The top ten techniques in charitable planning financial planners should know to improve their practice and their advice

1. Top 10 Charitable Planning
Strategies for Financial Advisors
Under the New Tax Law
Russell James, J.D., Ph.D., CFP®
Texas Tech University
Dept. of Personal Financial Planning

2. 1. Never give cash

3. Donor Nonprofit
$100k Cash
Donor Nonprofit
Income tax deduct.
+
Avoid capital gains
($90,000 x 23.8%)
$21,240
Income tax deduct.
($100,000 x 39.6%)
$39,600
$100k Stock

4. Donor Nonprofit
$100k Cash
Donor Nonprofit
Income tax deduct.
+
Avoid capital gains
($90,000 x 23.8%)
$21,240
Income tax deduct.
($100,000 x 39.6%)
$39,600
$100k Stock
Income tax deduct.
($100,000 x 37%)
$37,000
Income tax deduct.
+
Avoid capital gains
($90,000 x 23.8%)
$21,240
No Itemizing
Required
No Itemizing
Required

5. Donor Nonprofit
$100k Cash
Donor Nonprofit
Income tax deduct.
+
Avoid capital gains
($90,000 x 23.8%)
$21,240
($90,000 x 13.3%)
-($90,000 x 5.27%)
$7,227
Income tax deduct.
($100,000 x 39.6%)
$39,600
($100,000 x 13.3%)
-($100,000 x 5.27%)
$8,030
$100k Stock
Income tax deduct.
($100,000 x 37%)
$37,000
($100,000 x 13.3%)
$13,300
Income tax deduct.
+
Avoid capital gains
($90,000 x 23.8%)
$21,240
($90,000 x 13.3%)
$11,970

6. Donor Nonprofit
$100k low
basis stock
$100k
cash
immediately buy
identical stock
(100% basis)
No Need to Change Your Portfolio!
The Charitable Swap
No “wash sale” rule
because this is gain
property, not loss
property

7. Donor
Charities
$100k
cash
The Charitable Swap
Simplified
Donor
Advised
Fund
$
$
$
$100k low
basis stock
immediately buy
identical stock
(100% basis)

8. Donor
Charities
$100k
cash
A Free Tax Benefit you Give Up Every Time
You Donate CASH
Donor
Advised
Fund
$
$
$
$100k low
basis stock
immediately buy
identical stock
(100% basis)

9. Did you pay capital gains taxes last year?
Did you make cash gifts to charity?
If so,
You need a new
financial planner.
John Competitor, CFP®
Financial Planning Services for the Charitably Minded
Your.Competition@EatingYourLunch.com

10. Donor
Year1
$100k
cash
For non-itemizers, consider bunching
donations into BIG giving years
Donor
Advised
Fund
$
$
$
$100k low
basis stock
immediately buy
identical stock
(100% basis)
Year2
Year3

11. For some, the
benefits from giving
even cash went up
1. Federal rates went up
(33% to 35%) for
singles earning
$200,000 to $416,700
2. 2017 charitable tax
deductions reduced
by 3% of income over
$261,500 [Pease
limitation]
3. State tax benefits
higher
4. Income limits raised
to 60%

12. 2. Give retirement RMD first and
more at death

13. Life stages of a retirement account
Earlydistribution(before59½)
Regulardistribution (59½to70½)
Requiredminimumdistribution(after70½)

14. Giving after 70 ½
After age 70 ½ participants must take required minimum
distributions (account balance / remaining life expectancy) or pay
50% penalty
$10,000
$10,000incomeIRA

15. Giving after 70 ½
If the income is not needed, a charitable gift
deduction might offset the income
(if itemizing and no income giving limitations
exceeded and no negative effects from increased
AGI and not in the wrong state)
$10,000
$10,000incomeIRA $10,000deduction
$10,000

16. Giving after 70 ½
A Qualified Charitable Distribution (QCD) eliminates both the
income and deduction
$10,000
$0income
IRA
$0deduction

17. Qualified Charitable Distribution (QCD)
$10,000
$0income
IRA
$0deduction
$100,000
per person
maximum
Participant
70 ½ or
older
No private
foundations, donor
advised funds,
charitable trusts, or
charitable gift
annuities
IRAs or IRA
rollovers only; no
401(k), 403(b),
SEP, SIMPLE,
pension or profit
sharing plans

20. IRA(child);House(charity)
$1,000,000 House
$1,000,000 tocharity
$1,000,000 IRA
-$396,000 (39.6%federal
incometax)
-$110,000 (11%Oregonstate
incometax)
IRA(charity);House(child)
$1,000,000 IRA
$1,000,000 tocharity
$1,000,000 House
-$0(noincometax)

21. Retirement plan charitable beneficiaries
• A public charity
• A private family
foundation
• A charitable
remainder trust

22. • Not Charitable Lead Trusts
(because they aren’t tax
exempt)
• Avoid naming estate as
beneficiary with instructions in
estate documents (estate itself
may have to pay income taxes)
Bad retirement plan death beneficiaries

23. Charities are not “designated
beneficiaries”, so could
accelerate RMD’s for other
beneficiaries. Solutions:
• Separate IRAs into a 100% charitable
and 100% non-charitable account
before death (+ RMDs can be taken
from either to match desired plans)
• Beneficiaries can separate accounts by
end of year following participant
death1
• Payout charity share before
September 30 of year following
participant death.2
• If spouse is beneficiary, simply roll
that share into spouse’s IRA
Simple solutions to a potential trap
1. Treas. Reg. sec. 1.401(a)(9)-8 Q&A 2(a) 2. Treas. Reg. sec. 1.401(a)(9)-4 Q&A 4(a)

24. 3. Take deductions today for
transfers tomorrow

25. A remainder
interest in a home
or farm gives the
right to own the
property after a
set time or after
the death of a
person

26. Charitable deduction for
remainder interest deed in
$1,000,000 of farmland by age 59
donor
1.0% (Jan 13)
$804,790
11.6% (May 89)
$156,840

27. Leaving land to charity
by will
• Revocable
• $0 income tax deduction
• Impacts charity after death
Leaving land to charity
by remainder deed
• Irrevocable
• $804,790 immediate income
tax deduction
• Impacts charity after death
or immediately if charity
sells remainder interest
• Immediately increases cash
assets available for
investments (AUM)

28. Donor CRT Charity
Initial
Transfer
Anything Left
at Death
Payments
During Life
Charitable Remainder Trusts generate
an immediate tax deduction, even
though donor can manage assets and
receive income for life

29. 4. Match Deductions with Roth
conversions

30. Roth conversions and charitable planning
can work together to match
Income Deductions

31. $1MM in standard
IRA (withdraws
are taxable)
Roth
Conversion
$1MM in Roth
IRA (withdraws
are tax free)

32. Where can I find offsetting deductions?

33. Where can I find offsetting deductions?
Put money into a
• Charitable remainder trust
• Charitable lead trust
(grantor)
• Charitable gift annuity
• Donor advised fund
• Private foundation
Or give a remainder interest
in a residence or farmland to
a charity

34. Charitable deductions may be
limited (with five year carryover)
to 20%, 30%, 50%, or 60% of
income depending on gift and
recipient

35. If I have unused deductions,
how can I pull future income
into current year?

36. If I have unused deductions,
how can I pull future income
into current year?
With a Roth conversion

37. $1MM in standard
IRA (withdraws
are taxable)
Roth
Conversion
$1MM in Roth
IRA (withdraws
are tax free)

38. Roth conversions and charitable planning
can work together to match
Income Deductions

39. 5. Buy life insurance with new
tax deductions

40. Charitable planning devices
such as Charitable Gift
Annuities, Gifts of Remainder
Interests in Homes and Farms,
and Charitable Remainder
Trusts produce amazing tax
advantages, reducing income
taxes, capital gain taxes, and
estate taxes

41. But, they also reduce heirs’ inheritance
Heir
Charity Donor

42. Life insurance can diminish this concern

43. Can it pay to be
charitable?
Priscilla wants to sell a $1,000,000
non-income producing zero-basis
asset then spend the interest
income of 5% while
leaving principal for heirs. Her
combined state and federal tax rates
are:
capital gains (23.8%)
income (37%)
estate (40%)

44. Sale
$1,000,000 asset
-$238,000 capital gains tax
Client uses $38,100/year
($762,000 X 5% return)
Heirs receive $457,000
($762,000-$304,800 est. tax)
CRUT
$1,000,000 asset
$0 capital gains tax
$1,000,000 in 5% unitrust
pays $50,000 annually + a
charitable tax deduction of
$300,000 worth $111,000
+ ILIT
Client pays $111,000 initially
and $10,000 annually for a
$400,000 ILIT-owned policy(including post-crummey gift taxes)
Client uses $40,000/year
Charity receives $1,000,000
remainder
Heirs receive $400,000
(tax free from ILIT)

45. John, age 59, at 39.6% income tax rate, owns
$100,000 of farmland which he would like to use for
the rest of his life then leave to charity, but he also
wants to benefit his heirs.

46. Giving the remainder interest to charity creates a
deduction of $80,479 worth $32,869. Suppose this
will purchase a paid-up policy of about $50,000+.
John keeps lifetime use of farm
Charity gets 100% of farm at death
Heirs get $50,000+ (estate tax free)

47. 6. Earn more income by avoiding
capital gains tax

48. A client holds a large,
highly appreciated asset
that generates little
income (like developable
land or non-dividend
paying stock). How can
she convert it to income
generating property?

49. Option 1: Sell it. Pay the capital gains
tax. Earn income on the remaining
amount. $1,000,000 stock
$1,000,000 gain (if zero basis)
$238,000 tax (23.8% fed + ?% state)
$762,000 left to invest AUM

50. Option 2: Transfer to a CRT. Earn
income for life on the full amount.
$1,000,000 stock
$1,000,000 gain (if $100,000 cost)
_____$0 tax (CRT pays no tax)
$1,000,000 left to invest AUM

51. A client holds a highly appreciated asset that generates little income (like
developable land or non-dividend paying stock). How can she convert it to income
generating investments?
Simple Sale
$1,000,000 asset
$1,000,000 gain (if zero basis)
$288,000 tax (23.8% fed + 5% state)
$722,000 left to invest-AUM
Or California $629,000 left Charitable Remainder Trust
$1,000,000 asset
$1,000,000 gain (if $100,000 cost)
$0 tax (CRT pays no tax)
$1,000,000 left to invest-AUM
& $100,000+ tax deduction

52. 7. Prevent your clients from
dying (ever)

53. Client death is highly inconvenient
for financial planners
1. The government takes a chunk of
the assets
2. The kids divide up the rest into
smaller pools
• You CAN’T manage the money
(because you don’t have the
business relationships with each
of the kids)
• You DON’T WANT to manage
the money (because each
remaining pool is too small)

54. A donor advised fund or private
foundation holds money and
distributes charitable grants

55. Multi-generational management
Inheritance
• Small pools after division by 1/n
children and estate tax
• Individual relationships with each heir
• High maintenance / personal losses
Private Foundation/DAF
• Big pool with no division and no
estate tax
• Preexisting position as pool manager
• Low maintenance / charitable org.
losses

56. Donor Advised Fund
• No minimum payout
• Minimal setup & administrative
expense
• Expected control of grants
• Investment management allowed
with many financial institutions
• Legislatively newer
Private foundation
• 5% minimum payout
• Significant setup & administrative
expense
• Actual control of grants
• Investment management always
allowed
• Legislatively stable

57. Advanced charitable
strategies to preserve
wealth
• Lifetime and testamentary transfers
to private foundation
• CRT (spigot) paying for life (if
desired for consumption) then to
family foundation
• Zeroed out CLT that pays charitable
interest to family foundation,
excess growth to children
• Multi-generational: Testamentary
CRT, income to kids, then to private
foundation run by grandkids

58. 8. Grow tax free

59. Tax Free Growth Environments
• Growth inside a donor
advised fund is tax free
• Growth inside a charitable
remainder trust is tax free
(only distributions are taxed)
• Growth inside a private
foundation is tax limited
(either 2% or 1% rate)

60. Standard Account
10% growth, 39.6% federal, 5% state
Year 1 $10,000
Year 2 $10,554
Year 3 $11,139
Year 4 $11,756
Year 5 $12,407
… …
Year 18 $25,009
Year 19 $26,394
Year 20 $27,856
Donor Advised Fund/PF
10% growth, 39.6% federal, 5% state
Year 1 $10,000
Year 2 $11,000
Year 3 $12,100
Year 4 $13,310
Year 5 $14,641
… …
Year 18 $50,544
Year 19 $55,599
Year 20 $61,159

61. No upfront capital
gains tax at sale
Tax deferred growth
(only distributions
taxed)
Immediate tax
deduction
Post-mortem
management with
DAF/PF beneficiary
A CRT increases AUM

62. Will a maximum payout CRUT (with appreciated assets)
give more after-tax dollars to clients & heirs than a direct
investment with no charitable gift?
The Tax
Benefit
$
The
Charitable
Gift $
It depends…

63. Direct Investment v. Max-Payout CRUT
• Age 60 male & 55 female
• Vary life span (2012 IAM Table)
• Vary returns (historic large cap
std. dev.)
• Annual consumption
2.8% of initial investment
then inflation adjusted
• 20% basis asset
Monte Carlo Simulation of 3,000,000
retirement lifetimes
Yeoman, John C. (2014). The economics of using a
charitable remainder trust to fund a retirement
portfolio. The Journal of Wealth Management, 40-50.

64. (run out of money)
Failure
9.9%
(Average PV of initial $)
Consumed
52.88%
(Average PV of initial $)
for Heirs
47.12%
(any payment below
projected consumption)
Failure
7.9%
(Average PV of initial $)
Consumed
53.10%
(Average PV of initial $)
for Heirs
61.48%
Direct Investment
(No Charitable Gift)
Max Payout CRUT

65. 9. Make your wealthy clients
want to save More

66. Once my family and I
are provided for, why
would I keep working
to build wealth?

67. Do the estates of
people who make
charitable estate
plans grow
differently than the
general population?

68. After making their plan, charitable estate donors grew their estates
50%-100% faster than did others with same initial wealth

69. 10. Be in a growing market for
good clients

70. 0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
$2.0 million < $3.5
million
$3.5 million < $5.0
million
$5.0 million < $10.0
million
$10.0 million < $20.0
million
$20.0 million or more
Estate Size
Estates including charitable planning
(IRS Statistics of Income 2008)

71. Coming demographic wave will
impact CRT creation first, then CGA
creation, then bequests realization
Realized
Bequest Peak
Age: 88
Franey, J. W. & James, R. N., III (2013) Trending Forward: Emerging Demographics Driving Planned Giving. National Conference on Philanthropic
Planning, Minneapolis, MN, October 15-17, 2013
CRT Creation
Peak Age:
70-74
CGA Creation
Peak Age:
75-79

72. 0
5,000,000
10,000,000
15,000,000
20,000,000
50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total resident population by 5-year age groups
Key population just
beginning growth

73. 5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
1998 2000 2002 2004 2006 2008 2010 2012 2014p
Age 55+ charitable recipient among those with will/trust
by family status
Grandchildren
Children only
No Offspring (unmarried)
No Offspring (married)

74. 9%
11%
13%
15%
17%
19%
21%
Year (current age range)
Percent Childless Women at Age 40-44 in U.S.

75. 0%
2%
4%
6%
8%
10%
12%
14%
16%
1998 2000 2002 2004 2006 2008 2010 2012 2014p
Age 55+ inclusion of charitable recipient by
education
Grad School
College Grad
Some College
HS Grad
<HS Grad

76. 5%
10%
15%
20%
25%
30%
35% 1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
U.S. population share with bachelor's degree+
Age 55+
Age 35-54

77. 0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1998 2000 2002 2004 2006 2008 2010 2012 2014p
Age 55+ charitable beneficiary among those with
will/trust by giving/volunteering
Volunteer Only
Donor Only
Both
Neither

78. 30%
32%
34%
36%
38%
40%
42%
44%
46%
48%
50%
Age 55+ giving ($500+) & volunteering (100+ hours)
volunteer
charitable giving

79. Top 10 Charitable Planning
Strategies for Financial Advisors
Under the New Tax Law
Russell James, J.D., Ph.D., CFP®
Texas Tech University
Dept. of Personal Financial Planning