Charitable PlanningBy Ward J. Wilsey, JD, LLMThe Wilsey Law Firm3655 Nobel Dr. Suite 345San Diego, CA 92122www.wilseylaw.com

Charitable Planning QuestionsWhat are client’s charitable intentions?Would the client rather have assets go to the IRS or Charity?How will a gift that goes to the charity affect what goes to the children?What type of planning are we doingTestamentaryLifetime

Zero Estate Tax PlanningAssets left to charity will not be part of the taxable estate. IRC 2055If you leave the taxable estate to charity, there will be no taxable estate, and thus no estate taxes.If you leave the entire taxable estate to charity less will pass to the children than had you just paid the estate taxes

Comparison on $10,000,000 EstateNo Charitable PlanTaxable Estate to Charity$10,000,000 Estate($3,500,000) Exemption$6,500,000 Taxable Estate45% Estate Tax$2,925,000 Estate Tax$7,075,000 to Kids$10,000,000 Estate($3,500,000) Exemption$6,500,000 Taxable Estate$6,500,000 to Charity$0 Taxable Estate$0 Estate Tax$3,500,000 to Kids

Zero Estate Tax OptionsOutright gift of taxable estate to charityTestamentary Charitable Lead Annuity Trust

Zero Tax Option: Outright GiftGifts made to a qualifying charity are exempt from the Grantor’s estateIRC 2055(a)Qualifying CharitiesA gift to a governmental agency for public purposes. IRC 2522(a)(1)Corporation, trust, or fraternal organization operating for religious, charitable, scientific, literary, or educational purposes. Treas. Reg. 20.2055-1(a)(2).

Outright GiftQualifying TransfersBequest, legacy, devise, or transfer.Validity of transfer is determined under state law. Estate of Polster v. Commissioner, 274 F. 2d 358 (4th Cir. 1960)Properly executed beneficiary designation form will qualify. PLR 199939039Qualified Disclaimers. Treas. Reg. 20.2055-2(c)(1)Irrevocable and UnqualifiedIn writingNo later than 9 months after date of deathDisclaimer must be made prior to use by Disclaimant

Testamentary Charitable Lead Annuity TrustTCLAT is just a Charitable Lead Annuity Trust created after deathIncome stream for charity for term of yearsPossible to eliminate estate tax applied on assets transferred to the trustTransfer a substantial amount to family members at the termination of the trust with little or not gift or estate tax cost

TCLAT or TCLUT?Most planners will use a CLATAnnuity remains constantUnit-Trust adjusts upwardsAssuming asset growth, an Annuity will lead to more going to the Grantor’s family

TCLAT Zeroed Out LanguageFormula Clause should be used to zero-out estate taxes.Amount resulting in a charitable deduction that reduces the estate tax to zeroPLR 9631021, 9128051, 8946022This will depend on the 7520 rate at deathBig wildcardLess , or maybe nothing, will go to family if 7520 rate is fairly high at the clients deathTCLATs are very volatile

How does the TCLAT work?Annuity is paid out to charity for term of yearsA gift is made consisting of the present value of the remainder interestIn a Zeroed Out TCLAT, everything passes at the end of the term to descendents free of estate tax.Structured as a normal CLAT, discussed later

When to Use TCLATWhen client has significant charitable intent, but wants some to go to charityWhen client wants significant amount to go to Private Charitable FoundationWhen significant other estate planning measures have been usedFamily Limited PartnershipsSales to Intentionally Defective TrustsGRATsEtc.

Lifetime Charitable GiftingReasons for Charitable Gifting during LifetimeCharitable Intent and Income Tax DrivenOutright giftsCharitable Remainder TrustsTransfer Tax Driven Charitable Lead Annuity Trusts

Outright GiftContributions to Charity Receive an income tax deductionIRC 170Deductions limited to 50% of adjusted gross income.IRC 170(b)(1)(A)Deductions can be carried forward for 5 years and back for 2 yearsIRC 170(d)(1); Treas. Reg. 1.170A-10(b)

Gifts to CharityCharitable Deduction reductions50% rule can be reduced as follows:Long Term Capital gains deductions are limited to 30%. IRC 170(e)(1)Short Term Capital Gains limited to basis, deductible to 50% of adjusted gross income. IRC 170(e)(1)(A)Gifts of ordinary income property can be deducted only to basis. IRC 170(e)(1)(A); Treas. Reg. 1.170A-4(a)(1)

Gifts to CharityGifts to following are limited to a 30% deduction. IRC 170(b)(1)(B)Private Foundation.Veteran’s OrganizationsDomestic Fraternal SocietiesNon-Profit CemeteriesGifts to such organizations are reduced to 20% if:Long Term Capital Gain Property. IRC 170(b)(1)(D)(i)

Charitable Remainder TrustsBenefitsForgiveness of capital gainsImmediate charitable tax deductionInvestment of sale proceeds in tax free environmentAllows donor to control investment

Charitable Remainder TrustClient forms Charitable Remainder TrustClient takes back interest for life or term of years not to exceed 20 yearsCharity get remainderClient gets deduction equal to actuarial value of remainderAuthorized by IRC 664(d)

Types of Charitable Remainder TrustCharitable Remainder Annuity TrustPays annual annuity to grantor that remains the same every yearIRC 664(d)(1)(A);Charitable Remainder Uni-trustPays annual uni-trust amount to grantor each year based on beginning valueIRC 664(d)(2)(A)

Charitable Remainder TrustsTypesCharitable Remainder Annuity Trust (CRAT)(Straight) Charitable Remainder Unitrust (S-CRUT)Net Income Uni-Trusts (Ni-CRUT)Net Income Makeup Unitrust (Nim-CRUT)FLIP-CRUT

CRT UsesConversion of Core Capital into Tax Free Investment EnvironmentEliminating Capital Gains on Appreciated AssetsWhen TCLAT in place, a way to generate tax deductions on assets that will go to charity anyway

Charitable Lead TrustBenefitsCreate income stream for charitiesReduce or eliminate federal gift and estate tax on assets transferred to trust and on subsequent appreciationTransfer of substantial amount to family members

Charitable Lead TrustGift to CLTCLT pays charity for set number of yearsNo income tax deductionGift tax deduction for charitable interestIRC 7520(a)Can be designed to zero out gift tax