For producer use only. Not for presentation to the public. OLA 1886 T 1008 Advanced Charitable Legacy Planning Strategies 2-Hour CE Seminar | October 2008

For producer use only. Not for presentation to the public.OLA 1886 T 1008

Advanced Charitable Legacy Planning Strategies

2-Hour CE Seminar | October 2008

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

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

Family

Charity

Leveraging a gift

Benefiting a particular charity or cause

Attracting key talent

Split-interest gifts


Charitable Tax Deductions

Income deduction percentage limits of donor’s AGI

50%

30%

20%

5-year carry-forward

Some deductions limited to basis

Charitable estate tax deduction



Family Charitable

Asset Based

Family Dynamics

Legacy Planning

Flexibility Home

Business

Highly Appreciated Assets

Values/Ethics

Generations

Disabilities

Blended Families

A Survey of Concepts

Leveraging gifts

Benefiting a cause




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 a charitable cause or my alma mater. How can I leave a significant bequest to charity without depleting the legacy I leave for my loved ones?”

Designating charity as policy’s beneficiary

Gifting old policy to charity

Purchasing life insurance policy by a charity



Family Charitable

Asset Based

Family Dynamics

Legacy Planning

Flexibility Home

Business


Values/Ethics

Generations

Disabilities

Blended Families

Leveraging gifts

Benefiting a cause





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


Advantages of Private Foundations

Control for donor and his/her family

Focused charitable giving and activities

Long-term charitable giving

Tax deductions

Exposure and community influence

10

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

Disadvantages of Private Foundations

Administration and compliance—time-consuming, costly

Excise taxes

Self-dealing

Failure to distribute minimum of income

Excess business holdings

Net investment income

Investments that jeopardize charitable purpose

Legislative activities

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Donor-Advised Funds

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

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

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Family Charitable

Asset Based

Family Dynamics

Legacy Planning

Flexibility Home

Business


Values/Ethics

Generations

Disabilities

Blended Families

Leveraging gifts

Benefiting a cause




13


Executive Legacy: A Rewarding Way to Attract Key Personnel

Company’s top executives play vital role in business’s operations

Challenge to find benefit programs to attract and retain qualified employees

Company can pay premiums on life insurance policy for executives to use as generous charitable donation

May also work to attract individuals to serve as directors

“How can I attract and retain top talent to serve as executives and directors of my company?”

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How the Executive Legacy Works

Company agrees to pay life insurance policy premiums on lives of its key executives

Executives advise company as to which charity will be applicant for and owner of policy, and beneficiary of policy’s death benefit

Company pays premiums directly to insurance carrier, or to charity that then pays premiums

At executive’s death, charity receives death benefit income tax–free

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Benefits of Life Insurance in Charitable Legacy Planning

Individuals gain satisfaction of benefiting favorite charities

Employers attract and retain key executives and/or directors

Charities receive higher donation from executive/director

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Family Charitable

Asset Based

Family Dynamics

Legacy Planning

Flexibility Home

Business


Values/Ethics

Generations

Disabilities

Blended Families

Leveraging gifts

Benefiting a cause





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Split-Interest Gifts

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

Donor Irrevocable Gift of Assets to Trust

Remaining TrustPrincipal

Trust Income Payments

Split ownership of asset into two parts:

Income interest

Remainder interest

Gift to charity of one interest

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Conservation Easements

Easements on developable land permanently restrict aspects of usage to protect conservation resources

Ownership, enjoyment of land remains with donor

30% AGI income tax deduction

Estate exclusion up to 40% of property value

Life insurance replaces lost value for loved ones

“This farm has been in our family for generations. How can I ensure it remains in the family and that the land won’t be developed?”

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Understanding the Different Types of Charitable Remainder Trusts (CRTs)

Charitable Remainder Annuity Trust (CRAT)

Charitable Remainder Unitrust (CRUT)

Net Income Charitable Remainder Unitrust (NICRUT)

Net Income Make-up Charitable Remainder Unitrust (NIMCRUT)

“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 sell the asset and minimize the tax consequences?”

20


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

21


Charitable Remainder Annuity Trust (continued)

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)

22


Charitable Remainder Unitrust Types

Standard

Net income

Net income with make-up

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General CRUT Features

Can accept multiple contributions

Trust valued annually

Pays specified fixed percentage of trust value based on annual valuation of trust

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

24


Net Income Charitable Remainder Unitrust

Operates like standard CRUT, but income payments can only be made from current trust earnings

If trust income in given year exceeds payout rate specified in trust document, beneficiary(ies) can only receive specified amount

If trust income in given year is less than payout rate, beneficiary(ies) can only receive income trust earned in that year

Trustee cannot deplete trust principal to make income payments to income beneficiaries

25


Net Income Make-up Charitable Remainder Unitrust

Follows same payout rules as NICRUT, plus:

If trust income exceeds stated payout rate, can pay income beneficiary more to make up for years in which payments did not meet trust-defined rate

Trustee must distribute greater payments in years when current income exceeds trust rate to make up for those in years when payments did not equal trust rate

26


NIMCRUT Example

Year Value of Trust Asset

Income Current

Payout Payout Owed

1 $10 million 0% 0% 6%

2 $10.5 million 0% 0% 12%

3 $12.6 million 5% 5% 13%

4 $13.6 million 15% 15% 4%

5 $15.6 million 15% 10% none

6 $15.8 million 1% 1% 5%

Trust payout rate to income beneficiary = 6% annually

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Asset Replacement: Life Insurance and CRTs

What is asset replacement? Gifts to a CRT are irrevocable Heirs do not have claim to donated assets Life insurance provides way to “replace” what loved

ones would have received Benefits of using life insurance

Potential payment of insurance premiums with CRT income distributions

Removal of life insurance death benefit from donor’s estate

Estate tax liquidity for heirs Death benefits generally received income tax-free by

policy’s beneficiaries

28


Taxation of CRT Income

“Four-tiered” tax system

Ordinary income

Capital gains

Tax-free income

Return of cost basis, which is also tax-free income

29


CRT Tax Implications

Income tax deduction based on:

Trust’s payout terms

Payout rate, payment frequency, and duration

Initial value of assets contributed to trust

Federal midterm rate, declared monthly

Capital gains tax – deferred until distributions

Estate tax

Donated assets removed from donor’s taxable estate

Future growth/appreciation outside of estate

Gift tax – may be due if income stream is payable to person other than donor

30


CRUT Example – Background Facts

John Startup

47 years old, spouse is 45

Two children, ages 13 and 11

Owns stock of his company

John is ready to sell his business

Started business with $100,000 investment 10 years ago

Approximate current value is $5 million

31


CRUT Example – Goals

Capital gains would be recognized on sale of company by John

John does not need immediate income from sale of business

Wants to invest sale proceeds to fund future income needs

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How a CRUT Works

3. Annual income from trust goes to pay premiums

1. John contributes $5 million business to CRT

2. John receives tax deduction of $1.2 million and an annual income stream equal to 5% of the trust’s value

4. Upon John’s death, trust remainder goes to charity

CharityLife

Insurance

Donor CRUT

33


CRUT Example – Accomplishments

How did the CRUT help John?

Delays recognition of capital gains tax on $4.9 million of proceeds

Gives John immediate income tax deduction

John receives stream of income

Portion of income used to purchase life insurance – to replace asset for loved ones

34


Pooled Income Fund (PIF)

“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.”

PIF

Assets

Annual Payments Income Tax DeductionDonor

Charity

35


PIF Tax Consequences

Gift tax due if income to beneficiary other than donor

Donor’s estate usually smaller without asset, less estate tax

No capital gain tax to PIF on sale of asset

Income tax deduction to donor for value of remainder interest

36


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.”

Assets

Annual Payments Income Tax DeductionDonor

Charity

37


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

38


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

39


How the CLT Works

Mr. Johns

CLAT

Assets

RemainderInterest

TaxDeduction s

AnnualPayout

Beneficiaries

Mr. Johns, age 72$1 million contribution to CLAT

5% payout to charity§ 7520 rate = 3.8%

Trust asset growth rate 7.5%

Charitable gift tax deduction = $466,480

Gift taxable amount = $533,520After 15 years,

Charity received $750,000Loved ones receive $1.65 million

Charity

40


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 this 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

41


Enhanced Charitable Trust: 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

42


How the Enhanced Charitable Trust Works

Individual has large non-recurring taxable item and makes gift to CLAT

Donor receives charitable deduction to help offset income taxes due

CLAT uses majority of gift to purchase life insurance

Upon death of insured, a portion of death benefit is paid to charitable trust beneficiary

Remainder of death benefit paid to non-charitable trust beneficiary (subject to gift tax)

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

43


How the Enhanced Charitable Trust Works(continued)

CLAT also purchases fixed income vehicle to provide annual income to charity

Grantor trust: grantor is subject to income tax on its earnings paid to charity

Muni-bonds viable option for lead payment to charity

Small annual lead payment to charity

Generally 10-15% of donated assets goes towards purchase of income producing product

Majority of charitable contribution stems from life insurance proceeds

Non-charitable trust beneficiary receives remaining trust assets, in addition to a portion of life insurance proceeds

44


How the Enhanced Charitable Trust Works(continued)

Non-recurringTaxable Item CLAT

(2) Grantor receives charitable deduction to help

offset income taxes due

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

CharitableDeduction

(1) Individual has large

non-recurring taxable item and gifts to

CLAT

(3) CLAT uses donated asset to purchase

life insurance

LifeInsurance

(4a) Upon death of insured, 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

Charity Beneficiaries

45


How the Enhanced Charitable Trust Works

CLAT

Charity

Majority of contribution to the charity stems fromthe life insurance

proceeds

Small annual lead payments to charity

CLAT purchases fixed income vehicle to provide annual income to charity

LifeInsurance

Policy

Fixed Income Option(Municipal Bonds)

46


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

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Who May Fit the Profile?

Business professionals

Attorneys

Stock brokers

Executives

Business owners

Real estate investors

High net–worth retirees

Large IRA, qualified plan, annuity balance

48


Hypothetical Example

60-year-old male business owner:

Considering selling business valued at $5,000,000

Goals:

Maximize wealth transfer to loved ones

Minimize impact of taxes due to sale of business

Provide benefit to charity

Current and future tax implications:

45% income tax rate

55% estate tax rate

3.8% Section 7520 rate

49

$4,250,000


Option 1: No Planning

In 20 Years…$11,276,515

$5,000,000 sale of business

Immediately reduced by 15% capital gains tax

Assuming 5% after-tax growth...

50


Option 2: CRT

Current income tax deduction: $1,656,350

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

CRTBusiness valued at $5,000,000

$112,500 income taxes

$250,000 annual income to grantor

$8,632,000 life insurance death benefit

®Remaining proceeds of $137,500 purchase

a universal life insurance policy

Grantor pays taxes on CRT income of 45%

Annual 5% payout

Business giftedto CRT

51


Option 3: Enhanced CLAT

Current charitable income

tax deduction: $2,721,879

$20,000 annual incomegenerated for charity

Upon grantor’s death Charity

receives $5,000,000

*$2,278,121 subject to gift tax

Charity

CRT

Municipal bonds earning 4%

$5,000,000 Business

Non-charitable trust beneficiaries

$5M business giftedto CLAT*

Universal life insurance

policy $19,005,000 death benefit

®

$500,000purchases muni bonds

Upon grantor’s death non-charitable trust beneficiaries receive

$14,005,000*

$4,500,000purchases single

premium universallife insurance policy

52


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

$0

No Planning

$14,005,000$8,632,000Amount to loved ones

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

Amount to charity

$2,721,879$0*$10,276,515Subject to gift/estate tax

$0$250,000$0Annual income to grantor

$20,000$0$0Annual income to charity

$2,721,879$1,656,350$0Income tax deduction

$19,005,000 universal life insurance policy

$13,632,000(includes universal life

insurance policy in ILIT)$11,276,515Value of asset

With ECLATWith CRT

$5,624,431

*Assumes no gift taxes due to Crummey powers

53


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

$0

No Planning

$8,650,000$8,632,000Amount to loved ones

$10,355,000$5,000,000 (assuming 5% annual return)

Amount to charity

$551,736$0*$10,276,515Subject to gift/estate tax

$0$250,000$0Annual income to grantor

$20,000$0$0Annual income to charity

$4,448,264$1,656,350$0Income tax deduction

$19,005,000 universal life insurance policy

$13,632,000(includes universal life

insurance policy in ILIT)$11,276,515Value of asset

With ECLATWith CRT

$5,624,431

*Assumes no gift taxes due to Crummey powers

54


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

55


Benefits of Charitable Legacy Planning

Support a cause or charity one believes in

Advantageous tax planning

Charitable income tax deduction

Reduce one’s estate taxes

Pass on values to future generations

Share one’s wealth with family or others

Can help an employer attract and retain key talent

56


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.

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 Octobrt 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 1886 T 1008

2-Hour CE Seminar | October 2008

Advanced Charitable Legacy Planning Strategies

Documents

For producer use only. Not for presentation to the public. OLA 1886 T 1008 Advanced Charitable Legacy Planning Strategies 2-Hour CE Seminar | October 2008