Presented by Mark E. Melendy, Esq. Estate Planning and Charitable Giving After the 2017 Tax Cuts and Jobs Act Presented by Mark E. Melendy, Esq.

I. What Has Changed Background 2018 Changes Brief background of the new law for income and estate taxes. 2018 Changes Lower federal income tax rates and higher estate tax exemption. Higher Standard Deduction ($12,000/$24,000). Deduction caps for taxpayers who itemize, which may result in higher income tax when state taxes considered. Deduction caps and higher standard deduction are a clear concern with charitable giving because of increased number of non-itemizing taxpayers.

Overview Impact on Estate Planning Income tax planning will become a more critical part of most estate plans and require a more active role by financial planners, attorneys, CPAs. Estate tax exemption at $11.18 million per person means few taxpayers will be subject to estate tax. Many income tax benefits can be gained by using non-grantor trusts. These are trusts that are their own independent taxpayers that pay their own tax. Charitable donations still deductible for estate taxes but fewer taxpayers will benefit from the deduction. Life insurance will not be needed to pay estate tax, but will still be a useful tool in estate planning.

Planning Opportunities Identify client’s goal Use of temporary exemptions. Current $11.18 million is scheduled to sunset and revert to $5 million (inflation adjusted) in 2026. There is some concern of a repeal prior to 2026. There may be encouragement for clients to use as much of the exemption as they can, while they can. In many cases, this may constitute making transfers into trusts that constitute a completed gift for transfer tax purposes (irrevocable trusts). Due to state and local tax deduction cap of $10,000, many clients may find it beneficial to have non-grantor trusts. This cap is significant for clients incurring large property taxes on their home and vacation home, and state and local income taxes.

Planning Opportunities – continued Charitable Clients Can use a similar approach to gain full tax benefit from contributions. Transfer sufficient investment assets to trust to generate income to pay charitable donations. Trusts do not have a standard deduction. Income is offset by contribution deduction as long as tax law requirements are met. This will provide full offset for donation for married client. Preserve $24,000 standard deduction for couple on their personal return ($12,000 for individual taxpayers).

Tax Rates for Individuals in 2018 10% up to $9,525 12% up to $38,700 22% up to $82,500 24% up to $157,500 32% up to $200,000 35% up to $500,000 37% over $500,000

Tax Rates for Couples in 2018 10% up to $19,050 12% up to $77,400 22% up to $165,000 24% up to $315,000 32% up to $400,000 35% up to $600,000 37% over $600,000

II. Charitable Giving – Who Really Benefits Now Congress did not eliminate or limit charitable deduction, which had been a concern. In some ways, it was expanded. BUT state and local taxes limited to $10,000 deduction for taxpayers who itemize. Mortgage interest disallowed for home equity loans and limited to interest on mortgages of $750,000 or less.

Charitable gifts are unlimited and increased to 60% of AGI for cash gifts, up from 50% 30% limit remains for gifts of appreciated property. Pease limitation repealed, which had phased out as much as 80% of benefits of charitable and other itemized deductions for high income taxpayers under prior laws. Negates impact of lower minimum tax rates on after-tax costs of charitable gifts and other deductions for higher earners.

This Could be Bad, But Maybe Not So Bad Standard deduction now $12,000 per individual, $24,000 per couple ($1,300 additional deduction for aged and blind, $1,600 for unmarried taxpayers). Reduces dramatically number of taxpayers who will itemize – including itemizing charitable gifts. Accordingly, many more donors will give gifts from after-tax income, but they may still GIVE. Net effect of final legislation is to increase number of non-itemizers from 70% of taxpayers under prior law to an estimated 85%.

Many observers predict tax reform should have little impact on charitable giving by lower and middle income individuals because there is no reason to believe donors who didn’t itemize before will suddenly change habits if they still cannot itemize. Every situation for clients is different; there is no one size fits all.

Examples of Tax Effects on Individuals ($12,000 Standard Deduction) Higher Income Donor Unmarried professional lives in a high tax state. Taxable income over $300,000, with state and local income and property taxes of $27,500 (now limited to a $10,000 deduction) and deductible home mortgage interest of $15,000. Has regularly made charitable gifts of $20,000 annually and can fully deduct charitable gifts.

75-year old Retiree Lives in state without income tax and rents home. Has no itemized deductions. Anticipates having taxable income of $75,000, primarily consisting of distributions from an IRA. Plans to make $10,000 charitable gift using IRA and can do so without income tax impact.

Higher Income Individual Income of $400,000, of which $150,000 will be IRA distributions. State and local income and property taxes of $25,000, now limited to $10,000. If charitable distributions of $100,000 made from IRA, the $100,000 would be excluded from taxable income so AGI of $300,000. Could make additional deductible cash gifts to charity of up to 60%, or $180,000.

Examples of Tax Effects on Couples ($24,000 Standard Deduction) Couple “A” = Real Change from 2018 Both over age 65 years. Income of over $200,000 per year. State income tax is $12,000 and property taxes are $8,000 per year, now limited to $10,000 tax deduction. Charitable gifts of $5,000 per year. Charitable gifts NOT deductible. Aggregate “bunch” charitable gifts to certain years. Consider use of Donor Advised Funds.

Couple “B” = No Real Tax Change Total household income is $164,000. State income tax is $7,900 and property taxes are $6,300 per year. Mortgage interest of $15,000. Charitable gifts of $7,500 in 2018. Can fully deduct charitable gifts, same as under current law. In 2018, marginal tax rate will be 24% so tax savings would decrease by $300 to $1,800.

Couple “C” = Higher Income, Neutral Effect Household income of $1.5 million. In highest marginal tax bracket of 39.6% under prior law. Taxed at 37% maximum rate under new legislation. Mortgage of $1.5 million with interest of $67,000, of which $44,000 is currently deductible. State income tax is $75,000 and property taxes are $25,000 per year. Charitable gifts total $25,000.

Couple “C” – continued Under prior law, not allowed to deduct entire amount --- Pease limitation required them to reduce total itemized deductions by 3% of amount that income exceeded $313,800 = $35,586. Under new law, deductions reduced to $10,000 worth of state and local taxes and mortgage interest deduction of $44,000, so including the $25,000 in charitable gifts, total deductions = $79,000. Since Pease limitation repealed under new law, total deductions are not reduced. Increased after tax cost of charitable donation in 2018 is $650.

Couple “D” = Higher Income, Real Winners AGI is $2 million. Have outstanding capital gift pledge of $300,000. Stock subject to state and federal capital gains tax. Use $300,000 worth of stock to satisfy pledge which bypasses capital gains tax. $300,000 amount is also within 30% AGI limit for gifts of appreciated assets. Itemizing charitable gift deductions, as mortgage interest and state taxes alone exceed standard deduction amount.

Couple “D” – continued Under new law, with Pease limitation repealed, can take full $300,000 deduction in 2018. Charitable gift will be deducted with 2018 maximum tax rate of 37% and yield tax savings of $111,000, which is $12,232, or 12% more than 2017 savings would have been.

IRAs - Look for these Situations Ability of those 70-1/2 or older to make “qualified charitable distributions,” also known as IRA rollover gifts, was not changed by the tax reform. Donors can make tax-free gifts up to total of $100,000 per year from IRAs. When give funds directly from IRA to charity, not required to report the income on tax returns. Cannot be used for donor-advised funds To make several small gifts from an IRA, use an “IRA checkbook” offered at some brokerage houses, where each check is distribution from IRA.

Nine Requirements for Qualified Charitable Distribution (QCD): Donor at least 70-1/2 years of age. IRAs only – not 401(k) or 403(b) plans. Charitable distribution made directly from IRA. Three ineligible charitable recipients: non-operating (grantmaking) PFs, donor-advised funds and IRC Section 509(a)(3) supporting organizations. Can be no personal financial benefit to donor that would reduce charitable income tax deduction.

Nine Requirements for Qualified Charitable Distribution (QCD) - continued: Favorable tax treatment only applies to taxable portion of an IRA distribution. Maximum exclusion is $100,000 per year. For married couple filing joint return, limit is $100,000 per individual IRA owner, for maximum exclusion of $200,000 for joint return. Donor must have documentation from charity that would qualify the gift for full charitable income tax deduction under normal circumstances. Taxpayer should report IRA exclusion on front page of Form 1040, with reference to a QCD.

Final Points Under new 2017 tax legislation, laws governing gifts in form of charitable remainder trusts, charitable gift annuities, lead trusts and other split-interest gifts were not changed. Split-Interest Gifts – To some, irrevocable gifts completed today that feature income tax benefits, additional income and a tax-free growth environment (and other benefits) may be appealing compared to gifts with fewer or no benefits. Example: Retired couple who doesn’t have enough deductible expenses to itemize gifts under the new standard deduction of $26,600 for couples over 65 years. They can periodically make additions to Charitable Remainder Trusts (CRTs) (or periodically create gift annuities). Such gifts could make it possible to itemize charitable gifts.

Final Points – continued Charitable remainder trusts (CRTs) can be structured in ways that result in a portion of annual payments being used to make immediate charitable gifts directly from the trust. For those whose ability to itemize gifts has been reduced, this structure offers another way to achieve equivalent of full deductibility. Charitable lead trusts (non-grantor) offer a way for those who don’t itemize to make significant gifts over extended period in a way that’s essentially same as making fully deductible gifts. Charitable lead trusts (grantor) create a large charitable gift in the year of funding which may allow gift itemizing.

IV. Final Thoughts & Questions Lower federal taxes so taxpayers have more money to give. Deduction caps and higher standard deduction mean fewer taxpayers will receive income tax deduction for charitable gifts. How much of charitable giving is motivated by income tax deduction, time will tell, but hopefully not much. Always consider IRAs for charitable giving for taxpayers over 70 ½ AND for testamentary charitable gifts.

  Disclaimer While the information contained herein is intended to be accurate, it is, nonetheless, presented with the understanding that it does not constitute legal advice or professional assistance in any manner, but rather is offered to guide the discussion. An independent investigation of the current law must always be undertaken before recommending any action or inaction on the basis of these materials.