Download 4 Planned Gifts that Pay Income PowerPoint (Tuesday Morning)

Planned and Endowment
Giving: Gifts that Pay Income
Philip M. Purcell, JD
Ball State University Foundation
[email protected]
Copyright 2012@All rights reserved.
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Planned Gifts that Pay Income or
Provide Life Estate
• Charitable Gift Annuities
• Charitable Remainder Trusts
• Pooled Income Funds
• Remainder Interest in Personal Residence
or Farm with Retained Life Estate
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Partial Interest Rule
•No charitable income tax deduction for gifts of a
partial interest in donated property.
•No deduction for a gift in which the financial
interest in the donated asset is split between the
donor (or others) and a charitable organization.
•Exceptions allowed for specific types of “split
interest” gifts.
Qualified Split Interest Gifts
• Charitable Lead Trust
• Charitable Gift Annuity
• Charitable Remainder
Trust
• Pooled Income Fund
• Remainder Interest in
Personal Residence or
Farm with Retained Life
Estate
Present Value
• Lead Trust: Gift tax reduced by present value
of income payments projected to charity over
term of lead trust per IRS formula.
• Gift Annuity, Charitable Remainder Trust,
Pooled Income Fund, Remainder Interest:
Income tax charitable deduction for present
value of charity’s future interest per IRS
formula.
Charitable Gift Annuity
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What is a Charitable Gift Annuity?
•A gift annuity is a contract
between a donor and charity.
•The donor contributes cash or
assets.
•The charity promises to pay a
lifetime income to the donor or
loved ones chosen by the donor.
•1 or 2 annuitants per contract.
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Key Definitions
• Donor: Contributes cash or assets.
• Payments: Made by charity to one or two
annuitants per gift annuity contract.
• Rates: Payments based on rates recommended by
American Council on Gift Annuities.
• Annuitant: Donor/others who receive payments.
• Residuum: Amount remaining when the final
annuitant dies.
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How a Charitable Gift Annuity Works
1. GIFT
2. INCOME
3. RESIDUUM
Donors
When annuitant(s) die, the residuum
is available for charity’s use.
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Recommended Rates
•ACGA formed in 1927.
•Rates at www.acga-web.org.
•Rates are voluntary.
•Rates are subject to change.
•Reasonable assumptions to
assure a valuable residuum.
•Avoids competition.
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Assumptions of ACGA Rates
1. 50% of the initial gift remains at
annuitant’s death.
2. Invested assets earn 5.5%.
3. Fees of 1%.
4. Projected life expectancy based on
standard mortality tables.
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Corporate Liability
•The obligation to make the annual
payments is a corporate obligation.
•Be certain that donated assets can be
sold!
•Residuum not guaranteed.
•Financial Statement: Payments are a
liability.
•Financial Statement: Gifts are an
asset.
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State Regulations
• Must comply with applicable state laws
where the donor resides
• States may regulate: rates, contract
language, reserve requirement, investment
restrictions
• Details for all regulating states at ACGA
website: www.acga-web.org
Immediate Payment
Charitable Gift Annuity
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One Life Immediate Payment Rates
Age
Rate
60
4.4%
70
5.1%
80
6.8%
90+
9.0%
(ACGA rates as of January 1, 2012)
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Sample Two Life Immediate Rates
Younger Age / Older Age
60/65
70 / 75
80 / 85
Rate
4.0%
4.8%
6.1%
(ACGA rates as of January 1, 2012)
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Example of an Immediate Gift Annuity
Mary Smith
Age 70
Contributes $50,000
Annuity rate is 5.1% or $2,550 annually
1. If fund earns as expected and
2. If Mary dies as predicted then
$25,000 residuum to charity
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Risk of Gift Annuity Obligations
If Mary dies sooner, then charity may receive
more than a 50% residuum.
But…
If Mary outlives her expected life expectancy,
then charity must continue her annuity
payments.
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Immediate Payment Gift Annuity
$50,000
$2,550
70 Year Old
Donor
5.1% Payout
(Rates as of January 1, 2012)
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Immediate Payment Gift Annuity
Income Tax deduction = $16,769
$50,000
$2,550
70 Year Old
Donor
5.1% Payout
$2,091 Tax Free
Effective Payout Rate = 8.3%
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Can Be Established During Life
or at Death
During Life
• Also called “inter vivos”.
•Most charities require a
minimum of $5,000$10,000 for first annuity.
•Pays income immediately.
• Current income tax
charitable deduction.
At Death
• Also called
“testamentary”.
• Included in will.
• Pays income to
surviving loved ones.
• Estate tax charitable
deduction.
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Benefits of Gift Annuity for Donor
1. Fixed payments for lifetime at attractive rates.
2. Current income tax charitable deduction.
3. A portion of payments is tax-free. Cash gifts increase
tax-free payments.
4. If capital gain property such as stock is donated, then
portion of payments taxed at capital gain rate.
5. Note: If anyone other than donor or spouse receives
payments, then capital gains tax is immediately owed
plus potential gift tax.
6. Donation removed from taxable estate.
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Deferred Payment
Charitable Gift Annuity
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Deferred Payment Gift Annuity
•Donor elects to delay
receiving income for a set
period of time.
• Results in a higher
annual payout rate once
payments begin.
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Sample One Life
Deferred Payment Gift Annuity Rates
Age
50
Rate (10 Years)
5.31%
Rate (20 Years)
9.2%
(as of January 1, 2012)
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Example of Deferred Gift Annuity
Bob Boomer
Age 50
Contributes $50,000 for deferred annuity that will begin
payment in 20 years during his retirement at age 70.
Annuity rate is 9.2% or $4,600 annually
1. If fund earns as expected and
2. If Bob dies as predicted then
$25,000 residuum to Charity
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Benefits of Deferred Payment Gift Annuity for
Donor
1. Fixed deferred payments at attractive rates beginning
at designated date for rest of lifetime.
2. Current income tax charitable deduction.
3. A portion of payments is tax-free.
4. If capital gain property such as stock is donated, then
portion of payments taxed at capital gain rate.
5. Note: If anyone other than donor or spouse receives
payments, then gift tax may be owed.
6. Donation removed from taxable estate.
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Profile of Donor
• Desires fixed income for self and/or
loved ones.
•Attractive rates for older donors or
those willing to defer income.
•Needs tax savings.
•Desires tax-free payments.
•Can start with smaller gifts and
donate for more and larger annuities
over time.
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Charitable Remainder Trusts
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Charitable Remainder Trusts
Future
Interest
Gift
TRUST
Income
Donors
Charity
Income to donors or
individuals named by donors
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Can Be Established During Life
or at Death
During Life
• Also called “inter vivos”.
•Commonly at least
$100,000 initial gift.
•Pays income immediately.
• Current income tax
charitable deduction.
At Death
• Also called
“testamentary”.
• Included in will.
• Pays income to
surviving loved ones.
• Estate tax charitable
deduction.
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Charitable Remainder Trust
Income Tax deduction = $50,607
$100,000
$5,000
69 Year Old
Donor
5.0% Payout
CHARITABLE
REMAINDER
TRUST
Payout increases or
decreases with value
of trust
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Benefits to Donors
1. Income paid to the donor and/or loved ones for
lifetime(s) or term of years (not to exceed 20 years).
2. Charitable tax deduction.
3. Escape of capital gains tax.
4. Personalized investment portfolio can be adjusted over
time as needs change.
5. Donor selects trustee to manage the trust.
6. Trust assets excluded from estate tax.
7. Flexibility to change multiple charity designations.
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Special Tax Implications of CRTs
• The income tax charitable deduction value
must be at least 10% of the amount
donated to the trust.
• The trust is tax exempt and pays no capital
gains tax on the sale of donated
appreciated property.
• Potential gift tax if anyone other than
donor or spouse receives income.
• No estate tax owed on gifts to the trust.
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Wealth Replacement
Life insurance replaces for children
or other heirs the assets given to
charitable remainder trust. At the
end of the trust:
• Remainder of the trust passes to
charity.
• Life Insurance distributed for
benefit of children or other heirs.
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Types of Charitable Remainder Trusts
1. Charitable Remainder
Unitrusts:
• Standard (most popular)
• Net Income
• Net Income with Make Up
• Flip Trust
2. Charitable Remainder
Annuity Trust (least popular)
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Standard
Charitable Remainder
Unitrust
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How Standard Charitable Remainder
Unitrusts Work
1. Charitable remainder unitrust document created by
donor’s legal counsel.
2. Donor selects the trustee and charitable remainder.
3. Trust document specifies a payout percentage which
by law must be no less than 5%.
4. The trust pays from income and/or principal the stated
percentage of the principal as the principal is revalued
once each year (usually December 31).
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Market Adjusted Payouts
1. The actual dollar amount paid
from the trust is dependent
on performance of the
invested trust assets.
2. As market value goes down or
up, so does the annual
payment.
3. Can provide a hedge against
inflation over the long term.
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Profile of Donor
• Desires income for self and/or loved
ones.
•Able to make major gift.
•Believes principal value will rise.
•Owns highly appreciated assets .
• Wishes to convert non-income
producing property to a personalized
investment portfolio.
•Needs tax savings.
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Remainder Interest in
Personal Residence
or Farm with
Retained Life Estate
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How it Works
•
•
•
•
•
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Donor retains life estate.
Irrevocable gift of remainder.
Includes principal residence.
Vacation home, condo, co-op.
Includes fixtures - not equipment,
furnishings or crops.
Remainder value is discounted to reflect
depreciation and salvage value is factored.
Example
•
•
•
•
•
•
Donor age 65
$500,000 property value
1% AFR rate (August 2012)
$318,884 income tax charitable deduction
Retained life estate
Removed from taxable estate
Adjusted Federal Rate (AFR Rate)
• A factor in the formula used to calculate the
tax benefits of any split interest gift
• Changes monthly
• At an historic low
• December 2012: 1%
When AFR Decreases
• Gift Annuity income
• Increase in tax
value increases but
deduction for
Remainder Interest in deduction decreases.
• Charitable Remainder
Residence or Farm.
Annuity Trust tax
• Reduction in gift or
deduction decreases.
estate tax liability for
Charitable Lead Trust. • Minimum impact on
CRUTs.
Planning Considerations
• Income tax charitable deduction for present
value of remainder interest.
• Deduction increases as AFR rate drops.
• Escape of capital gains tax and estate tax
liability.
• Useful if charity needs the specific real estate
or if the property value sustains until ultimate
receipt and sale by charity.
• Remainder Interest Agreement required.
Remainder Interest Agreement
•
•
•
•
•
Signed by Donor and Charity
Liability for Property Taxes
Payment of Property Insurance
Obligation for Maintenance Costs
Right of Charity to refuse future leases,
major changes to property that may
diminish value, etc.