Charitable Planning


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Charitable Planning

  1. 1. Charitable Planning<br />By Ward J. Wilsey, JD, LLM<br />The Wilsey Law Firm<br />3655 Nobel Dr. Suite 345<br />San Diego, CA 92122<br /><br />
  2. 2. Charitable Planning Questions<br />What are client’s charitable intentions?<br />Would the client rather have assets go to the IRS or Charity?<br />How will a gift that goes to the charity affect what goes to the children?<br />What type of planning are we doing<br />Testamentary<br />Lifetime<br />
  3. 3. Zero Estate Tax Planning<br />Assets left to charity will not be part of the taxable estate. IRC 2055<br />If you leave the taxable estate to charity, there will be no taxable estate, and thus no estate taxes.<br />If you leave the entire taxable estate to charity less will pass to the children than had you just paid the estate taxes<br />
  4. 4. Comparison on $10,000,000 Estate<br />No Charitable Plan<br />Taxable Estate to Charity<br />$10,000,000 Estate<br />($3,500,000) Exemption<br />$6,500,000 Taxable Estate<br />45% Estate Tax<br />$2,925,000 Estate Tax<br />$7,075,000 to Kids<br />$10,000,000 Estate<br />($3,500,000) Exemption<br />$6,500,000 Taxable Estate<br />$6,500,000 to Charity<br />$0 Taxable Estate<br />$0 Estate Tax<br />$3,500,000 to Kids<br />
  5. 5. Zero Estate Tax Options<br />Outright gift of taxable estate to charity<br />Testamentary Charitable Lead Annuity Trust<br />
  6. 6. Zero Tax Option: Outright Gift<br />Gifts made to a qualifying charity are exempt from the Grantor’s estate<br />IRC 2055(a)<br />Qualifying Charities<br />A gift to a governmental agency for public purposes. IRC 2522(a)(1)<br />Corporation, trust, or fraternal organization operating for religious, charitable, scientific, literary, or educational purposes. Treas. Reg. 20.2055-1(a)(2).<br />
  7. 7. Outright Gift<br />Qualifying Transfers<br />Bequest, legacy, devise, or transfer.<br />Validity of transfer is determined under state law. Estate of Polster v. Commissioner, 274 F. 2d 358 (4th Cir. 1960)<br />Properly executed beneficiary designation form will qualify. PLR 199939039<br />Qualified Disclaimers. Treas. Reg. 20.2055-2(c)(1)<br />Irrevocable and Unqualified<br />In writing<br />No later than 9 months after date of death<br />Disclaimer must be made prior to use by Disclaimant<br />
  8. 8. Testamentary Charitable Lead Annuity Trust<br />TCLAT is just a Charitable Lead Annuity Trust created after death<br />Income stream for charity for term of years<br />Possible to eliminate estate tax applied on assets transferred to the trust<br />Transfer a substantial amount to family members at the termination of the trust with little or not gift or estate tax cost<br />
  9. 9. TCLAT or TCLUT?<br />Most planners will use a CLAT<br />Annuity remains constant<br />Unit-Trust adjusts upwards<br />Assuming asset growth, an Annuity will lead to more going to the Grantor’s family<br />
  10. 10. TCLAT Zeroed Out Language<br />Formula Clause should be used to zero-out estate taxes.<br />Amount resulting in a charitable deduction that reduces the estate tax to zero<br />PLR 9631021, 9128051, 8946022<br />This will depend on the 7520 rate at death<br />Big wildcard<br />Less , or maybe nothing, will go to family if 7520 rate is fairly high at the clients death<br />TCLATs are very volatile<br />
  11. 11. How does the TCLAT work?<br />Annuity is paid out to charity for term of years<br />A gift is made consisting of the present value of the remainder interest<br />In a Zeroed Out TCLAT, everything passes at the end of the term to descendents free of estate tax.<br />Structured as a normal CLAT, discussed later<br />
  12. 12. When to Use TCLAT<br />When client has significant charitable intent, but wants some to go to charity<br />When client wants significant amount to go to Private Charitable Foundation<br />When significant other estate planning measures have been used<br />Family Limited Partnerships<br />Sales to Intentionally Defective Trusts<br />GRATs<br />Etc.<br />
  13. 13. Lifetime Charitable Gifting<br />Reasons for Charitable Gifting during Lifetime<br />Charitable Intent and Income Tax Driven<br />Outright gifts<br />Charitable Remainder Trusts<br />Transfer Tax Driven <br />Charitable Lead Annuity Trusts<br />
  14. 14. Outright Gift<br />Contributions to Charity Receive an income tax deduction<br />IRC 170<br />Deductions limited to 50% of adjusted gross income.<br />IRC 170(b)(1)(A)<br />Deductions can be carried forward for 5 years and back for 2 years<br />IRC 170(d)(1); Treas. Reg. 1.170A-10(b)<br />
  15. 15. Gifts to Charity<br />Charitable Deduction reductions<br />50% rule can be reduced as follows:<br />Long Term Capital gains deductions are limited to 30%. IRC 170(e)(1)<br />Short Term Capital Gains limited to basis, deductible to 50% of adjusted gross income. IRC 170(e)(1)(A)<br />Gifts of ordinary income property can be deducted only to basis. IRC 170(e)(1)(A); Treas. Reg. 1.170A-4(a)(1)<br />
  16. 16. Gifts to Charity<br />Gifts to following are limited to a 30% deduction. IRC 170(b)(1)(B)<br />Private Foundation.<br />Veteran’s Organizations<br />Domestic Fraternal Societies<br />Non-Profit Cemeteries<br />Gifts to such organizations are reduced to 20% if:<br />Long Term Capital Gain Property. IRC 170(b)(1)(D)(i)<br />
  17. 17. Charitable Remainder Trusts<br />Benefits<br />Forgiveness of capital gains<br />Immediate charitable tax deduction<br />Investment of sale proceeds in tax free environment<br />Allows donor to control investment<br />
  18. 18. Charitable Remainder Trust<br />Client forms Charitable Remainder Trust<br />Client takes back interest for life or term of years not to exceed 20 years<br />Charity get remainder<br />Client gets deduction equal to actuarial value of remainder<br />Authorized by IRC 664(d)<br />
  19. 19. Types of Charitable Remainder Trust<br />Charitable Remainder Annuity Trust<br />Pays annual annuity to grantor that remains the same every year<br />IRC 664(d)(1)(A);<br />Charitable Remainder Uni-trust<br />Pays annual uni-trust amount to grantor each year based on beginning value<br />IRC 664(d)(2)(A)<br />
  20. 20. Charitable Remainder Trusts<br />Types<br />Charitable Remainder Annuity Trust (CRAT)<br />(Straight) Charitable Remainder Unitrust (S-CRUT)<br />Net Income Uni-Trusts (Ni-CRUT)<br />Net Income Makeup Unitrust (Nim-CRUT)<br />FLIP-CRUT<br />
  21. 21. CRT Uses<br />Conversion of Core Capital into Tax Free Investment Environment<br />Eliminating Capital Gains on Appreciated Assets<br />When TCLAT in place, a way to generate tax deductions on assets that will go to charity anyway<br />
  22. 22. Charitable Lead Trust<br />Benefits<br />Create income stream for charities<br />Reduce or eliminate federal gift and estate tax on assets transferred to trust and on subsequent appreciation<br />Transfer of substantial amount to family members<br />
  23. 23. Charitable Lead Trust<br />Gift to CLT<br />CLT pays charity for set number of years<br />No income tax deduction<br />Gift tax deduction for charitable interest<br />IRC 7520(a)<br />Can be designed to zero out gift tax<br />