top 10 charitable planning strategies for financial advisors
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The top ten techniques in charitable planning financial planners should know to improve their practice and their adviceTRANSCRIPT
Top 10 Charitable Planning Strategies for
Financial Advisors
Russell James, J.D., Ph.D., CFP®Texas Tech University
Dept. of Personal Financial Planning
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
1. Never give cash
Donor Charity$100k Cash
Donor Charity
Income tax deduction ($100,000 x 39.6%)
$39,600+
Avoid capital gains tax($90,000 x 23.8%)
$21,240
Income tax deduction ($100,000 x 39.6%)
$39,600
$100k Stock
Donor Charity$100k low basis stock
$100kcash
immediately buy identical stock(100% basis)
The Charitable Swap
No “wash sale” rule because this is gain property, not loss
property
Donor
Charities
$100kcash
The Charitable SwapSimplified
Donor Advised
Fund
$
$
$
$100k low basis stock
immediately buy identical stock(100% basis)
Donor
Charities
$100kcash
A FREE tax benefit you lose every time you give cash
Donor Advised
Fund
$
$
$
$100k low basis stock
immediately buy identical stock(100% basis)
Did you pay capital gains taxes last year?Did you make cash gifts to charity?If so,
You need a new financial planner.
John Competitor, CFP®Financial Planning Services for the Charitably [email protected]
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
2. Give retirement RMD first and more at death
Life stages of a retirement account
Early distribution (before 59 ½)
Regular distribution (59 ½ to 70 ½)
Required minimum distribution (after 70 ½)
Giving after 70 ½
After age 70 ½ participants must take required minimum distributions (account balance / remaining life expectancy) or pay 50% penalty
$10,000
$10,000 incomeIRA
Giving after 70 ½ If the income is not needed, a charitable gift deduction might offset the income
(if itemizing and no income giving limitations exceeded and no pease limitation effects and no negative effects from increased AGI and not in the wrong state)
$10,000
$10,000 incomeIRA $10,000 deduction
$10,000
Giving after 70 ½
In some years, congress has allowed a Qualified Charitable Distribution (QCD), eliminating both the income and deduction
$10,000
$0 income
IRA$0 deduction
Qualified Charitable Distribution (QCD)
$10,000
$0 income
IRA$0 deduction$100,000
per person maximum
Participant 70 ½ or older
No private foundations, donor
advised funds, charitable trusts, or
charitable gift annuities
IRAs or IRA rollovers only; no
401(k), 403(b), SEP, SIMPLE,
pension or profit sharing plans
Retirement plan assets
inherited by non-charitable beneficiaries
are reduced by income tax
Does it matter which goes
where?
A client with a $1MM IRA and a $1MM house wants to leave
one to her child and one to
charity
IRA(child); House(charity)$1,000,000 House$1,000,000 to charity
$1,000,000 IRA -$396,000 (39.6% federal
income tax) $604,000 to child
-$110,000 (11% Oregon state income tax)
$494,000 to child
IRA(charity); House(child)$1,000,000 IRA$1,000,000 to charity
$1,000,000 House -$0 (no income tax)$1,000,000 to child
Retirement plan charitable beneficiaries
• A public charity• A private family
foundation• A charitable
remainder trust
• Not Charitable Lead Trusts (because they aren’t tax exempt)
• Avoid naming estate as beneficiary with instructions in estate documents (estate itself may have to pay income taxes)
Bad retirement plan death beneficiaries
Charities are not “designated beneficiaries”, so could accelerate RMD’s for other beneficiaries. Solutions:• Separate IRAs into a 100% charitable and
100% non-charitable account before death (+ RMDs can be taken from either to match desired plans)
• Beneficiaries can separate accounts by end of year following participant death1
• Payout charity share before September 30 of year following participant death.2
• If spouse is beneficiary, simply roll that share into spouse’s IRA
Simple solutions to a potential trap
1. Treas. Reg. sec. 1.401(a)(9)-8 Q&A 2(a) 2. Treas. Reg. sec. 1.401(a)(9)-4 Q&A 4(a)
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
3. Take deductions today for transfers tomorrow
A remainder interest in a home or farm gives the right to own the property after a set time or after the death of a person
OK, you can have my
stuff now.
Charles A. Donor
Charitable deduction for remainder interest deed in $1,000,000 of farmland by age 59 donor
1.0% (Jan 13)
$804,79011.6% (May 89)
$156,840
Leaving land to charityby will
• Revocable• $0 income tax deduction
• Impacts charity after death
Leaving land to charityby remainder deed
• Irrevocable• $804,790 immediate income
tax deduction• Impacts charity after death
or immediately if charity sells remainder interest• Immediately increases cash
assets available for investments (AUM)
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts generate an immediate tax deduction, even
though donor can manage assets and receive income for life
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
4. Match Deductions with Roth conversions
Roth conversions and charitable planning can work together to match
Income Deductions
$1MM in standard IRA (withdraws
are taxable)
Conversion creates $1MM in immediate
taxable income
Roth Conversion
$1MM in Roth IRA (withdraws
are tax free)
TaxableTax Free
Where can I find offsetting deductions?
Where can I find offsetting deductions?
Put money into a• Charitable remainder trust• Charitable lead trust
(grantor)• Charitable gift annuity• Donor advised fund• Private foundationOr give a remainder interest in a residence or farmland to a charity
Charitable deductions may be limited (with five year carryover) to 20%, 30%, or 50% of income depending on gift and recipient
If I have unused deductions, how can I pull future income into current year?
If I have unused deductions, how can I pull future income into current year?
With a Roth conversion
$1MM in standard IRA (withdraws
are taxable)
Conversion creates $1MM in immediate
taxable income
Roth Conversion
$1MM in Roth IRA (withdraws
are tax free)
TaxableTax Free
Roth conversions and charitable planning can work together to match
Income Deductions
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
5. Buy life insurance with new tax deductions
Charitable planning devices such as Charitable Gift Annuities, Gifts of Remainder Interests in Homes and Farms, and Charitable Remainder Trusts produce amazing tax advantages, reducing income taxes, capital gain taxes, and estate taxes
But, they also reduce heirs’ inheritance
Heir Charity Donor
Life insurance can diminish this concern
Tax Free Life Insurance
Can it pay to be charitable?
Priscilla wants to sell a $1,000,000 non-income producing zero-basis asset then spend the interest income of 5% while leaving principal for heirs. Her combined state and federal tax rates are:
capital gains (23.8%) income (39.6%) estate (40%)
Sale$1,000,000 asset -$238,000 capital gains tax
Client uses $38,100/year ($762,000 X 5% return)
Heirs receive $457,000 ($762,000-$304,800 est. tax)
CRUT$1,000,000 asset $0 capital gains tax$1,000,000 in 5% unitrust pays $50,000 annually + a charitable tax deduction of $300,000 worth $120,000
+ ILITClient pays $120,000 initially and $10,000 annually for a $400,000 ILIT-owned policy (including post-crummey gift taxes)
Client uses $40,000/year
Charity receives $1,000,000 remainder
Heirs receive $400,000 (tax free from ILIT)
John, age 59, at 39.6% income tax rate, owns $100,000 of farmland which he would like to use for the rest of his life then leave to charity, but he also wants to benefit his heirs.
Giving the remainder interest to charity creates a deduction of $80,479 worth $32,869. Suppose this will purchase a paid-up policy of about $50,000+.
John keeps lifetime use of farmCharity gets 100% of farm at deathHeirs get $50,000+ (estate tax free)
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
6. Earn more income by avoiding capital gains tax
A client holds a large, highly appreciated asset that generates little income (like developable land or non-dividend paying stock). How can she convert it to income generating property?
Option 1: Sell it. Pay the capital gains tax. Earn income on the remaining amount. $1,000,000 stock
$1,000,000 gain (if zero basis)
$238,000 tax (23.8% fed + ?% state)
$762,000 left to invest AUM
Option 2: Transfer to a CRT. Earn income for life on the full amount.
$1,000,000 stock$1,000,000 gain (if $100,000 cost)
_____$0 tax (CRT pays no tax)
$1,000,000 left to invest AUM
A client holds a highly appreciated asset that generates little income (like developable land or non-dividend paying stock). How can she convert it
to income generating investments?
Simple Sale
$1,000,000 asset$1,000,000 gain (if zero basis)
$288,000 tax (23.8% fed + 5% state)
$722,000 left to invest-AUM
Or California $670,000 left Charitable Remainder Trust
$1,000,000 asset$1,000,000 gain (if $100,000 cost)
$0 tax (CRT pays no tax)
$1,000,000 left to invest-AUM
& $100,000+ tax deduction
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
7. Prevent your clients from dying (ever)
Client death is highly inconvenient for financial planners
1. The government takes a chunk of the assets
2. The kids divide up the rest into smaller pools
• You CAN’T manage the money (because you don’t have the business relationships with each of the kids)
• You DON’T WANT to manage the money (because each remaining pool is too small)
A donor advised fund or private foundation holds money and distributes charitable grants
Multi-generational managementInheritance• Small pools after division by
1/n children and estate tax• Individual relationships with
each heir• High maintenance / personal
losses
Private Foundation/DAF• Big pool with no division
and no estate tax• Preexisting position as pool
manager• Low maintenance /
charitable org. losses
Donor Advised Fund• No minimum payout• Minimal setup &
administrative expense• Expected control of grants• Investment management
allowed with many financial institutions
• Legislatively newer
Private foundation• 5% minimum payout• Significant setup &
administrative expense• Actual control of grants• Investment management
always allowed• Legislatively stable
Advanced charitable strategies to preserve
wealth
• Lifetime and testamentary transfers to private foundation
• CRT (spigot) paying for life (if desired for consumption) then to family foundation
• Zeroed out CLT that pays charitable interest to family foundation, excess growth to children
• Multi-generational: Testamentary CRT, income to kids, then to private foundation run by grandkids
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
8. Grow tax free
Tax Free Growth Environments• Growth inside a
donor advised fund is tax free
• Growth inside a charitable remainder trust is tax free (only distributions are taxed)
• Growth inside a private foundation is tax limited (either 2% or 1% rate)
Standard Account10% growth, 39.6% federal, 5% state
Year 1 $10,000Year 2 $10,554Year 3 $11,139Year 4 $11,756Year 5 $12,407
… …Year 18 $25,009Year 19 $26,394Year 20 $27,856
Donor Advised Fund/PF10% growth, 39.6% federal, 5% state
Year 1 $10,000Year 2 $11,000Year 3 $12,100Year 4 $13,310Year 5 $14,641
… …Year 18 $50,544Year 19 $55,599Year 20 $61,159
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
9. Make your wealthy clients want to save More
Once my family and I are provided for, why would I keep working to build wealth?
Do the estates of people who make charitable estate plans grow differently than the general population?
After making their plan, charitable estate donors grew their estates 50%-100% faster than did others with
same initial wealth
Never give cash
Give retirement RMD first and more
at death
Take deductions today for transfers
tomorrow
Match Deductions with Roth
conversions
Buy life insurance with new
tax deductions
Earn more income by avoiding capital
gains tax Prevent your
clients from dying (ever) Grow tax free Make your wealthy
clients want to save MoreBe in a growing market for good clients
10. Be in a growing market for good clients
$2.0 milli
on < $3.5 milli
on
$3.5 milli
on < $5.0 milli
on
$5.0 milli
on < $10.0 milli
on
$10.0 milli
on < $20.0 milli
on
$20.0 milli
on or more
0%
10%
20%
30%
40%
Estates including charitable planning(IRS Statistics of Income 2008)
Estate Size
Charitable Estate Planning among US Adults Aged 55-65
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
1996 1998 2000 2002 2004 2006
Increases in charitable planning are driven by increases in childlessness and education
VariableEstimate
(s.e.) p-valueEstimate
(s.e.) p-valueEstimate
(s.e.) p-valueYear 0.0138
(0.0032)<.0001 0.0033
(0.0034)0.3298 0.0015
(0.0036)0.664
Any children -0.6251 (0.0345)
<.0001 -0.6224 (0.0479)
<.0001
Years of Education
0.1412 (0.0048)
<.0001 ….full set of
….
control variables
Probit analysis of all respondents age 55-65 in 1996-2006 HRS. Outcome variable is the presence of charitable estate planning.
Time trend exists
Time trend disappears
when including childlessness
and education
• The trend of increased charitable estate planning is driven by changes in childlessness and education.
• This allows us to predict rapid growth of charitable estate planning in the coming decades as both of these will unalterably increase for upcoming retiree populations.
Top 10 Charitable Planning Strategies for
Financial Advisors
Russell James, J.D., Ph.D., CFP®Texas Tech University
Dept. of Personal Financial Planning