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"The tax code allows us..." The tax code allows us to choose between two types of philanthropy  as it relates to the management of our Social Capital. Voluntary (Gifts) Involuntary  (Taxes)

Gifts During Lifetime ADVANTAGES: 1. Income Tax Deduction for the FMV of the Gift 2. Charity Receives the Immediate Use of the Gift 3. Removes Value from the Estate DISADVANTAGE: Loss of Income to the Donor

Gifts Made at Death ADVANTAGES: 1. No Loss of Income During Lifetime 2. Charitable Estate Tax Deduction DISADVANTAGES: 1. No Income Tax Deduction 2. Gift to Charity is Delayed until Client’s Death

Charitable Remainder Trusts COMBINES THE ADVANTAGES 1. Donor Retains the Income During Lifetime 2. Removes the Assets from the Estate 3. Receives an Immediate Income Tax Deduction 4. Charity Can Plan on Receiving the Gift

FORMATION OF REMAINDER TRUST

Transfer of Remainder Interest

Design of CRT: Flexibility Donor – can be one or more individuals, usually husband and wife are donors Stream of Payments – can be a fixed amount or a variable amount Charitable Beneficiary – can be any “qualified” charity

Three Tax Advantages CRTs  Tax Exempt Status: Generally, CRTs do not pay income tax –can sell highly appreciated assets without capital gain Immediate Income Tax Deduction: Deduction is equal to the present value of the charitable interest Estate Tax Deduction: Assets are excluded from the grantor’s estate

Benefit of Tax Exempt Status

Income Tax Deduction Immediate deduction even though charity does not receive any assets until the trust terminates Deduction equals the value of the remainder interest Limitations as to the amount of the deduction that can be used annually

Estate Tax Deduction At the termination of the CRT, the value of the assets pass estate tax free to the charity Children have lost the after tax value of the asset Can replace the value lost by purchasing a wealth replacement life insurance policy

BOTTOM LINE

TYPES OF CRTs REMAINDER ANNUITY TRUSTS REMAINDER UNITRUSTS

ANNUITY TRUSTS Pays the Donor a “Fixed” Annuity Payment Annuity Payment Must be at Least 5% Assets are Only Valued Once Donor Cannot Add to the Trust Payments are More Certain Used When Assets Are Unlikely to Appreciate

UNITRUST Pays the Donor a “Unitrust” Payment Assets Are Valued Each Year Pays a Fixed Percentage of the Value of the Trust Each Year Donor Can Add Assets Payments Are Not Certain Used When Assets Are Likely to Appreciate

TYPES OF UNITRUSTS Straight Unitrust  i.e. Pays 8% of Trust Valued Each Year Net Income Unitrust, i.e. Pays the Lower of 8% or the Income Generated by the Trust Each Year Net Income With Make-up Provisions, i.e. Pays the Same as a Net Income, Except In Years With Higher Income You Can Make Up Past Years Deficiency “Flip Unitrust” – starts a  straight unitrust – at some point it flips into a “Net Income Unitrust”

INCOME BENEFICIARY Donor Donor & Spouse One or More Third Persons

The TRUSTEE Donor – The donor can serve as trustee Compliance issues and conflicts of interest Cannot serve if hard to value assets are transferred Independent Individual Trustee Independent Corporate Trustee

FUNDING - Types of Assets Low Basis Highly Appreciated Produces Little if Any Income An Asset Donor Would Sell and Diversify Into an Income Producing Asset if Not for Capital Gains

EXAMPLES Real Estate i.e. Bare Ground or Depreciated Income Producing Property Stock in Closely Held Company Low basis, low dividend stock IRA or Annuity

REMAINDER BENEFICIARY Public Charity: Best tax deductions Private Foundation: Reduced tax deduction Donor Can Retain the Power to Change the Remainder Beneficiary

Charitable Lead Trust Opposite of a Remainder Trust Income interest is paid to a charity for a period of time At expiration, assets return to the family Income tax deduction based on the value of the lead interest Used as a “freeze” technique: works well with appreciating assets

FORMATION OF LEAD TRUST

Termination: Lead Trust

Gift Tax Consequences The value of the remainder interest is a “gift” for tax purposes The remainder interest equals the value of the trust, minus the value of the lead interest Transfer tax savings is achieved if the assets in the lead trust appreciate more rapidly than the IRS assumed growth rate

Charitable Trusts:  “No Nos” Cannot have a binding contract to sell assets that are transferred to the CRT Cannot engage in “business activities” Cannot invest in certain types of assets

Charitable Gift Annuity Charitable Trust “Lite” No set up fees, or ongoing management fees High guaranteed, fixed income to donor, with a large percentage tax free and non-reportable Large Income Tax deduction Capital Gains Tax relief Remainderment to “Family Foundation” Easily coupled with Wealth Replacement Trust

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