Tax-Wise Charitable Giving Leveraging Your Client’s Philanthropic Impact Through Asset-Based Charitable Gifting Strategies Sioux Falls Estate Planning Council November 12, 2015 Presented by Michael J. Occhipinti, MBT Gift Planning Advisor/Western US Wycliffe Foundation

What we will cover… How you can help your clients… Make capital gains taxes optional Multiply the impact of their giving through appreciated assets Transfer tax dollars to charitable dollars to increase their philanthropic impact Leave a significant legacy Review and learn from case studies of others who have used tax-wise gifting strategies.

Taxes, Taxes, Taxes !!! Income Taxes Federal: 0% to 39.6% State: 0% to 13.3% Federal Capital Gain Tax: 15% to 20% State Capital Gain Tax: 0% to 13.3% National average is 5% ACA (aka “Obamacare”) Tax: 3.8%

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands. To demand more in the name of morals is mere cant.” --Judge Learned Hand

Capital Gains Tax is “Optional” Pay the tax Defer the tax Avoid the tax Death Charitable Gifting

Baseline Case Study: Outright Gift of Asset-“Quintuple Tax Savings” The tax savings from a gift of an appreciated asset can be significant when compared to a cash contribution… and maybe preferable to cash gift. Nick and Rachel own an appreciated asset worth $10,000 with a tax basis of $4,000. They are in a combined 40% federal and state income tax bracket. If they were to make a cash gift of $10,000, they would save approximately $4,000 in taxes... If they instead gifted the appreciated asset, they would generate an income tax deduction of $10,000 and then some…their net tax results will be significantly higher. Let’s see how…

Case Study: Outright Gift of Asset-“Quintuple Tax Savings” Appreciated Asset Gift $ 10,000 Ordinary Federal Income Taxes Saved (35%) $ 3,500 Ordinary State Income Taxes Saved (5%) $ 500 Capital Gain Tax Saved (20%) $ 1,200 Obama care Tax Saved (3.8%) $ 228 State Capital Gain Saved (5%) $ 300 Total Tax Savings $ 5,728 Cash Gift Tax Savings: $ 4,000 Difference $ 1,728 … 43% increase!

Donor Advised Fund Case Study: Joe and Dawn Green   Case Study: Donor Advised Fund Joe and Dawn Green Worked in real estate and acquired several rental properties over the years Would like to donate one of the properties to support their church and two of their favorite charities Selling the property would trigger a 30% capital gains tax. What can they do?....

Donor Advised Fund Solution Case Study: Donor Advised Fund Solution Established the “Green Family Fund” using a DAF, and contributed the property to the fund. This gave them an income tax deduction for the appraised market value and bypassed federal and state capital gains taxes. Once the property was sold, they were able to make grants from their DAF to their church and other charities.

How does a Donor Advised Fund Work? Green Donor Advised Fund 1 2 3 “Charitable Checkbook” 4 1. Open account 2. Gift cash or assets 3. Receive tax deduction 4. Grant gifts

Case Study: Zero-Tax Gift and Sale Kirk and Cindy own an income property they purchased many years ago. It has appreciated substantially and is now worth $500,000. Their tax basis after cost + improvements – depreciation in $100,000. They are tired of being landlords and have had several offer to purchase the property; however, they are balking at the high “price tag” of the capital gains taxes…in their case $100,000! They know they cannot keep all of the sales proceeds and would like to find a way to both receive some cash from the sale and make a gift to the Lord’s work.

Case Study: Zero-Tax Gift and Sale Outright Sale: Fair Market Value $500,000 Cost (tax) Basis $100,000 Capital Gains $400,000 Tax at 25% $100,000 Net to Kirk and Cindy $400,000 Net to Charity $ 0  Loss of capital !!! IRAs IRAs and pension plans are very popular. Nearly all Americans have one or more of these "qualified plans." According to Federal Reserve data, over $3 trillion is in IRAs, and total pension plans now exceed $10 trillion in value. There are two principal benefits of qualified plans. For regular IRAs (not Roth IRAs) and employer-sponsored defined benefit and defined contribution plans, contributions are tax free and the balance grows tax free. Of these two benefits, the greatest economic benefit is tax-free growth. While nearly everyone has an IRA or pension plan and the concept of these plans is straightforward, there are a multitude of specific rules governing contributions and distributions.

Case Study: Zero-Tax Gift and Sale Portion $311,000 Gift $189,000 Capital Gains Tax @ 25% $62,000 Income Tax Savings @ 33% Zero-Tax Solution: Keep a portion, gift a portion… IRAs IRAs and pension plans are very popular. Nearly all Americans have one or more of these "qualified plans." According to Federal Reserve data, over $3 trillion is in IRAs, and total pension plans now exceed $10 trillion in value. There are two principal benefits of qualified plans. For regular IRAs (not Roth IRAs) and employer-sponsored defined benefit and defined contribution plans, contributions are tax free and the balance grows tax free. Of these two benefits, the greatest economic benefit is tax-free growth. While nearly everyone has an IRA or pension plan and the concept of these plans is straightforward, there are a multitude of specific rules governing contributions and distributions.

Case Study: Zero-Tax Gift and Sale Income tax savings offset capital gain taxes Sale Portion $311,000 Gift $189,000 Capital Gains Tax @ 25% $62,000 Income Tax Savings @ 33% $62,000 Wash* To DAF for charities IRAs IRAs and pension plans are very popular. Nearly all Americans have one or more of these "qualified plans." According to Federal Reserve data, over $3 trillion is in IRAs, and total pension plans now exceed $10 trillion in value. There are two principal benefits of qualified plans. For regular IRAs (not Roth IRAs) and employer-sponsored defined benefit and defined contribution plans, contributions are tax free and the balance grows tax free. Of these two benefits, the greatest economic benefit is tax-free growth. While nearly everyone has an IRA or pension plan and the concept of these plans is straightforward, there are a multitude of specific rules governing contributions and distributions. * Caveat: Check with CPA to make sure the “wash” will occur in year of gift … or over 1 to 6 years

Case Study: Charitable Remainder Trust Robert and Mary, ages 68 and 65, are unhappy with the net return they receive from a highly-appreciated but under-productive asset. They are concerned about their current and future financial security/income. The property has an appraised fair market value of $500,000; a tax basis of $100,000; and a net annual income of $10,000 (2%). They are in a 32% combined federal and state marginal income tax bracket and 22% capital gain bracket. They are considering selling the asset but there is an obstacle: the tax on the long-tern capital gains due to market appreciation will result in a tax of approximately $88,000. Planning Dilemma: How can they convert this asset into income, without triggering the capital gains tax ($88,000)? Let’s look at their options…

Case Study: Charitable Remainder Trust Results: 200% increase in income from $10,000 to $30,000 Avoid capital gain taxes of $88,000 Entitled to a $154,000 charitable income tax deduction Created a future endowment for their favorite charities--Enables them to be voluntary philanthropists through their giving vs. an involuntary philanthropists through taxation. 6% Charitable Remainder Trust Gift of Asset Income for Life Tax Deductions & Saving Income Capital Gain Remainder to Charity at death of Survivor

Comparison Utilizing Sale: Utilizing the Charitable Remainder Trust: 1. Fair Market Value $ 500,000 2. Tax Basis <$ 100,000> 3. LTCG $ 400,000 4. Capital Gain Tax (22%) <$ 0 > 5. Net Cash Proceeds $ 500,000 6. Reinvest Cash/Capital @ 6% $ 30,000 7. Increase/(decrease) over previous income +$ 20,000 8. Income Tax Savings $154,000 @32% $ 49,000 Utilizing Sale: 1. Fair Market Value $ 500,000 2. Tax Basis <$ 100,000> 3. LTCG $ 400,000 4. Capital Gain Tax (22%) <$ 88,000> 5. Net Cash Proceeds [1-2-5] $ 412,000 6. Reinvest Cash/Capital @ 6% $ 24,700 7. Increase/(decrease) over previous income +$ 14,700 8. Income Tax Savings $ 0

Case Study: Blended Gift: Sale/DAF/CRT Roger and Josette live in Canada. He is Canadian, she is American. They owned a highly appreciated asset gifted to them by her parents. Appraised market value is $611,000 and tax basis is $24,000. Their goals are to: Sale the asset without payout capital gains taxes to both the US and Canada Receive lifetime income Make charitable gifts to several charities Leave something for their children

Case Study: Blended Gift: Sale/DAF/CRT Farmland $611,000 Lifetime Income Keep and Sell $201,000 Wycliffe Foundation DAF $134,600 Charitable Remainder Trust $275,400 Remainder Inheritance to Children Charity

Charitable Giving Trust Case Study: Charitable Giving Trust This strategy allows owners of a closely-held business to accomplish their charitable giving goals from their business through the donating of a non-voting interests of their business into a specially designed charitable trust. 1. Due diligence prior to implementing strategy. 4. Net income from minority interest’s pro-rata share of dividends and profits flow to family giving fund. 2. Donate minority non-voting interest to Charitable Trust. Family Giving Fund (donor advised fund) Special Charitable Trust 3. Receive income tax deduction based on appraised fair market value 5. Recommend grants from giving fund to your favorite charities

Case Study: John and Mary own a business (S-Corp) with a $10 million value. Their adjusted gross income (AGI) is $1 million from which they give $100,000. Observe the powerful impact they could have through their giving if they were to gift a 4% non-voting interest of business with an appraised value of $300,000 into a specially designed charitable trust.   Before Charitable Trust Plan After Charitable Trust Plan Change Giving $ 100,000 $ 400,000 + $300,000 Taxes $ 360,000 $ 240,000 - $120,000 Living expenses $ 240,000 No change Net Extra Cash for reinvesting in business, investments, gifting, etc. $ 400,000 $ 520,000 + $120,000

The benefits to a business owner utilizing this strategy include the following: Receive an immediate income tax deduction based upon the appraised value of the interest Reduce current income tax liability Increase cash flow immediately Maintain control over their business Net income is available for distribution and investment in charitable work by directing grants to their favorite charities No effect on lifestyle needs Avoid capital gains on shares gifted and when business is sold Reduce future estate taxes

or Special Charitable Trust Case Study Charitable Planning Prior to Sale of Business – Tax-Free Sale Gifting a portion of the shares of a business into a charitable trust or donor advised fund prior to a binding agreement to sell the business will allow the business owner to avoid the capital gains and transfer tax dollars into charitable dollars. 1. Due diligence prior to implementing strategy. Donor Advised Fund or Special Charitable Trust 2. Donate portion of non- voting shares 3. Receive income tax deduction 5. Donor makes grants from giving fund to favorite charities.   4. Donor and trust or DAF sells interests to buyer 4. Cash to trust or DAF 4. Cash to donor Charities

Case Study: A business has fair market value of $10,000,000 and cost basis of $1,000,000. The owner is in a combined federal and state income tax bracket of 48% and capital gain bracket of 28%. An outright sale will result in a capital gains tax of $2.5 million…a 25% loss of capital to taxes. If prior to the sale the owner were to gift $3.4 million in shares to a charitable trust or donor advised fund, the resulting income tax deduction and savings would offset the capital gains on the $6.6 million of shares retained and sold by the owner.    Sale, No Gift Gift, Then Sale Business Value $10,000,000 Sale Portion $ 6,557,000 Gift Portion $ 0 $ 3,443,000 Allocated Basis $ 9,000,000 $ 656,000 Net Gain $ 5,902,000 Tax on Gain $ 2,520,000 $ 1,240,000 Taxes Saved Net Tax Net to Donor $ 7,480,000 Net Charity $ 3,433,000 Net to Donor & Charity

The results and benefits to a business owner using this strategy are as follows: Receive an immediate charitable income tax deduction for appraised value of interest donated Avoid capital gains taxes on the shares donated into the CT or DAF Use the income tax savings generated by the charitable tax deduction to off-set capital gain taxes on the shares still held and sold by the business owner Receive “tax-free” proceeds from sale of business Turn tax dollars into charitable dollars Invest in the work of philanthropy by directing grants to his or her favorite charities

(Assuming Congress passes extension of this law) IRA Gifts – Qualified Charitable Rollover Direct Transfer to Charity, no tax recognition Must be at least age 70 ½ Traditional IRA’s only Up to $100,000 max. per year

IRA Gifts – Qualified Charitable Rollover Satisfies Required Minimum Distribution rules. Effective through 12/31/2015. 401(k), 403(b) do not qualify. First roll into IRA. Simple to do!

IRA Rollover Gifts Not included in taxable income! May avoid limits on deductions May prevent bump into higher tax bracket “Best” way to give cash

Case Study: Joyce has made generous annual gifts to her favorite charities. Now that she is 701/2, she must begin taking her Required Minimum Distributions, which will be $107,000 for the current year. She does not need the income, as she has other investments that provide an adequate income. And her RMD payments are taxable at ordinary income rates.

Case Study: Solution: Transferring $100,000 from her IRA directly to one or more charities will result in the following: Qualify $100,000 of the $107,000 as non-taxable income Reduce her AGI and taxable income by $100,000 Save $44,000 in federal and state income taxes Make a significant current gift to one or more charities without affecting her cash flow

IRA Rollover Gifts Who Can Benefit? Anyone 70 ½ + with IRA considering a gift to charity Those who do not itemize deductions Those who do not receive state charitable income tax deduction (CT, IN, MI, NJ, OH, MA, WV) Those whose giving exceeds the 50% AGI limitation Those who are high income earners

“To give away money is an easy matter and in any man’s power, but to decide to whom to give it and how large and when, and for what purpose and how, is neither in every man’s power nor an easy matter. Hence, it is that such excellence is rare, praiseworthy and noble.” -- Aristotle

Questions?

How Can We Help You? Combined over 50 years of charitable gift and estate planning experience. Available resource with regard to charitable gifting strategies. No cost, no pressure, no hidden agenda, and there is never any cost or obligation to give. We understand donors have multiple charitable interests. Our job is to help you show them best way to give...not to direct them to where they give. All client information is kept confidential We can interact with clients as directed by you Website resources Clients will reap the benefits of wise stewardship.

Thank You… Michael J. Occhipinti, MBT Gift Planning Advisor/Western US Phone: (800) 681-5103 michael_occhipinti@wycliffe.org www.wycliffefoundation.org