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Charitable Remainder Trusts

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A Charitable Remainder Trust is a split interest trust consisting of an income interest, which is paid to the donor or other beneficiary during the term of the trust, and a remainder interest, which ...

A Charitable Remainder Trust is a split interest trust consisting of an income interest, which is paid to the donor or other beneficiary during the term of the trust, and a remainder interest, which is paid to the designated charity. The purpose of this strategy is to harbor net investment income in a tax-exempt environment while leveling income over a longer period of time to keep MAGI below the threshold amount. CRTs are especially useful when there is a large capital gain that pushes income above the threshold amount.

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Charitable Remainder Trusts Presentation Transcript

  • 1. Year-End Planning: Charitable Remainder Trust (CRT) Strategies Presented by: Robert S. Keebler, CPA, MST, AEP Keebler & Associates LLP © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved
  • 2. Introduction About the PFP Section & PFS Credential • The AICPA PFP Section provides information, resources, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and their closely held entities (learn more at aicpa.org/PFP) • The CPA/Personal Financial Specialist (PFS) credential distinguishes CPAs as subject-matter experts who have demonstrated their financial planning knowledge through experience, education and testing (learn more at aicpa.org/PFS) American Institute of CPAs® Personal Financial Planning Section 2
  • 3. Introduction Robert S. Keebler, CPA, MST, AEP Robert.Keebler@KeeblerandAssociates.com 920-593-1700 American Institute of CPAs® Personal Financial Planning Section 3
  • 4. Charitable Remainder Trust (CRT) A Charitable Remainder Trust (CRT) is a split interest trust consisting of an income interest and a remainder interest. During the term of the trust, the income interest is usually paid out to the donor (or some other named beneficiary). At the end of the trust term, the remainder (whatever is left in the trust) is paid to the charity or charities that have been designated in the trust document. PURPOSE OF STRATEGY (as it relates to the 3.8% NIIT): To harbor “net investment income” in a tax-exempt environment while at the same time leveling income over a longer period of time to keep MAGI below the “threshold amount”. © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 4
  • 5. Charitable Remainder Trust (CRT) Donor (Income Beneficiary) Donor receives an immediate income tax deduction for present value of the remainder interest (must be at least 10% of the value of the assets originally contributed) Transfer of highlyappreciated assets CRT Annual (or more frequent) payments for life (or a term of years) At the donor’s death (or at the end of the trust term), the charity receives the residual assets held in the trust Charity (Remainder Beneficiary) © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 5
  • 6. Two Main Types of CRTs Charitable Remainder Annuity Trust (CRAT) • The beneficiaries receive a stated amount of the initial trust assets each year - The amount received is established at the beginning of the trust and will not change during the term of the trust regardless of investment performance (unless inadequate investment performance causes the trust to run out of assets) Charitable Remainder Unitrust (CRUT) • Income beneficiaries receive a stated percentage of the trust’s assets each year. - The distribution will vary from year to year depending on the investment performance of the trust assets and the amount withdrawn © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® 6 Personal Financial Planning Section 6
  • 7. Charitable Remainder Trusts Charitable remainder trusts can be used to reduce or avoid surtax and incremental capital gains tax by smoothing out income CRTs are particularly useful when a taxpayer has a large capital gain that pushes income above the applicable threshold amount (ATA) Before explaining how the planning works, it will be helpful to look at some background information © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 7
  • 8. CRTs – Taxation The donor will NOT realize gain or loss when property is transferred to the trust However, the grantor may be required to recognize gain if: • Property transferred is subject to indebtedness that exceeds grantor basis • Grantor receives property from the trust in exchange for the transfer to the trust. The donor will NOT realize gain or loss if and when the transferred assets are subsequently sold by the trustee of the CRT © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 8
  • 9. CRTs – Taxation The character of income received by the recipient is subject to and controlled by the tier rules of IRC §664(b) • First, distributions are taxed as ordinary income • Second, distributions are taxed as capital gains • Third, distributions are taxed as tax-exempt income (e.g. municipal bond income) • Finally, distributions are assumed to be the non-taxable return of principal CRTs are not subject to the 3.8% surtax CRTs are not subject to the new 5.0% incremental capital gains tax © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 9
  • 10. CRTs – Taxation © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 10
  • 11. Substantial Sale CRT Substantial Sale CRT (Standard CRT) • CRT to eliminate or reduce/defer the 3.8% Surtax and 5% incremental capital gains tax © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 11
  • 12. Substantial Sale CRT - Example T has a $1 million stock position with $0 basis. Scenario 1 – T sells the entire position, incurring 20% capital gains tax, 3.8% net investment income tax, and 5% state tax. Scenario 2 – T moves the entire position to a 20-year CRUT. • The CRUT is assumed to distribute at 11.093%* rate per year after 1 year. • Tax savings from charitable donation is reinvested In both scenarios, a 4% growth rate and 1.5% yield is assumed for assets *Rate as of 8/13 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 12
  • 13. Substantial Sale CRT - Example Net to Family $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Scenario #1 - Sell Immediately Scenario #2 - 20-Year CRUT © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 13
  • 14. Substantial Sale CRT - Example Net to Family & Charity $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Scenario #1 - Sell Immediately Scenario #2 - 20-Year CRUT © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 14
  • 15. Retirement CRT Retirement CRT • CRT to eliminate or reduce the 3.8% surtax and 5% incremental capital gains tax while deferring income until after retirement © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 15
  • 16. Retirement CRT - Example T has a $1 million stock position with $0 basis. Scenario 1 – T sells the position in increments over 10 years, incurring 20% capital gains tax, 3.8% net investment income tax, and 5% state tax each year. Scenario 2 – T moves the stock to a 20-year CRUT in the same increments over 10 years. • The CRUT is assumed to distribute at 11.093%* rate per year after 10 years. • Tax savings from charitable donation is reinvested In both scenarios, a 4% growth rate and 1.5% yield is assumed for assets *Rate as of 8/13 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 16
  • 17. Retirement CRT - Example Net to Family $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Scenario #1 - Sell Stock Annually Scenario #2 - 20-Year CRUT © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 17
  • 18. Retirement CRT - Example Net to Family & Charity $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Scenario #1 - Sell Stock Annually Scenario #2 - 20-Year CRUT © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 18
  • 19. Income Shifting CRT Income Shifting CRT (Standard CRT for children) CRT to eliminate or reduce/defer the 3.8% surtax and 5% incremental capital gains tax while shifting the incidence of taxation to children and grandchildren © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 19
  • 20. Income Shifting CRT Shifts ordinary income to family Shift capital gains to family members Benefit charity © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 20
  • 21. Charitable Remainder Trust (CRT) for Benefit of Donor’s Children Donor’s Children and Grandchildren Donor receives an immediate income tax deduction for present value of the remainder interest (must be at least 10% of the value of the assets originally contributed) Transfer of highlyappreciated assets Standard - CRT Annual (or more frequent) payments for life (or a term of years) Considerations • Income Tax • Gift/Estate Tax • Generation Skipping Tax At the donor’s death (or at the end of the trust term), the charity receives the residual assets held in the trust Charity (Remainder Beneficiary) © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 21
  • 22. Income Shifting CRT - Example T has a $1 million stock position with $0 basis. Scenario 1 – T sells the entire position, incurring 20% capital gains tax, 3.8% net investment income tax, and 5% state tax. Scenario 2 – T moves the entire position to a 20-year CRUT, for his own benefit • The CRUT is assumed to distribute at 11.093%* rate per year after 1 year. • Tax savings from charitable donation is reinvested Scenario 3 - T moves the entire position to a 20-year CRUT, for the benefit of his children • The CRUT is assumed to distribute at 11.093%* rate per year after 1 year. • Tax savings from charitable donation is reinvested • The children will have a 15% rate on Federal Capital Gains . In both scenarios, a 4% growth rate and 1.5% yield is assumed for assets *Rate as of 8/13 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 22
  • 23. Income Shifting CRT - Example Net to Family $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Scenario #1 - Sell Immediately Scenario #2 - CRUT f/b/o Grantor Scenario #3 - CRUT f/b/o Children © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 23
  • 24. Income Shifting CRT - Example Net to Family & Charity $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Scenario #1 - Sell Immediately Scenario #2 - CRUT f/b/o Grantor Scenario #3 - CRUT f/b/o Children © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 24
  • 25. Mathematics of Charitable Planning in a Four-Dimensional Tax System © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 25
  • 26. 1 Year Payoff Vs. 10 Year Payoff - 23.8% Tax Rate $120,000.00 $100,000.00 81% Present Value ($) $80,000.00 74% 67% $60,000.00 $40,000.00 $20,000.00 $0.00 100 0 4 Discount Rate (%) 6 8 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 26
  • 27. 1 Year Payoff Vs. 10 Year Payoff 15% Tax Rate $70,000.00 $60,000.00 81% Present Value ($) $50,000.00 74% 67% $40,000.00 $30,000.00 $20,000.00 $10,000.00 $0.00 100 0 4 Discount Rate (%) 6 8 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 27
  • 28. 1 Year Payoff Vs. 20 Year Payoff 23.8% Tax Rate $120,000.00 $100,000.00 Present Value ($) $80,000.00 68% 57% $60,000.00 49% $40,000.00 $20,000.00 $0.00 100 0 4 Discount Rate (%) 6 8 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 28
  • 29. 1 Year Payoff Vs. 20 Year Payoff 15% Tax Rate $70,000.00 $60,000.00 $50,000.00 Present Value ($) 68% 57% $40,000.00 49% $30,000.00 $20,000.00 $10,000.00 $0.00 100 0 4 Discount Rate (%) 6 8 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 29
  • 30. Comparing the 23.8% to the 15% for 10 Years 120000 100000 81% Present Value ($) 80000 74% 67% 60000 23.8% 15% 40000 20000 0 100 0 4 Discount Rate (%) 6 8 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 30
  • 31. Comparing the 23.8% to the 15% for 20 Years 120000 100000 Present Value ($) 80000 68% 57% 60000 49% 23.8% 15% 40000 20000 0 100 0 4 Discount Rate (%) 6 8 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning Section 31
  • 32. Required Disclosure Under Circular 230 Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors. American Institute of CPAs® Personal Financial Planning Section 32
  • 33. PFP Section Resources (aicpa.org/PFP) The CPA’s Guide to Financial & Estate Planning– 1000-page, 4 volume, in-depth guide for practitioners (updated for ATRA) Forefield Advisor (aicpa.org/pfp/forefield) • Client education and communication tool • Written by CPAs, attorneys and other subject matter experts • More than 3,000 resources covering personal financial planning, including estate, tax, retirement, investment and risk management planning • Keyword searches: American Taxpayer Relief Act, net investment income tax American Institute of CPAs® Personal Financial Planning Section 33
  • 34. Resources for Post-ATRA & NIIT Planning Planning After ATRA and the Net Investment Income Tax Toolkit • • aicpa.org/pfp/proactiveplanning Complimentary PFP Section member/PFS credential holder benefit Other Resources for Purchase from Bob Keebler (www.cpa2biz.com) • • • • Tax Planning After the Healthcare Surtax: Tools, Tips, and Tactics* The Small Business Jobs Act of 2010: Tools, Tips, and Tactics The Tax Relief and Job Creation Act of 2010: Tools, Tips, and Tactics The Rebirth of Roth: A CPA's Ultimate Guide for Client Care* Coming soon! More Resources for Purchase from Bob Keebler* • • Planning Opportunities After ATRA: Tools, Tips, and Tactics Tax Rate Evaluator: A Graphical Calculator for Tax Planning After ATRA Visit aicpa.org/pfp/join to become a member *discounts available for PFP/PFS members American Institute of CPAs® Personal Financial Planning Section 34
  • 35. Proactive Year-End Financial and Tax Planning Where to Find More Education 10/25/2013 1:00-2:00p.m. ET Year-End Financial and Tax Planning Strategies to Address ATRA and the Net Investment Income Tax (Overview)* 11/11/2013 1:00-2:45p.m. ET Top Estate and Income Tax Planning Strategies* 11/12/2013 1:00-2:45p.m. ET Investment Tax Planning – Creating Tax Alpha* 1/20-22/2014 Las Vegas AICPA Advanced Personal Financial Planning Conference (cpa2biz.com/PFP) • Advanced education covering tax, estate, retirement, investments and risk management planning to be ready for 2014 and beyond • 2-day pre-conference workshop on implementing a PFP practice, Jan 18-19 To register and to view the full calendar of upcoming PFP Section events, visit aicpa.org/PFP and click on CPE & Events. *To access the archives, visit aicpa.org/pfp/webseminars. American Institute of CPAs® Personal Financial Planning Section 35
  • 36. Contact AICPA PFP Team Staff with Questions financialplanning@aicpa.org American Institute of CPAs® Personal Financial Planning Section 36