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PPPLA Case Study Session May 29,2014

Jim Normandin, President Memorial Medical Center Foundation

FBO: Long Beach Memorial, Miller Children’s Hospital Long Beach, Community Hospital Long Beach their Centers of Excellence and related clinics

Jnormandin@memorialcare.org

Workshop Objectives

  Identify scenarios / situations where a CRT or other Charitable vehicle may be a viable planning option

  Identify potential donors for whom a CRT may be beneficial

  Provide marketing ideas

  Get you excited about the prospects for Charitable Trust Planning

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The State of Charitable Gift Planning 2014 …my view

When you consider the current tax climate gift planners have a unique opportunity to engage in meaningful discussion as to how charitable planning can resolve a financial and or estate planning dilemma.   It’s been my experience sharing this information with both prospective donors and professional advisors allows their inner philanthropist to emerge.  Fortunately proper integration into the planning process can also result in favorable income, estate, and gift tax consequences.  So let’s see why I believe charitable planning may be back in vogue. 

Washington 1-24-14

The likely next chairman of the Senate Finance Committee and 32 other senators from both parties are calling for the protection of tax deductions for charitable giving if Congress embarks on comprehensive tax reform. In a letter, dated Thursday to Sen. Max Baucus, D-Mont., the current Finance chairman, and Sen. Orrin Hatch, R-Utah, the ranking member of the panel, the lawmakers said the tax break facilitated more than $300 billion in donations to charitable organizations in 2012, supporting soup kitchens, afterschool programs and medical research projects. “It is the only provision that encourages taxpayers to give away a portion of their income for the benefit of others,” the letter stated. “For this reason, it is not a loophole, but a lifeline for millions of Americans in need.”

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Good News •  Philanthropy is popular …Giving Pledge. •  Stock Market up 2013 and holding it’s own in

2014 ! •  S&P 29.6% & Dow 26.5% 2013 …2014 ? •  Real Estate values are up •  Boomers are retiring, income is king. •  Senior Population 41 M 2010 -71 M 2030 •  Opportunity: look for Situations & LISTEN! •  Income tax planning not estate tax planning

for most. $5.34 Million, X2 Spouse, Portability •  Charitable Giving can resolve financial and

wealth transfer planning dilemma's.

The American Taxpayer Relief Act of 2012 made permanent for 2013 and beyond the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers filing jointly, $425,000 for heads of households). Income above these levels is now taxed at a 39.6 % . …What about the State tax impact in addition?

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•  ATRA also raised the top rate for long-term capital gains and dividends to 20 percent, applicable to all net long-term capital gains from transactions made on or after January 1, 2013.

•  That top rate will apply to the extent that a taxpayer's income exceeds the thresholds set for the 39.6 percent rate ($400,000 for single filers; $450,000 for joint filers and $425,000 for heads of households). Especially applicable to those investors who have been riding the recent stock market rally, the rate from 15 percent to 20 percent represents a 33.33 percent tax increase.

•  Set into motion on January 1, 2013 by the Affordable Care Act of 2010, higher-income taxpayers have been required to pay an additional 3.8 % on net investment income as well as a 0.9 percent Additional Medicare Tax on earned income.

•  The 3.8% net investment tax not only covers capital gains and dividends, but also passive-type income flowing from real estate, investments in businesses, and the like. The rules are complex, and many taxpayers were shocked on 4-15-14 as to the extent to which income on their 2013 tax returns was subject to the new net investment income tax.

•  For income subject to this tax, the effective rate will increase to 23.8 percent on net capital gain and dividends and 43.4 percent on short-term capital gain and all other passive-type income

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•  ATRA Act officially eliminated the “Pease” limitation on itemized deductions. The new thresholds, first applied in 2013, are $300,000 for married couples and surviving spouses; $275,000 for heads of households; $250,000 for unmarried taxpayers; and $150,000 for married taxpayers filing separately.

•  The Pease limitation reduces the total amount of a higher-income taxpayer's otherwise allowable itemized deductions by three percent of the amount by which the taxpayer's adjusted gross income exceeds this applicable threshold. The amount of itemized deductions may be reduced up to 80 percent under this formula. Certain items, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded.

Example A: Single Taxpayer has earned income of $175,000 and receives $20,000 of dividends and capital gains. The modified adjusted gross income is $195,000, an amount less than the $200,000 threshold. Therefore, Single Taxpayer is not subject to the Medicare tax. Example B: Single Taxpayer has earned income of $180,000 and receives $90,000 from a passive limited partnership distribution. The modified adjusted gross income is $270,000. Because there is $90,000 of net investment income and a total of $70,000 of income in excess of the $200,000 threshold, the taxpayer is subject NIIT on the lesser of $70,000 or $90,000. The tax is 3.8% x $70,000 or $2,660.

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•  ATRA …what relief? •  Now What? … Never underestimate a

discussion about Legacy. •  Tell a story …Legacy & Impact

–  Yvette and Robert …it began with a CGA funded with $25,000 …(2002 and in 2006)

–  Fast Forward $1,700,000 (+) Endowment 2013.

–  Robert, CRUT multiple times …509(a)(3) –  John age 92 59.2 M 47.0 MT some gifting but

wants to be philanthropic…work in progress

Where Am I? GATHER FACTS 

Family Data Net Worth Statement 

Cash Flow Risk A:tudes 

ESTABLISH OBJECTIVES Short term/Long Term 

PrioriBes Time Horizons 

DEVELOP FINANCIAL PLANS  

1. Develop Tax‐ReducBon Strategies 2. Examine Cash Flow 3. Protect Assets/Manage Risk 4. Develop AccumulaBon Strategy 5. Preserve and Distribute Estate 

 (Coordinate with Client’s other Advisers) 

Where Do I Want to Be? 

How Do I Get There? 

How do various  Charitable 

Techniques fit in? 

CONTROL AND EXECUTE PLANS Make Adjustments in Tax/Cash Flow Select Specific Financial Instruments 

Appraise AcBvity Reconsider ObjecBves And Revise Plans 

Unacceptable Hold Steady UnBl Next Measure of Performance 

MEASURE PERFORMANCE 

ATTAIN OBJECTIVES 

Steps in Financial Planning 

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A Success Story

Generation-Skipping A La Mode: It begins with a Concerned Son. In mid-1994, we were introduced to Mr. 68 by an insurance professional who had been discussing the family estate plan. A successful, retired business owner, Mr. 68 had a substantial estate, and to exacerbate the tax potential, was the sole beneficiary of his mother’s (age 93) $1.5 million estate.

Case Study Generation-Skipping a la mode

$755,775 20-year CRAT

Paying 8%

Creates CRAT

Receives Charitable Income Tax Deduction of $170,000

Grandchild #1 Receives $20,154

Annually For 20 yrs.

Grandchild #2 Receives $20,154

Annually For 20 yrs.

Grandchild #3 Receives $20,154

Annually For 20 yrs.

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Fast Forward to today…

 Mr. 68 lives only one year, predeceased his mother;

 Mother dies in late 2000, lives to see many of her great- grandchildren educated with her legacy;

 Grandchildren as of Sept. 2014 wil have received $1,209,240;

 Charitable remainder trust balance as of March 31, 2014 is $702.061.36;

  Do you think they’ll remember their grandmother?

In advance of the Case Study discussion please consider the following.

•  With each of these cases you need to ask, What else do I need to know? Fact Finding, through feeling finding questions.

•  Armed with additional information what planning techniques

might you recommend? Why?   •  Intervivos:   •  Testamentary: •  What needs to be done now to facilitate your

recommendations?

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Case Study #1 •  Mr. Riviera is a widower 93 years of age. He is currently living

in an assisted living facility. He has agency relations with a Trust Company and really likes his trust officer, his CPA and his cat “Blackie”. Mr. Riviera can be classified as “old school”.

•  Mr. Riviera has two nieces; one he has seen recently and the other came to his wife’s funeral in 2009. He told one of his nieces that he was going to give some money to charity because of his wife’s disease. The niece responded with “You can’t do that, my kids need the money”. He expressed to his trust officer that he has never met her kids. The trust officer contacted the gift planner and asked “What can we do to help secure his legacy?”

•  Mr. Riviera’s assets include cash, securities and a 1965 black Buick Riviera of which he is the original owner in beautiful condition with 88,000 original miles.

Case Study #2

•  Bill and Marie have made significant annual gifts. In 2004 they attended a Charitable Trust seminar in concert with a local real estate office. Now at age 88 Bill now considers the hospital his second home and his physicians as his closest friends and is reaching out for assistance.

•  Bill and Marie have 2 grown children. Their assets include low yielding CDs, treasuries and a spectacular recreational vehicle. They own a home in a gated community and a 12-unit apartment complex. Bill has made it clear that he needs to preserve income.

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Case Study #3

•  Mrs. Ann B., age 88, has been a widow for over 10 years. She has three grown children, all married with children of their own. She is in good physical and mental health. 

•  Mrs. Ann B. and her husband had a charitable remainder trust and she is the surviving beneficiary. Her assets include an IRA valued at 1.3 million and partial interest in a single family residence on the water valued at 4.9 million and a securities portfolio worth 2.9M

•  Her children want her to take advantage of the $5.350 million exemption available under current tax law. She is philanthropic minded and has come to the gift planner for help.

The Ideal Legacy A Charitable Remainder Unitrust

Custom Designed for Your Family Needs So much can go wrong in our attempts to plan an estate that secures our family's financial future. Here's a glimpse: •  Heir reinvests poorly, heavy losses •  Timing issues - pending divorce, business

transition, etc. •  Windfall proves disincentive to career

development, continued college enrollment •  Heir's friend starting new business, seeks investors •  Heir does not understand/consider the taxation

of qualified plan withdrawals, takes a lump-sum distribution of all proceeds

•  Heir greets new wealth with a spending spree

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The ideal legacy

•  is a professionally-managed trust which pays the heirs regular income for a term of up to 20 years or their lifetimes.

•  INCOME, that's what is needed to secure your heirs' future.

• Oh.....your heir can mismanage this quarter's payment or deposit it in a community property account and lose it in spousal property settlement, but next quarter's distribution and all future distributions remain the heir's separate property.

• No re-investment responsibilities, no accounting chores, no large taxable events as capital gains are realized by the trust.

•  Just cash the checks and report that part of the annual income which is calculated by the trustee as taxable.

•  Finally, at the end of the term, when your heirs' needs have been met as planned, any remainder will pass to Memorial Medical Center Foundation to fund the area of need your family restricted...heart, cancer, pediatrics, etc.

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Case Study – There are Tax‐exempts,  and then there is Tax‐Exempt 

                        Tax Exempts                               Charitable                                       Gi2 Annuity 

   $100,000 @ 4.2% =      $100,000 @ 7.2% =  $350.00 per month      $600. per month  or $4,200 per year *      ($481.00 tax exempt)                      or $7,200 per year ** 

OR 

Individual age 82, single life with income from social security and a porbolio of securiBes and bonds.  A homeowner with an IRA account. UBlizing their Charitable Tax deducBon of $51,617 possible to make Tax favored IRA withdraws and asset reposiBoning. 

Testamentary Transfers Inevitable Only Decisions:

How much, what, to Whom when and in what form?

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TRUSTOR’S ESTATE Where does it go?

FAMILY/

Heirs We deserve it all!

CHARITY

Legacy, What will yours be?

Wealth Transfer Considerations:

Voluntary or Involuntary Philanthropy ?

 

IRS

Transfer tax is voluntary!

TRUSTOR’S ESTATE Where does it go?

FAMILY/

Heirs We deserve it all!

CHARITY

Legacy, What will yours be?

Wealth Transfer Considerations:

Voluntary or Involuntary Philanthropy ?

 

IRS

Transfer tax is voluntary!

X

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You Can’t take it with you !

  It’s not always about Taxes; Estate Exemption $5,340M = $2,081, 800 Credit.   Will & / or Trust: A road map for your life’s work   Peace of mind planning   Ask for a bequest …2.5% solution   Choose your management team   Family / Corporate Fiduciary

– Power of Attorney – Successor Trustee – Health Care Directive

Lifetime Transfers Challenging....

  Transferor's unknown future needs   Transferor's desire to control assets   Transferor may be occupying / using asset   Income, Gift and GST tax issues   Recipient not able to manage   It’s just not comfortable

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Testamentary Unitrust 

Estate Value $4,250,000 

Children $2,250,000 

Charity $2,045,851 

Prepared for Generous Papa 

   

This educaTonal illustraTon is not professional tax or legal advice; consult a tax advisor about your specific situaTon.  See data sheets for assumpTons. 

1.  Part of estate to unitrust with balance, after costs, to Children. Charitable intent fulfilled the “give it twice plan” Estate tax a non issue for now.

2.  Trust income of 5% paid for 20 years. First year income $90,000. Estimated total income of $1,914,163. Gift of income within the allowance.

5% Unitrust $1,800,000 

Term of 20 Years

3.  If unitrust earns 5.64%, pays 5%, then grown 0.64%. After income payments for 20 years, unitrust to charity.

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Trust Benefits for Family and Charity 

Year 1    $1,800,000               $90,000              $  90,000 

Year 5          1,858,544               92,334                455,817 

Year 10        1,918,992               95,337                926,459 

Year 15        1,981,406               98,438             1,412,409 

Year 20        2,045,851             101,640             1,914,163 

PRINCIPAL 

5.642% Return  

UT INCOME PAYMENTS 

5.00% Pmt 

TOTAL OF                  UT  INCOME PAYMENTS 

Family 20.0 years:       $2,209,090 

Charity 20.0 years:      $2,045,851 

Charitable DeducHon:    $655,393 

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Not All Assets Make good Inheritances Do more with your IRA

•  IRA Charitable rollover expired 12-31-13. •  Gift your RMD to Charity to offset taxation. •  Advisors suggesting using IRA assets to satisfy Charitable

Bequest •  Testamentary CRUT to receive unspent IRA proceeds. Jane’s

Story…..Friends and Nursing Education •  Complex area of planning, multiple beneficiaries charitable

and non charitable. •  Will the stretch IRA survive …will there be legislation that

mandates distribution within 5 year of death for non spouse beneficiaries?

•  The TCRUT could survive as the answer, income on the installment with professional asset management and appeal to many.

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Bequest of IRA 

Estate Value $6,250,000 

Family $4,415,000 

Prepared for John Bequest 

   

This educaTonal illustraTon is not professional tax or legal advice; consult a tax advisor about your specific situaTon.  See data sheets for assumpTons. 

1.  Create by will a plan with bequest to charity of taxable IRA. Maintain full control of property during life.

2.  Bequest to charity enables a charitable estate tax deduction of $1,835,000 and income/estate tax savings of $812,500.

IRA To Charity $1,835,000 

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Trustor Must Document his/her

Planned Wealth Distribution

•  Updated Will/Trust, Revisit the Plan •  Incorporate the CRUT / CRAT /CLUT /CLAT

into the Estate Plan • Disclaimers •  Foundation, Private/Supporting •  Endowment, Advised Fund

• Planned gifts can be transformational

• Humanacis before Mechanics

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• Getting to Know Your Donor/Prospect –  Are you having a personal conversation? –  How are they connected to your

organization? – What is their story? – What are they trying to accomplish? –  Are they working with Advisors?

• Building Trust is a Two-Way Street –  Are you being responsive? –  Is the donor responsive to your needs? –  Does the donor’s gift align with your

organization’s mission?

 Retiree looking for income/yield

•  Consider Annuitizing (CGA) or (DCGA) part of the portfolio, reposition appreciated stock.

  Early retirement filling the gap to optimize Social Security at 70

•  Consider short term CRUT with high payout

Look for Situations

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•  Shift NII to Charity; gift the asset that generates the NII avoid the 3.8% tax.

• NII is assessed on Modified AGI the charitable deduction is an itemized deduction and does not reduce MAGI.

• Reduce income to below the threshold to avoid NII, takes advance planning.

•  Fund DAF lives happily ever after or other charitable vehicle in advance of triggering event.

Tax wise exit from investment Real Estate

• Low basis, management challenges, not another 1031 exchange. • All to trust? • Multiple Trust, some for heirs some for Grantors • FLIP CRUT for heirs now …privatized family security • Legacy Plan … Endowment, DAF etc.

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OUTRIGHT SALE OF APARTMENT BUILDING

$2,500,000

Tired Landlords, Age 76 and 75, sell their building

Results Cost Land $100,000 Cost Building 400,000 Accum. Dep. (400,000) Adjusted Basis 100,000 FMV, land and building $2,500,000 Federal Tax Liability if sold: Proceeds $2,500,000 Less Commission (6.2%) (155,000) Less Adjusted Basis (100,000) Gain 2,245,000 Section 1250 Gain $400,000 Tax (25%) (100,000) Capital Gain $1,845,000 Tax (20%) (369,000) State & Med. Tax (approx. 13%) (291,850) Total Tax Liability if sold $ 760,850

After tax cash proceeds $1,584,150

Purchase of a property by a charity for less than its fair market value. Property purchased for cash / installment note or both;

Donor receives income tax deduction for difference between FMV of property and purchase price;

Some capital gains tax relief on appreciated property; Can be appropriate for encumbered property – donor’s

equity is the deduction. Installment bargain sales provide income to donor

Bargain Sale

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Bargain Sale

$2,500,000

Gift $700,000 MMCF for a Donor Advised Fund. Tired

Landlords involve their children and family grants to

areas of interest advisory role

$1,500,000 amortized at 6%

over 20 years

$10,746/M

Term Income

$2.579,152

Costs and Taxes $52,003

Net Cash $247,997

Bargain Sell The Building

$300,000 Cash Paid

Charitable RemainderTrusts

DONORS CRT Asset

Charity Asset

Heirs

Payment Stream Deduction*

*Income, Gift, Estate and/or GST Deduction. Deduction depends on which Type of CLT is used.

Cash Flow Diagram

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Tired Landlords ages 76 and 78 Gift Apartment Building to fund a CRUT @ 5%, FMV $3,000,000

Gift Property to MMCF fund a CRT

Annual Income = CRUT FMV X 5% first year =$150,000

Income Tax Deduction of $1,576,410 and bypass up to $2,700,000 gain

Remainder to MMCF $3,455,565* to Fund Family’s DAF/Lasting Legacy

*5.89 NET Total Return

Tired Landlords gift apartment to MMCF to fund two CRUTs one with income to them and one with income to heirs $3,000,000

$1,500,000 in a Charitable Remainder Trust with income to

Tired Landlords

$1,500,000 in a Charitable Remainder Trust with income to Children for 20 yrs.

Tired Landlords receive:

• Income of $1,283,281* over their joint lifetimes;

• Income tax deduction of $788,205 and $546,161 for a total of $1,334,366.

Children receive:

• Annual Income, over term of CRUT = $ 1,633,465 * (20 yrs)

• PV Gift to Heirs $953,839

One Property, Two Trusts

Remainder to MMCF for DAF

$3,517,722*

*5.89% net Total Return

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Benefits

•  Income to Children now = Wealth Transfer

•  Income to Distribute in 20 from Family Fund = Values Transfer

•  Leverage value of Gift for Gift Tax •  Immediate Tax savings •  Philanthropic Legacy •  Total Legacy income + remainder $6, 434,468

Closing thoughts: • Don’t be greedy • Help the client with net after tax CASH • Securities gift and sell • Real Estate undivided issues. • Personel residence beyond 121 Exclusion

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• Need to diversify: majority of holdings in single issue.

• Education funding for heirs(s) …short term trust. Transferring income to lower tax bracket the student heir.

•  Income to Parent. Trustee makes direct deposit.

• House rich asset and income poor. • Do your giving while your living…

Outright Gifts!

•  Its not about taxes it’s the mission of the organization

• Motivation, Opportunity, Money, • Desire to support • Work with their advisors / introduce

them • Know how to integrate planning

with their objectives • Everybody is a prospect • Accelerating a bequest or let it be

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•  Income taxes are progressive know how it will affect their bottom line

•  If Estate Taxes are an issue know how you can help mitigate the voluntary tax

• Educate Advisors ….don’t assume • Have some fun and make new

friends • Everybody is a prospect!

Planning Today

• “baby boomers” set to retire, historically low interest with 2013 great investment returns.

• Make a gift while retaining a reliable source of income, CGA’s, CRT’s

• High estate/gift tax exemptions accelerate the bequest for lifetime income.

• Look for situations and educate them on the Charitable Alternarive.