2019 TAX SAVINGS LANDSCAPE FOR CHARITABLE GIVING

OH, THE TIMES, THEY ARE A-CHANGIN’

Presented to:Charitable Gift Planners

Of Central FloridaJanuary 10, 2019

Winter Park, FL

Brad Gornto, Esq., LLMEffectual Giving, LLC; iCLAT Solutions, LLC & Gornto Law, PLLC

Email: brad.gornto@effectualgiving.com Phone: (386) 257-2554www.effectualgiving.com – www.iclat.net - www.gorntolaw.com

All content presented herein is copyrighted material of Effectual Giving, LLC 2017. “iCLAT®” is a registered trademark of Effectual Giving, LLC. All rights reserved.

Brad Gornto has practiced law throughout Florida for over 18 years in the areas of complexestate & charitable planning, business/tax law, probate and trust administration. In additionto his law practice, Brad is also the President and Founder of Effectual Giving, LLC, which is aNational consulting firm that works with charitable organizations, philanthropic families, andallied professionals in the actual implementation of effective planned giving solutions.

Brad earned his undergraduate degree (marketing) from Florida State University, his lawdegree (JD) from the University of Florida College of Law, and his Master of Laws in Taxation(LLM) from the University of Miami School of Law.

As a volunteer, Brad currently serves as: (i) a member of the Florida State UniversityFoundation, Inc. Planned Giving Advisory Council in Tallahassee, Florida; (ii) DevelopmentAdvisor to the Board of Directors for the C.S. Lewis Study Center based in Northfield,Massachusetts; and (iii) President and member of the Board of Directors for Charitable GiftPlanners of Central Florida.

Brad B. Gornto, Esq., LL.MEffectual Giving, LLC; Gornto Law, PLLC; iCLAT Solutions, LLC310 Wilmette Avenue, Suite 5Ormond Beach, FL 32174Email: brad@gorntolaw.com - brad.gornto@effectualgiving.comOffice: (386) 257-2554Mobile: (386) 843-2398LinkedIn: https://www/linkedin.com/in/bradgornto

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Roadmap for Today

• Part 1: Primer on Tax Law Changes Relevant for Charitable Giving

• Part 2: Timely Charitable Giving Strategies in 2019

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Part 1: Primer on Key Changes to Tax Law

• Lower Income Tax Rates & New 0% Tax Bracket• Estate, Gift & GST Tax Rates (Exemptions Doubled to $12M/$24M)• Standard Deduction Has Doubled (For all Taxpayers)• Major Changes to Itemized Deductions (Charitable Deduction

Survived)• Charitable Income Tax Deduction Changes• Shifting Trends Relevant to Charitable Giving• Pending Legislation• MANY OTHER MAJOR CHANGES….not directly related to charitable

giving• Reduced corporate income tax rate from 35% to 21% and new 199A

deductions for smaller businesses (lower taxes…means more $ to give)

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Individual Income Tax Rates - LOWERED

2017 Individual Income Tax Rate Brackets

(Single Person)

2019Individual Income Tax Rate Brackets

(Single Person)

Taxable Income Tax

Less than $9,325 10%

$9,325 to $37,950 $932 plus 15% of excess

$37,950 to $91,900 $5,226 plus 25% of excess

$91,900 to $191,650 $18,714 + 28% of excess

$191,650 to $416,700 $46,644 + 33% of excess

$416,700 to $418,400 $120,910 + 35% of excess

Over $418,400 $121,505 + 39.6% of excess

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Taxable Income Tax

Less than $9,700 0% (ZERO)

$9,700 to $39,475 $970 plus 12% of excess

$39,475 to $84,500 $4,543 plus 22% of excess

$84,500 to $160,725 $14,382 + 24% of excess

$160,725 to $204,100 $32,749 + 32% of excess

$200,000 to $510,300 $46,629 + 35% of excess

Over $510,300 $153,798 + 37% of excess

Estate, Gift & GST Tax Unified Credit Exemption Amounts Doubled

2017•Exemption Amount

(unified credit)

• $5,490,00 per personOR

• $10,980,000 for a married couple

2019•Exemption Amount

(unified credit)

• $11,400,000 per personOR

• $22,800,000 for a married couple

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Insignificance of Estate Tax Compared to Income Tax (Based on 2013 Data)

Estate Tax Return Data (2013)

• Only 11,300 estate tax returns filed in U.S.

• Only 4,700 were taxable returns in U.S.

• Only 1 in 550 deaths had to file estate tax returns (0.18% of deaths)

**probably 50% fewer in 2019 based on current $11.4M exemption

Income Tax Return Data (2013)

• 145,000,000 individual income tax returns filed

• 32,783,000 Business Tax Returns Filed (C Corp, S Corp and Partnership/LLC)

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The Standard Deduction Has Doubled (For all Taxpayers)

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Filing Status 2017 Standard Deduction

2018 StandardDeduction

2019 Standard Deduction

Single Person $6,350 $12,000 $12,200

Married $12,700 $24,000 $24,400

Head of Household

$9,325 $18,000 $18,350

KEY TAKEAWAY: While its good news for the general public, the doubled standard deduction amount will prevent many donors from receiving any income tax savings from their charitable gifts.

Major Changes to Itemized Deductions (Charitable Deduction Survived)

• Most of the Itemized Deductions Eliminated Altogether• (Medical Expenses, Investment Expenses, Work Related Expenses)

• Deduction for State & Local Taxes (SALT) Capped at $10,000• HUGE blow for residents in States that have separate income tax

• Charitable Deduction & Mortgage Interest Deduction Remain Intact• The AGI limitation for Charitable Gifts of Cash to Public Charities (so-called

50% organizations) was increased from 50% to 60% • *also applies to cash gifts to donor advised funds

• Overall Limitation to Itemized Deductions (“Pease Limitation”) is Suspended Until 2026

• Great news for your high-income donors!!

• The “80% Rule” for Gifts for Preferred Seating at Football Games & Events Is Eliminated

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SUMMARY of % AGI Limitations forCharitable Income Tax Deduction

(for Individuals)

• CHARITABLE GIFTS “TO” A PERMISSIBLE DONEE (CHARITABLE ORGANIZATION)

• CHARITABLE GIFTS “FOR THE USE OF” A PERMISSABLE DONEE (CHARITABLE ORGANIZATION)

• 5 Year Carry-forward Applies to Any Excess Deduction Amount

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Public Charity

Non-Public Charity (Private Foundation)

Cash or Non-Capital Gain

Propery

Capital Gain

Property

Applicable% AGI

Limitation

X X Special 30%*

X X 60%**X X 20%

X X 30%

Summary of % AGI Limitations forCharitable Income Tax Deduction

(for Individuals)

• CHARITABLE GIFTS “FOR THE USE OF” A PERMISSABLE DONEE (CHARITABLE ORGANIZATION)

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Public Charity Non-Public Charity (Private Foundation)

Cash orNon-Capital Gain

Property

Capital Gain

Property

Applicable % AGI

Limitation

X X Special 20%*

X X 30%**

X X 20%

X X 30%

• 5 Year Carry-forward Applies to Any Excess Deduction Amount

Shifting Trends Relevant to Charitable Giving

• Greater emphasis on INCOME Tax planning in charitable giving • Lesser emphasis on ESTATE Tax planning in charitable giving• The Meteoric Rise of Donor Advised Funds

• Donor Advised Funds are more of a “friend” than a foe to public charities.• Anonymous Giving• “BUNCHING” annual gifts to a DAF because of higher standard deduction• Allows for Gifting of Complex/Non-Marketable Assets

• Charitable Gifting from Individual Retirement Arrangements (IRAs) for Donors Over Age 70 ½ (so-called Charitable IRA Rollover)

• Rise in Popularity of Charitable Lead Trusts for annual donors & Pooled Income Funds for deferred planned gifts

• Both of which produce very large current year charitable deductions as a result of continual low IRS interest rates

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Pending Legislation

• Charitable Giving Tax Deduction Act of 2017• Unlimited “above-the-line” deduction for all charitable gifts

• Legacy IRA Act H.R. 1337 (Expansion of Charitable IRA Rollover Rules)• Increases Amount from $100,000 to $400,000

• Applies toward RMDs for donors older than 70 1/2• Not taxable income to the IRA Owner• No charitable income tax deduction

• Expands scope of IRA Gifts from outright gifts to Charitable Gift Annuities and Charitable Remainder Trusts

• 16 co-sponsors (15 Republican and 1 Democrat)

• Based on the Nov 2018 elections and shift in control in the House of Representatives to the Democrats ……. WHO KNOWS

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Part 2: Timely Charitable Giving Strategies for Donors

Initial Planned Giving Thoughts

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Planned Giving Deferred Giving

Planned Giving is Also a Powerful Tool For Donor Stewardship

Part 2: Timely Charitable Giving Strategies for Donors

• Smart “Immediate” Planned Gifts• Appreciated Securities & Real Estate – Instead of Cash (avoid cap gains)• Charitable IRA Rollover & the “IRA Checkbook” (for donors over 70 ½ with

IRAs)• Lump Sum “Bunched” Charitable Gift (fewer donors can itemize now)• Become Donor Advised Fund Friendly

• Strategic “Annual Recurring” Planned Gifts• The “reversionary” charitable lead trust (aka “Enhanced Offering/Pledge” or

the “iCLAT”) generates an accelerated income tax deduction for ongoing annual gifts.

• Strategic “Deferred” Planned Gifts• Have charity named as IRA Beneficiary Instead of a Beneficiary of Will • CRT vs. “Young” Pooled Income Fund

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Charitable IRA Rollover – What is it?

• Under Current Law (Permanent)

• IRA Owners who are at least 70 ½ can direct up to $100,000 directly to a church or charity.

• Distribution will count towards the donor Required Minimum Distribution (RMD), but will NOT be treated as taxable income to the donor.

• IMPORTANT….it will keep donor in lower tax bracket• Donor does NOT get a charitable income tax deduction, which is not a

problem because fewer donors will be able to itemize now (higher standard deduction).

• Distribution must be made by the IRA Custodian directly to the charity

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Charitable IRA Rollover – Takeaways

• Highly recommend it to be communicated to ALL your donors who are least 70 ½.

• Starting in 2018, most of your donors will not receive any tax savings from making their gifts from their regular checking account, because of the higher standard deduction ($12,000 single/$24,000 married).

• Donors will appreciate learning this information from you, instead of their CPA come next April !! Wonderful reason for donor meeting/call NOW!

• “IRA Charity Checkbooks” will become more and more common for older donors to make their annual charitable gifts.

• Schwab and Vanguard (more to come…)

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Factor or Issue Donor Advised Fund Private Foundation

Start-Up Fees and ComplexityMinimal paperwork and usually can be established with less than $5,000 and

an initial deposit

Substantial legal fees and other start-up costs involved. Typically takes many months to create and get 501(c)(3)

determination letter

Ongoing Administrative & Management Fees

Varies with parent organization and level of service; typically low

Extensive ongoing fees and time involved to administer. Must file annual

tax returns; conduct meetings, to manage and administer all functions

AGI Limits for ClaimingCharitable Income Tax

Deduction for Contributions

60% of AGI (adjusted gross income) forcash gifts, 30% for gifts of assets,

securities or real property

30% of AGI for cash gifts; 20% for gifts of assets, securities or real property

Required Annual Distributions to Charities

NONE Must expend 5% of net assets valued annually, regardless actual investment

returns

Privacy BenefitsComplete confidentiality available for

client and for the grant recipient charities

No anonymity. Annually filed Form 990s are public records for grants,

expenses, staff salaries, etc.

Excise Tax NONE Excise tax of 1% to 2% of net investment income. Punitive penalties

Valuation of GiftsFair Market Value (provided client

owned contributed asset more than 1 year)

Fair market value for cash and publicly traded stock; cost basis for other gifts including closely held stock and real

estate

All content presented herein is copyrighted material of Effectual Giving, LLC 2019. All rights reserved.18

What is a “Reversionary” Charitable Lead Trust?

• It is the lesser known type of CLT that is solely designed for accelerated income tax savings – not estate tax savings.

• DIFFERENCE…. At the end of the CLT term’s annual payments to charity, the assets of the CLT simply REVERT back to the donor.

• DIFFERENT from most CLTs (> 90%), which are designed so that the CLT assets will pass to children or grandchildren at the end of the CLT term – to save or eliminate estate taxes.

• MUCH SIMPLER for DONOR because he or she knows that it does not thinking about his or her spouse, children or grandchildren – the donor’s current estate plan will not be disturbed at all

• It is also commonly known as an iCLAT. The “i” stands for income tax deduction and its donor-centric focus.

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“Reversionary” Charitable Lead Trust

• IMPORTANT CONSIDERATIONS:

• “ACCELERATED” YEAR 1 INCOME TAX CHARITABLE DEDUCTION for the donor.• The LOW IRS Interest Rates (the 7520 Rate for January 2019 is 3.6%) generates a very

large initial charitable deduction, which typically ranges between 80% and 90% of the sum of the CLT’s total annual charitable payments over its term.

• The donor profile of a CLT is identical to current and prospective annualdonors who give at least $10,000 to charities

• Ideal for donors to “faith-based” charities and/or “higher education” charities

• Good for annual donors who either:(i) have a spike “ordinary income” event of at least $250,000; OR(ii) currently have high level adjusted gross income (>$500,000) which is about to end within next few years due to retirement or other reasons.

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Additional Takeaways forReversionary Charitable Lead Trusts

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• It can also be funded with rental real estate, S Corp stock, LLC or LP interests (generally, not operating businesses).

• Excellent “PLAN B” strategy“ if its too late for “pre-sale” planning (“prearranged sale doctrine” applicable to a particular transaction)

• Donor can serve as trustee and retain CONTROL

• Less stringent appraisal concerns compared to traditional CLTs and CRTs (no taxable gift involved) - appraisal cost savings to donor

• The CLT’s annual payments to charity do not need to be fixed, the payments to charity can increase each year, even balloon (“shark-fin” or “balloon” CLAT- Rev. Proc. 2007-45).

Tax Savings for Charity Named asIRA Beneficiary Instead of Beneficiary of Will

$100,000 to The Mustard Seed after Death as a Beneficiary of the Donor’s

Last Will & Testament

The Mustard Seed

To Donor’s Kids

IRA $0 $100,000

Last Will & Test. $100,000 $0

Less: Income Tax to IRS

$0 ($25,000)

Net Amount $100,000 $75,000

$100,000 to The Mustard Seed after Death as a Beneficiary of the Donor’s

IRA

The MustardSeed

To Donor’sKids

IRA $100,000 $0

Last Will & Test. $0 $100,000

Less: Income Tax to IRS

$0 $0

Net Amount $100,000 $100,000

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*Simple difference results in $25,000more to donor’s kids, less to IRS.= HAPPY KIDS (aka Future Donors)

“Young” Pooled Income Funds

•Background for Pooled Income Funds (PIFs)

• Pooled Income Funds were established in 1969 under IRC §642(c)(5)

• The PIF is another “deferred” form of planned gift that provides lifetime income to donor (tax-free diversification), similar to CRTs and CGAs

• The PIF pays all “income” (variable) to the donor (and/or other family member) for life based on “rate of return” on a per share/unit basis (like a mutual fund) by March 15th of the year after the prior year

• The PIF principal assets can never be invaded to benefit the donor, so usually a PIF will leave a larger remainder interest gift to charity than a comparable CRT or CGA

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What is “Income” in a PIF?

•The PIF trust document established by a public charity can define “income” to include any of the following items:

• Interest & Dividends• Rents & Royalties• Short Term Capital Gain• Receipts from Closely Held Entity; and• 50% of post gift Realized Long Term Capital Gain

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What is a “Young” Pooled Income Fund?

• A PIF that is < 3 years old (a “Young” PIF), the donor’s charitable income tax deduction is calculated using the a specific discount rate defined in Treasury Regs. (this rate is based on the 7520 rate at end of the year minus 1%)

• The CURRENT RATE for 2019 for “Young” PIFs is 2.2% (it was 1.4% in 2018)• THIS IS WHY THE DEDUCTION IS MUCH LARGER THAN CRTs

• For PIFs that are at least 3 years old, the donor’s charitable income tax deduction is calculated using a discount rate that is equal to the highest rate of return during the last 3 years

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“Young” PIF vs. CRTCharitable Income Tax Deduction

“Young” PIF

• Facts:• 65 year old donor• $500,000 asset to “young” PIF

• Charitable Deduction• $345,930

• 69% of total value of gifted asset

Charitable Remainder Unitrust

• Facts:• 65 year old donor• $500,000 asset to CRT• 5% lifetime payout to donor• Dec 2018 7520 Rate (3.6%)

• Charitable Deduction• $228,035

• 45% of total value of gifted asset

• Note: The deduction for a comparable CGA is $178,241

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Comparison:“Young” Pooled Income Fund vs. CRT

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Benefits toDonor

“Young” Pooled Income Fund

Charitable Remainder Trust

Charitable Income Tax Deduction in Year 1

Much LARGER than a comparable CRT (or CGA)

Much SMALLER than a comparable Young PIF

Capital Gains Tax “Avoidance”Capital gains taxes are completely avoided

by donor

Capital gains are “trapped” in CRT, subject to the

4-tier accounting rules

Multiple Generation Planningfor Donors

YES10% Remainder requirement of CRTs

does NOT apply

NO10% Remainder requirement prevents

Multi-Generational Planning

Useful For Younger Donors (20s & 30s)

YES(10% remainder requirement of CRTs does

not apply)

NO10% Remainder requirement prevents younger donors from using CRTs (and

CGAs for that matter)

Set Up Costs & Time NONE ; only a few days need to set up Significant up-front costs and time with

attorney/CPA, annual tax returns & admin

Amount of Initial GiftLower Threshold

(as low as $25,000)Higher Threshold

(usually $250,000 minimum)

POST GIFT UBTITaxed at lower rates because it flows out

with income to donor100% excise tax

($1 UBTI = $1 tax)

Donor Control

NONEPIF must be maintained by the recipient charity (charity must be trustee or have

removal power over trustee)

Much greater control, the Donor can serve as trustee

Comparison:“Young” Pooled Income Fund vs. CRT

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Benefits toDonor

“Young” Pooled Income Fund

Charitable Remainder Trust

Structure Life InterestMust be based on life (or lives) and must

be paid each yearCan be for term (up to 20 years) or based on life (or lives); delayed, turned on & off

“Sprinkling” Life InterestNO (only a spray distributions based on set

%’s to defined beneficiaries)YES (trustee can have discretion to “sprinkle” to class of beneficiaries)

Recipient of Life Interest ONLY individuals Individuals, corporations, LLCs, other trusts

Debt Encumbered Property LESS PROBLEMS HUGE PROBLEMS

Commingling with Other Gifts to Same Charity

YES NO

Donor ControlNONE

PIF must be run or owned by the recipient charity (charity must be the trustee)

Much greater control, the Donor can serve as trustee

END OF PART #2

Questions?

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