2014 AdNet Days - Chris Hoyt Presentation

CHARITABLE PLANNING FOR

UPPER-INCOME DONORS

PRINTING SUGGESTIONS:If you want to print out these slides, may I suggest:

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It makes it hard to read. Suggest using the print

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#2 – PRINT SIX SLIDES PER PAGE. Slides contain a

very large font. Six slides per page will conserve paper.


UPPER-INCOME DONORS

Advancement Network

2014 Annual ConferenceCleveland, Ohio -- October 18, 2014

CHRISTOPHER R. HOYT

University of Missouri - Kansas City

School of Law

Tax Planning Challenges

* Planning Strategies for the new 3.8% surtax: Net Investment Income

* Retirement Assets -- Hot Topics-- Lifetime planning-- Bequests of Retirement Assets

-- spouse -- trusts -- charities

INCOME TAX RATES

INVEST WAGES LTCG

Income Level -MENT (+1.45%) & Divid

AGI < $200k/$250k 28% 29.4% 15%

Congratulations! Brilliant tax planning! “Bush tax cuts” remain in full effect for people with adjusted gross income under $200,000 ($250,000 on a joint return)

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $200k/$250k 33% 34.4% 15%

33% rate when taxable income

> $186,350 -- single

> $226,850 – married filing jointly

TAX RATES paid on TAXABLE INCOME

ADJUSTED GROSS INCOME (“AGI”)

Minus: Greater of

-- Standard Deduction ($6,100)

or

-- Itemized Deductions (Mortgage interest;

charitable contributions; state & local taxes)

Minus: Personal Exemption & Dependents

($3,900 each)

= TAXABLE INCOME

WEALTHY PAY SOME TAXES ON “AGI”

ADJUSTED GROSS INCOME(“AGI”)

Minus: Greater of

-- Standard Deduction ($6,100)

or

-- Itemized Deductions (Mortgage interest;

charitable contributions; state & local taxes)

Minus: Personal Exemption & Dependents

($3,900 each)

= TAXABLE INCOME

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $200k/$250k 33% 34.4% 15%

33% rate when taxable income

> $186,350 -- single

> $226,850 – married filing jointly

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $200k/$250k 33% 34.4% 15%

plus health care surtax 3.8% 0.9% 3.8%

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $200k/$250k 33% 34.4% 15%


36.8% 35.3% 18.8%

0.9% MEDICARE SURTAX:

When Compensation Exceeds $200,000 ($250,000 married joint return)

Compensation -- wages & self-employment income

(Added to 1.45% Medicare/Medicaid tax )

(Employee pays entire 0.9%; no employer match)

Employer must withhold when W-2 Form compensation exceeds $200,000

Married joint? Together over $250,000?-- Pay on Form 1040 , e.g. if neither spouse has over $200,000

. (e.g., Husband has $100k and Wife has $160k = $260k)

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $200k/$250k 33% 34.4% 15%


36.8% 35.3% 18.8%

3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns)

3.8% surtax on the lesser of:

Net Investment Income

or

MAGI over $200,000 ($250,000 joint)

($125,000 married sep)


How many people are affected?

2011 Tax Returns with AGI over $200,000:

3.2% of all returns

0.7% of single returns

7.6% of married joint returns

86% of the returns with over $200,000*

of AGI were married joint




or

MAGI over $200,000 ($250,000 joint)




or

MAGI over $200,000 ($250,000 joint)

( $200k/$250k not indexed for inflation)




or

MAGI over $200,000 ($250,000 joint)

( $200k/$250k not indexed for inflation )

Trusts and estates pay 3.8% at $12,150 !!


Strategies for three different taxpayers:

#1 - Richest 1% - Income over $400,000

-- Reduce NII (not likely to get AGI <200k)

#2 – Taxpayers with AGI near $200k ($250 jt)

-- Either reduce NII or reduce AGI

#3 - Taxpayers with AGI below $200k ($250 jt)

-- Avoid spikes in income that trigger 3.8% tax









-- Charitable Remainder Trusts !!

CHARITABLE

REMAINDER

TRUSTS

CHARITABLE REMAINDER TRUSTS

Payment to non-charitable beneficiary

(ies) for life *or* for a term of years

(maximum 20 years)

Remainder interest distributed to

charity

Exempt from income tax


EXAMPLE

Husband & wife age 65

Sell stock or land for $1 million gain

Other option: contribute to CRT

before sale is finalized; have CRT

make the sale


CRT PROVIDES:

1. Charitable income tax deduction

2. Greater cash flow for life

3. Avoid spike in income – 3.8% tax

4. “Wealth replacement” strategy with

life insurance.


DONATE STOCK TO C.R.T.;

KEEP THE STOCK C.R.T. SELLS STOCK

Sales Price $ 1,000,000 $1,000,000

Cost of Stock -0- -0-

Gain on Sale $ 1,000,000 $1,000,000

Capital Gains

Tax (about 25%) 250,000 None

Remaining Proceeds $ 750,000 $1,000,000


DONATE STOCK TO C.R.T.;

KEEP THE STOCK C.R.T. SELLS STOCK

Remaining Proceeds $ 750,000 $1,000,000

Interest Rate x 5% x 5%

Annual Income $ 37,500 $ 50,000

══════ ══════

(33% more)


CRT PROVIDES:

1. Charitable income tax deduction

2. Greater cash flow for life

3. Avoid spike in income – 3.8% tax

4. “Wealth replacement”

strategy with life insurance.



Interest & Dividends

Annuities

Rents & Royalties

Profits from LLC / S Corp (if not employed)

Business of trading commodities & fin instruments

Most capital gains


Income Exempt from Surtax:

Trade / Business income from an LLC, partnership, Subchapter S corporation or sole proprietorship, provided the recipient is employed at the business.

-- “material participation” test

(work 500+ hours during the year?)

Gain from selling property used in trade/ business [rental property gains -> 3.8% tax]


Other Income Exempt from 3.8% Surtax:

Income that isn’t interest, rents, gains, etc :

Retirement income – social security, qualified plans: IRAs, 401(k), pensions, etc – (non-qualified annuities are subject to tax)

Wages & self-employment income ( 0.9% tax)

Alimony income

Lottery winnings

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $200k/$250k 33% 34.4% 15%


36.8% 35.3% 18.8%

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $200k/$250k 33% 34.4% 15%

AGI > $250k/$300k 33% 34.4% 15%

-- 3% phase-out itemized deductions

-- Phase-out personal exemptions

PHASEOUTSAGI > $250,000 ($300,000 joint returns)

[2014: > $254,200 ($305,060 joint returns)]

3% Phase-out Itemized Deductions

-- disguised 1% tax rate hike (3% x 33% rate)

Personal and Dependent Exemptions

-- $3,900 apiece for self & each dependent

-- lose 2% for every $2,500 income increase

-- 100% eliminated AGI > $377k ($427k jnt)

(Phase-out $254k-$377k ( $305k-$427k jnt))

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $250k/$300k 33% 34.4% 15%

-- 3% phase-out itemized deductions

-- Phase-out personal exemptions

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $250k/$300k 33% 34.4% 15%

plus 3% phase-out 1% 1 % 1%

[plus personal exemption phase-out means

extra tax until AGI $377,000 ($427,000 jnt)]

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $250k/$300k 33% 34.4% 15%



37.8% 36.3% 19.8%

[plus personal exemption phase-out means

extra tax until AGI $377,000 ($427,000 jnt)]

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

Taxb>$400/$450 39.6% 41.0% 20%

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

Taxb>$400/$450 39.6% 41.0% 20%



44.4% 42.9% 24.8%

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

Taxb>$400/$450 39.6% 41.0% 20%



With $12,000+ income, 44.4% 42.9% 24.8%

Trusts & Estates >> 43.4% 23.8%

INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $200k/$250k 33% 34.4% 15%

AGI > $250k/$300k 33% 34.4% 15%

Taxb>$400/$450 39.6% 41.0% 20%

REAL INCOME TAX RATES

INVEST WAGES LTCG


AGI < $200k/$250k 28% 29.4% 15%

AGI > $200k/$250k 36.8% 35.3% 18.8%

AGI > $250k/$300k 37.8% 36.3% 19.8%

Taxb>$400/$450 44.4% 42.9% 24.8%

[higher for AGI between $254-377k ($305-427k joint) for personal exemption phase-out]


Two Ways to reduce the 3.8% surtax :

#1 - Reduce AGI to less than $200,000

($250,000 joint)

and/or

#2 – Reduce Net Investment Income









Reduce Net Investment Income

Two Ways to reduce Net Investment Income:

#1 - Convert NII into income that isn’t NII

#2 – Shift NII to family and to charity that

aren’t subject to tax on their NII


Convert NII into Income That Isn’t NII

Some examples:

#1 - Taxable interest to tax-free muni interest

#2 – Life insurance

#3 – Work 500+ hours at business

#4 – Monster-size Roth IRA Conversions


Shift NII to Family/Charity who pay

no 3.8% tax [note: trusts do pay 3.8%]

Family: Give income-generating investments

Charity:

#1 – Make gifts of appreciated stock

#2 - Donor advised funds & private foundations

#3 – Charitable lead trusts

#1 – MAKE GIFTS

OF APPRECIATED STOCK

DOUBLE-TAX ADVANTAGE

Charitable Income Tax Deduction for the

Full Appreciated Value of the Stock

Never Pay Income Tax on the Growth of

the Value of the Stock

Loss Property? Sell for tax loss; give cash

DOUBLE BENEFIT FROM GIFT

OF APPRECIATED L.T.C.G.

PROPERTY

<< AVOID LONG-TERM

CAPITAL GAIN TAX

<< CHARITABLE INCOME

TAX DEDUCTION

$ Benefits Max Federal Taxes Saved

Person in 2012

50%

<< 15%* LTCG Tax Rate

<< 35% Marginal Tax Rate

* 25% RE Dep Recap

* 28% Collectibles

IMPACT OF

INDIVIDUAL INCOME TAX

RATE CHANGES

in 2012 and 2013-14

FUTURE INCOME TAX RATES

Highest tax rates 2012 2013-14

Investment income 35% 44.4%

Earned income 36.4% 43.0%

(wages – 1.45% health)

LT Capital Gains 15% 24.8%


Person in the Year 201250%

<< 15%* LTCG Tax Rate

<< 35% Marginal Tax Rate

* 25% RE Dep Recap

* 28% Collectibles


Person in the Year 201465.4%

<< 24.8%* LTCG Tax Rate

<< 39.6*% Marginal Tax Rate

(3.8% surtax not avoided

by charitable deduction)

* 29.8% RE Dep Recap

* 32.8% Collectibles


Shift investment income to charity: #1 – Make gifts of appreciated stock

#2 - Donor advised funds

& private foundations#3 – Charitable lead trusts

DONOR ADVISED FUNDS

Administrative Convenience

– split large gift to many charities

-- anonymous gifts possible with DAFs

-- one receipt from DAF/PF instead of

many CWAs from many charities

Shift Net Investment Income

Client with $400,000+ of income says:

• “My $100,000 investment produces

$4,000 of taxable income every year”

• “I give $4,000 to charity every year”

• “I want to make a charitable bequest

of $100,000”

Shift Net Investment IncomeClient with $400,000+ of income says:• “My $100,000 investment produces $4,000 of taxable income

every year”


SOLUTION: LIFETIME GIFT OF $100,000 TO PF or DAF; Shift income

• Lifetime income tax deduction produces refund; better than just estate tax bequest

• Investment income of PF/DAF not subject to 3.8% NII surtax

.

Shift Net Investment IncomeClient with $400,000+ of income says:• “My $100,000 investment produces $4,000 of taxable income

every year”


SOLUTION: LIFETIME GIFT OF $100,000 TO PF or DAF; Shift income

• Lifetime income tax deduction produces refund; better than just estate tax bequest

• Investment income of PF/DAF not subject to 3.8% NII surtax

• Tip: Make gift to DAF of appreciated stock


Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%]

Family: Give income-generating investments

Charity:

#1 – Make gifts of appreciated stock





• “My $100,000 investment produces

$4,000 of taxable income every year”


• “I don’t want a charitable bequest of

$100k. Want $100k to go to family.”



• “My $100,000 investment produces $4,000 of taxable income every year”

• “I give away $3,000 to charity every year”

• “I want family to get the $100,000 investment”

CONCEPT: Put $100,000 into a Charitable Lead Trust for a term of years. Whereas donor is paying 3.8% NIIT on all 4%, the CLT would pay only on undistributed 1%. [ PLUS: CLT discount on wealth transfer ]


Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%]

#1 – Donate appreciated stock



COST/BENEFIT – Is administrative cost of PF or CLT worth doing just for 3.8% tax savings? Other benefits are needed.( Compare: DAF cheap!)

Taxpayers with AGI Near $200,000

Two Ways to reduce the 3.8% surtax :

#1 - Reduce Net Investment Income

(convert NII or shift NII)

and/or

#2 – Reduce AGI to less than

$200,000 ($250,000 joint)

Taxpayers with AGI Near $200,000 and

with lots of Net Investment Income

Reduce AGI to less than $200k ($250 jnt)

• Reduce NII (see strategies listed earlier)

• Avoid large Roth IRA conversions

• Maximize compensation deferral

-- 401(k) contributions

-- Non-qualified deferred comp (Sec. 409A)

• “Charitable IRA Rollover”


”Charitable IRA Rollover” - over age 70 ½

• “QCD” – Qualified Charitable Distribution

• Have charitable gift made directly from IRA to

charity (max: $100,000 /year)

• QCD distribution not counted as income (Price? No itemized charitable deduction)

• QCD can satisfy annual RMD

REQUIRED MINIMUM

DISTRIBUTIONS

*LIFETIME DISTRIBUTIONS*

Age of Account Owner Required Payout

70 1/2 3.65%

75 4.37%

80 5.35%

85 6.76%

90 8.75%

95 11.63%

100 15.88%

Taxpayers with AGI Near $200,000 and

with lots of Net Investment Income


71 year old professional

• $150,000 compensation income

• $50,000 net investment income

• This year: first RMD from IRA: $40,000

• Intends to make charitable gift: $30,000



Compensation $150,000

Investment 50,000

IRA RMD . << IRA income

AGI $200,000 not subject

to 3.8% tax




Investment 50,000

IRA RMD 40,000 << IRA income

AGI $240,000 not subject

to 3.8% tax



Normal Gift


Investment 50,000

IRA RMD 40,000

AGI $240,000 << 3.8% surtax

on $40,000



Normal Gift


Investment 50,000

IRA RMD 40,000

AGI $240,000 << 3.8% surtax

Taxable Income $210,000 on $40,000



Normal Gift IRA Gift

Compensation $150,000 $150,000

Investment 50,000 50,000

IRA RMD 40,000

AGI $240,000

Taxable Income $210,000



Normal Gift IRA Gift

Compensation $150,000 $150,000

Investment 50,000 50,000

IRA RMD 40,000 10,000

AGI $240,000 $210,000

3.8% surtax on: $40,000 $10,000

Will Law Be Extended to 2014?

>Planning strategy for 2014if, as in 2008, 2010 & 2012, law has not

been extended until December!:

Give RMD to charity;

can’t lose ! (Some IRAs balk)

Will Law Be Extended to 2014?

>Planning strategy for 2014if, as in 2008, 2010 & 2012, law has not been

extended until December!:

Give RMD to charity;

can’t lose ! (Some IRAs balk)

(May 29, 2014 – House Ways & Means Cmmtee

voted to make retroactive & permanent !)




-- Need to reduce NII (won’t have AGI <200k)




Retirement Assets

Proposal to liquidate inherited IRAs in just five years

Impact on planning

charitable bequests

THREE STAGES OF A

RETIREMENT ACCOUNT

Accumulate Wealth

Retirement Withdrawals

Distributions After Death

Accumulate Wealth

Tax deduction at contribution

Accumulate in tax-exempt trust

Taxed upon distribution

= Tax Deferred Compensation

TYPES OF QRPs

1. Sec. 401 – Company plans

2. Sec. 408 – IRAs

-- SEP & SIMPLE IRAs

3. Sec. 403(b) & 457–Charities

4. Roth IRAs & 401(k)/403(b)

Roth IRA,

Roth 401(k), or Roth 403(b)

INVERSE OF TRADITIONAL:

No tax deduction at contribution

Accumulate in tax-exempt trust

Not taxed upon distribution

THREE STAGES

Accumulate Wealth



RETIREMENT

TAXATION

General Rule – Ordinary income

Exceptions:

-- Tax-free return of capital

-- NUA for appreciated employer

stock

-- Roth distributions are tax-free

USUAL OBJECTIVE:

Defer paying income taxes in order to get

greater cash flow

Principal 10% Yield

Pre-Tax Amount $ 100,000 $ 10,000

Income Tax

on Distribution (40%) 40,000

Amount Left to Invest $ 60,000 $ 6,000

REQUIRED MINIMUM

DISTRIBUTION (“RMD”)

BACKGROUND: 50% penalty if not

receive distribution from IRA, 401(k), etc:

#1 – lifetime distributions from own IRA:

beginning after age 70 ½

#2 – an inherited IRA, 401(k), etc –

beginning year after death *

REQUIRED MINIMUM

DISTRIBUTIONS

*LIFETIME DISTRIBUTIONS*

Age of Account Owner Required Payout

70 1/2 3.65%

75 4.37%

80 5.35%

85 6.76%

90 8.75%

95 11.63%

100 15.88%

ADVANTAGES OF

ROTH IRAsUnlike a regular IRA,

no mandatory lifetimedistributions from a

Roth IRA after age 70 ½

Yes, there are mandatory distributions after death

THREE STAGES

Accumulate Wealth



Distributions

After Death Income taxation

Mandatory ERISA distributions

Estate taxation

Asset Protection – Clark v. Rameker

Collision of multiple laws at death

Inherited IRAs -- Bankruptcy

US Supreme Court: Inherited IRAs are

not “retirement funds” entitled to

Sec. 522 bankruptcy exemption

under federal or state exemption

laws. Clark, et ux v. Rameker, 573 U. S. __ (Jun, 12, 2014)

Solution: Name trust with spendthrift

provisions as beneficiary of an IRA

or other qualified plan ?

Distributions

After Death> Income taxation> Mandatory ERISA distributions

> Estate taxation

Collision of three tax worlds at death

INCOME IN RESPECT OF A

DECEDENT - “IRD” – Sec. 691

No stepped up basis for retirement assets

After death, payments are income in respect of a decedent (“IRD”) to the

beneficiaries

Common mistake in the past: children

liquidate inherited retirement accounts.

Distributions

After Death> Income taxation

> Mandatory ERISA distributions

> Estate taxation

Collision of three tax worlds at death

Distributions

After DeathAfter death, must start liquidating account

• Tax planning for family members who

inherit: DEFER distributions as long as

possible – greater tax savings

• “Stretch IRA” – make payments over

beneficiary’s life expectancy

Distributions

After Death“ life expectancy“

Oversimplified: Half of population will die before that age, and half will die after

Implication: For the 50% of people who live beyond L.E. date, an inherited IRA will be empty before they die.

REQUIRED MINIMUM

DISTRIBUTIONS

*LIFE EXPECTANCY TABLE*

Age of Beneficiary Life Expectancy

30 83 53.3 more years

40 83 43.6

50 84 34.2

60 85 25.2

70 87 17.0

80 90 10.2

90 97 6.9

REQUIRED MIN. DISTRIBUTIONS


“STRETCH IRAS”


30 53.3 more years

40 43.6

50 34.2

60 25.2

70 17.0

80 10.2

90 6.9



“STRETCH IRAS”


30 1.9% 53.3 more years

40 2.3% 43.6

50 2.9% 34.2

60 4.0% 25.2

70 5.9% 17.0

80 10.0% 10.2

90 14.5% 6.9

SENATE PROPOSAL:

LIQUIDATE ALL INHERITED

IRAs IN FIVE YEARS

2012 – Highway Bill – not enacted

President Obama budget proposal

June, 2014 – Sen. Wyden adds to Highway Bill

EXCEPTIONS

-- Spouse -- minor child -- disabled

-- Person not more than ten years younger

REQUIRED MINIMUM DISTRIBUTIONS

Example: Death at age 80?

CURRENT LAW: *Life Expectancy Table*


30 1.9% 53.3 more years

40 2.3% 43.6

50 2.9% 34.2

60 4.0% 25.2

70 5.9% 17.0

80 10.0% 10.2

90 10.0% 6.9 * [10.2 yrs]

REQUIRED MINIMUM DISTRIBUTIONS

Example: Death at age 80?

PROPOSED: FIVE YEARS if >10 yrs younger


30 5 years

40 5

50 5

60 5

70 5.9% 17.0

80 10.0% 10.2

90 10.00% 6.9 * [10.2 yrs]

SENATE PROPOSAL:

LIQUIDATE ALL INHERITED

IRAs IN FIVE YEARSEXCEPTIONS

-- Spouse -- minor child -- disabled

-- Person not more than ten years younger

TAX TRAP: Does naming a trust for a spouse

(e.g., QTIP trust; credit shelter trust) as an IRA

beneficiary mean required liquidation in 5 years?

SENATE PROPOSAL: LIQUIDATE ALL

INHERITED IRAs IN FIVE YEARS

IMPLICATIONS FOR CHARITIES

Donors more likely to consider

Outright bequests

Retirement assets to tax-exempt CRT

Child: income more than 5 years; then charity

Spouse only (marital estate tax deduction)

Spouse & children (no marital deduction)

FUNDING CRTs

WITH

RETIREMENT ASSETS

2-GENERATION CHARITABLE

REMAINDER TRUST

Typically pays 5% to elderly surviving

spouse for life, then 5% to children for

life, then liquidates to charity

Like an IRA, a CRT is exempt from

income tax

Can operate like a credit-shelter trust for IRD assets [no marital deduction]


REMAINDER TRUST

Can be a solution for second marriages when estate is top-heavy

with retirement assets. Example:

-- Half of IRA to surviving spouse

-- Other half of IRA to a CRT for 2nd

spouse and children from 1st marriage


REMAINDER TRUST

TECHNICAL REQUIREMENTS

Minimum 10% charitable deduction

-- all children should be over age 40

CRUT – minimum 5% annual distrib

Not eligible for marital deduction

(see 2002 article on topic)

MANDATORY DISTRIBUTIONS

[Assume inherit IRA at age 80 and die at 92]

Own Accumulation Conduit

AGE IRA Trust Trust .

80 5.35% 9.80% 9.80%

85 6.76% 19.23% 13.16%

90 8.78% 100.00% 18.18%

91 9.26% empty 19.23%

92 9.81% empty 20.41%

MANDATORY DISTRIBUTIONS

[Assume inherit IRA at age 80 and die at 92]

Own Accumulation Conduit

AGE IRA Trust Trust . C R T .

80 5.35% 9.80% 9.80% 5.00%

85 6.76% 19.23% 13.16% 5.00%

90 8.78% 100.00% 18.18% 5.00%

91 9.26% empty 19.23% 5.00%

92 9.81% empty 20.41% 5.00%

HOW TO LEAVE A

RETIREMENT

ACCOUNT TO BOTH

FAMILY & CHARITY

CHARITABLE BEQUESTS

FROM QRPs

Best type of bequest: taxable income !

Easier than formality of a will: Name

charity as beneficiary on form of plan

-- no need for attorney to draft

-- no need for witnesses, etc.

“You can’t make a charitable bequest

unless you have a will”

Wrong. A retirement plan is a trust with its

own beneficiary designations. Like other

trusts, assets can pass outside probate.

Name a charity as a beneficiary

- the cheapest “charitable remainder trust”

LIFETIME GIFTS: ONLY IRAsBEQUESTS: ANY QRP

1. Sec. 401 – Company plans

2. Sec. 408 – IRAs

-- SEP & SIMPLE IRAs

3. Sec. 403(b) & 457–Charities

4. Roth IRAs & 401(k)/403(b)

Avoiding Problems With

Charitable Bequests

* Let Other Beneficiaries

Have Stretch IRA*Keep IRD Off of Estate’s Income Tax Return

* Guarantee Offsetting Charitable Income Tax

Deduction if Have to Report Income



“STRETCH IRAS”


30 53.3 more years

40 43.6

50 34.2

60 25.2

70 17.0

80 10.2

90 6.9


Charitable Bequests

* Let Other Beneficiaries Have Stretch IRA

*Keep IRD Off of Estate’s Income

Tax Return

* Guarantee Offsetting Charitable

Income Tax Deduction if Have to

Report Income

WHAT CAN GO WRONG ?

TWO WAYS TO MAKE A CHARITABLE BEQUEST FROM A RETIREMENT ACCOUNT

#1 – NAME CHARITY AS BENEFICIARY OF THE ACCOUNT

#2 – PAY ACCOUNT TO ESTATE OR TRUST THAT THEN MAKES A CHARITABLE BEQUEST


Charitable Bequests

* Let Other Beneficiaries

Have Stretch IRA*Keep IRD Off of Estate’s Income Tax Return

* Guarantee Offsetting Charitable Income Tax

Deduction if Have to Report Income

WHAT CAN GO WRONG #1?

• Other beneficiaries cannot do stretch IRA if charity is beneficiary?

• Solutions:

* cash out charity’s share by Sept 30

or

* separate account for charity p. 39

WHAT CAN GO WRONG #2 ?

TWO WAYS TO MAKE A CHARITABLE BEQUEST FROM A RETIREMENT ACCOUNT

#1 – NAME CHARITY AS BENEFICIARY OF THE ACCOUNT

#2 – PAY ACCOUNT TO ESTATE OR TRUST THAT THEN MAKES A CHARITABLE BEQUEST

WHAT CAN GO WRONG #2?

Estate or trust has taxable income

from receiving IRA distribution,

but maybe there is no offsetting

charitable income tax deduction

when the IRA check is given to a

charity.

WHAT CAN GO WRONG?

IRS Chief Counsel Memorandum ILM 200848020

Decedent left his IRA to a trust that benefited his six children and several charities

Trust received cash from IRA; paid entire charitable share, leaving the six children as the only remaining beneficiaries of the trust.

IRS: “Taxable income from IRA, but nocharitable deduction.” Reason: trust had no instructions to pay income to charities p.39

WHAT CAN GO WRONG?

Solution #1 – Keep IRD off of

estate’s/trust’s income tax return

a. Name charity as beneficiary of IRA

b. “Distribute” IRA to charity if

document allows

Caution: IRS memo on danger of using

retirement accounts to satisfy pecuniary bequests p.41

WHAT CAN GO WRONG?

SOLUTION #2 – draft document to

get an offsetting charitable income tax

deduction in case estate or trust has

income

I instruct that all of my charitable gifts, bequests and

devises shall be made, to the extent possible, from

"income in respect of a decedent" ….. P.42


UPPER-INCOME DONORS

Advancement Network

2014 Annual ConferenceCleveland, Ohio -- October 18, 2014

CHRISTOPHER R. HOYT

University of Missouri - Kansas City

School of Law

Government & Nonprofit

2014 AdNet Days - Chris Hoyt Presentation