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.
3 For producer use only. Not for presentation to the public.
Identifying the Client’s Legacy
Family
Charity
Leveraging a gift
Benefiting a particular charity or cause
Attracting key talent
Split-interest gifts
4 For producer use only. Not for presentation to the public.
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
5 For producer use only. Not for presentation to the public.
Identifying the Client’s Legacy
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
Split-interest gifts
Attracting key talent
6 For producer use only. Not for presentation to the public.
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
7 For producer use only. Not for presentation to the public.
Identifying the Client’s Legacy
Family Charitable
Asset Based
Family Dynamics
Legacy Planning
Flexibility Home
Business
Highly Appreciated Assets
Values/Ethics
Generations
Disabilities
Blended Families
Leveraging gifts
Benefiting a cause
Split-interest gifts
Attracting key talent
A Survey of Concepts
8 For producer use only. Not for presentation to the public.
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
9 For producer use only. Not for presentation to the public.
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
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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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For producer use only. Not for presentation to the public.
Identifying the Client’s Legacy
Family Charitable
Asset Based
Family Dynamics
Legacy Planning
Flexibility Home
Business
Highly Appreciated Assets
Values/Ethics
Generations
Disabilities
Blended Families
Leveraging gifts
Benefiting a cause
Split-interest gifts
Attracting key talent
A Survey of Concepts
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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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For producer use only. Not for presentation to the public.
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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For producer use only. Not for presentation to the public.
Family Charitable
Asset Based
Family Dynamics
Legacy Planning
Flexibility Home
Business
Highly Appreciated Assets
Values/Ethics
Generations
Disabilities
Blended Families
Leveraging gifts
Benefiting a cause
Split-interest gifts
Attracting key talent
Identifying the Client’s Legacy
A Survey of Concepts
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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?”
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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
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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)
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For producer use only. Not for presentation to the public.
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
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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
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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
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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
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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
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For producer use only. Not for presentation to the public.
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
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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
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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
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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
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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
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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
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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
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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
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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
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For producer use only. Not for presentation to the public.
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
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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
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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
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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
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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
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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
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For producer use only. Not for presentation to the public.
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)
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For producer use only. Not for presentation to the public.
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
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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
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$4,250,000
For producer use only. Not for presentation to the public.
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...
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For producer use only. Not for presentation to the public.
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
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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
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For producer use only. Not for presentation to the public.
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
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For producer use only. Not for presentation to the public.
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
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For producer use only. Not for presentation to the public.
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
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For producer use only. Not for presentation to the public.
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
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For producer use only. Not for presentation to the public.
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).