES LTCGIncome Level -MENT (+1.45%) & Divid• AGI < $200k/$250k 28% 29.4% 15%

Congratulations! Brilliant tax planning! “Bush tax cuts” remain in full effect for people with adjusted gross income under $200,000 ($250,000 on a joint return)

INCOME TAX RATES INVEST WAGES LTCGIncome Level -MENT (+1.45%) & Divid• AGI < $200k/$250k 28% 29.4% 15%• AGI > $200k/$250k 33% 34.4% 15%

33% rate when taxable income > $183,250 -- single > $223,050 – married filing jointly

TAX RATES paid on TAXABLE INCOMEADJUSTED GROSS INCOME (“AGI”)• Minus: Greater of -- Standard Deduction ($6,100) or -- Itemized Deductions (Mortgage interest; charitable contributions; state & local taxes)• Minus: Personal Exemption & Dependents

($3,900 each)

= TAXABLE INCOME

WEALTHY PAY SOME TAXES ON “AGI”

ADJUSTED GROSS INCOME (“AGI”)• Minus: Greater of -- Standard Deduction ($6,100) or -- Itemized Deductions (Mortgage interest; charitable contributions; state & local taxes)• Minus: Personal Exemption & Dependents

($3,900 each)

= TAXABLE INCOME

INCOME TAX RATES INVEST WAGES LTCGIncome Level -MENT (+1.45%) & Divid• AGI < $200k/$250k 28% 29.4% 15%• AGI > $200k/$250k 33% 34.4% 15% plus health care surtax 3.8% 0.9% 3.8% 36.8% 35.3% 18.8%

HEALTH CARE SURTAXMAGI > $200,000 ($250,000 joint returns)

• Different rates for investment and labor -- 3.8% on interest, dividends, annuities, royalties, rents, profits from LLC/S Corp (if not employed) and most capital gains -- 0.9% earned income (wages, etc.)• $200k/$250k not indexed for inflation • Trusts and estates pay 3.8% at $11,950

HEALTH CARE SURTAXMAGI > $200,000 ($250,000 joint returns)

Income Exempt from Surtax:• Retirement: IRA distributions, etc.• Trade / Business income from a

Subchapter S corporation or partnership, provided the recipient is employed at the business.

-- “material participation” test (work 500+ hours during the year?)

INCOME TAX RATES INVEST WAGES LTCGIncome Level -MENT (+1.45%) & Divid• AGI < $200k/$250k 28% 29.4% 15%• AGI > $200k/$250k 33% 34.4% 15%• AGI > $250k/$300k 33% 34.4% 15%

-- 3% phase-out itemized deductions -- Phase-out personal exemptions

PHASEOUTSAGI > $250,000 ($300,000 joint returns)

• 3% Phase-out Itemized Deductions -- disguised 1% tax rate hike (3% x 33% rate)• Personal and Dependent Exemptions -- $3,900 apiece for self & each dependent-- lose 2% for every $2,500 income increase-- 100% eliminated AGI > $372k ($422k jnt)

INCOME TAX RATES INVEST WAGES LTCGIncome Level -MENT (+1.45%) & Divid• AGI < $200k/$250k 28% 29.4% 15%• AGI > $250k/$300k 33% 34.4% 15% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% 37.8% 36.3% 19.8%[plus personal exemption phase-out means extra tax until AGI $372,000 ($422,000 jnt)]

INCOME TAX RATES INVEST WAGES LTCGIncome Level -MENT (+1.45%) & Divid• AGI < $200k/$250k 28% 29.4% 15%• Taxb>$400/$450 39.6% 41.0% 20%

INCOME TAX RATES INVEST WAGES LTCGIncome Level -MENT (+1.45%) & Divid• AGI < $200k/$250k 28% 29.4% 15%• Taxb>$400/$450 39.6% 41.0% 20% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% 44.4% 42.9% 24.8%

INCOME TAX RATES INVEST WAGES LTCGIncome Level -MENT (+1.45%) & Divid• AGI < $200k/$250k 28% 29.4% 15%• Taxb>$400/$450 39.6% 41.0% 20% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% With $12,000+ income, 44.4% 42.9% 24.8%Trusts & Estates >> 43.4% 23.8%

FUTURE INCOME TAX RATES

STRATEGIES FOR HIGH-INCOMES* Reduce AGI !! “Charitable IRA Rollover”* Municipal bonds* Avoid spikes in income from major gains on property sales -- tax-exempt CRTs & installment sales

PLANNING FOR CHARITABLE GIFTS

OF APPRECIATED STOCKIN LIGHT OF FUTURETAX RATE CHANGES

DONORS LIKE TO CONTRIBUTE APPRECIATED STOCK

DOUBLE-TAX ADVANTAGE• Charitable Income Tax Deduction for the

Full Appreciated Value of the Stock• Never Pay Income Tax on the Growth of

the Value of the Stock• Loss Property? Sell for tax loss; give cash

DOUBLE BENEFIT FROM GIFT OF APPRECIATED L.T.C.G. PROPERTY

<< AVOID LONG-TERM CAPITAL GAIN TAX

<< CHARITABLE INCOME TAX DEDUCTION

$ Benefits Max Federal Taxes Saved

Person in 2012

50%

<< 15%* LTCG Tax Rate

<< 35% Marginal Tax Rate

* 25% RE Dep Recap * 28% Collectibles

IMPACT OF INDIVIDUAL INCOME TAX

RATE CHANGES in 2012 and 2013

FUTURE INCOME TAX RATES

Highest tax rates 2012 2013• Investment income 35% 44.4%• Earned income 36.4% 43.0% (wages – 1.45% health)• LT Capital Gains 15% 24.8%

$ Benefits Max Federal Taxes Saved

Person in the Year 201250%

<< 15%* LTCG Tax Rate

<< 35% Marginal Tax Rate

* 25% RE Dep Recap * 28% Collectibles

$ Benefits Max Federal Taxes Saved

Person in the Year 201365.4%

<< 24.8%* LTCG Tax Rate

<< 39.6*% Marginal Tax Rate(3.8% surtax not avoided by charitable deduction)

* 29.8% RE Dep Recap * 32.8% Collectibles

PROPOSALS TO CHANGE THE

INCOME TAX DEDUCTION FOR

CHARITABLE GIFTS

Obama Budget Proposal:

TAX BENEFIT FROM CHARITABLE GIFTS & MORTAGE INTEREST LIMITED TO 28%

Example: Rich person has $100 income$ 44 <<-- Pay tax at 44% [39.6%+surtax] -28 <<-- Tax savings from $100 gift$ 16 <<-- Cost of making $100 gift

2012 Presidential Candidate Mitt Romney Proposal:

ITEMIZED DEDUCTIONS LIMITED TO A MAXIMUM OF $17,000 (or $25,000 or $50,000 or …)

BOTTOM LINE: When there is serious tax reform, itemized deductions are the first target.

HOUSE WAYS & MEANS CMTEE: PROPOSALS TO CHANGE CHARITABLE

DEDUCTION February, 2013

“Options for Changing the Tax Treatment of Charitable Giving”

Eleven proposals – examine impact on : -- charitable giving and -- tax collections

2013 WAYS & MEANS CMTEE: PROPOSALS TO CHANGE CHARITABLE

DEDUCTION

“FLOOR” PROPOSAL – can only deduct when gifts exceed dollar amount [$500/$1,000 joint] or percent of income [2% of income]

“would reduce gifts, but add incentive for increased charitable giving”

THE FEDERAL ESTATE TAX

FUTURE OF ESTATE TAX ?Year Threshold2001 $ 675,0002002-2003 $ 1,000,0002004-2005 $ 1,500,0002006-2008 $ 2,000,0002009 $ 3,500,0002010 REPEALED ! [* carryover basis]2011-2012 $ 5,000,000 inflation indexed2013 $ 5,250,000 inflation indexed

Federal Estate Tax Returns Filed2012 [exclud portab] 8,300 (estim) 26% charit2007 38,000 20%2004 62,700 18%2001 108,000 17%1998 97,900 17%1995 69,780 19%1992 59,200 19%

OTHER TRANSFER TAX RULES

• Gift Tax -$5+ million inflation indexed

• GST - $5+ million inflation indexed

• 40% estate & gift tax rate• Portability for married couples permanent