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Charitable Planning

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