FAMILY & CHARITABLE ESTATE PLANNING CHRISTOPHER R. HOYT University of Missouri - Kansas City School of Law

WEALTH WILL GO EITHER -- TO FAMILY/FRIENDS OR TO SOCIETY-- Taxes Charity Family PLANNED GIVING – INCREASE THE SHARE THAT GOES TO FAMILY & CHARITY BY REDUCING AS MUCH AS POSSIBLE THE SHARE THAT GOES TO TAXES

TRANSFER OF WEALTH Family Gift Charity Gift Income Tax No Deduction Deduct ! Estate Tax Pay Tax Deduct! Gift Tax Pay Tax, Deduct! (if over $14,000/year/person) (if over $14,000/year/person)

PLANNED GIFTS LIFETIME -- Outright -- Deferred – CRT, CGA, CLT AT DEATH -- Outright -- Deferred – CRT, CGA, CLT

IMPACT OF NEW TAX RATES ON CHARITABLE GIVING

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 Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% 33% rate when taxable income > $183, single > $223,050 – 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 Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% plus health care surtax 3.8% 0.9% 3.8% 36.8% 35.3% 18.8%

HEALTH CARE SURTAX MAGI > $200,000 ($250,000 joint returns) Different rates for investment and labor % on interest, dividends, annuities, royalties, rents, profits from LLC/S Corp (if not employed) and most capital gains % earned income (wages, etc.) $200k/$250k not indexed for inflation Trusts and estates pay 3.8% at $11,950

HEALTH CARE SURTAX MAGI > $200,000 ($250,000 joint returns) Income Exempt from Surtax: Retirement: IRA distributions, etc. Trade / Business income from a Subchapter S corporation or partnership, provided the recipient is employed at the business. -- “material participation” test (work 500+ hours during the year?)

INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid 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

PHASEOUTS AGI > $250,000 ($300,000 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 % eliminated AGI > $372k ($422k jnt)

INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $250k/$300k 33% 34.4% 15% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% 37.8% 36.3% 19.8% [plus personal exemption phase-out means extra tax until AGI $372,000 ($422,000 jnt)]

INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% Taxb>$400/$ % 41.0% 20%

INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% Taxb>$400/$ % 41.0% 20% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% 44.4% 42.9% 24.8%

INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% Taxb>$400/$ % 41.0% 20% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% With $12,000+ income, 44.4% 42.9% 24.8% Trusts & Estates >> 43.4% 23.8%

FUTURE INCOME TAX RATES STRATEGIES FOR HIGH-INCOMES * Reduce AGI !! “Charitable IRA Rollover” * Municipal bonds * Avoid spikes in income from major gains on property sales -- tax-exempt CRTs & installment sales

PLANNING FOR CHARITABLE GIFTS OF APPRECIATED STOCK IN LIGHT OF FUTURE TAX RATE CHANGES

DONORS LIKE TO CONTRIBUTE 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 % << 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

FUTURE INCOME TAX RATES Highest tax rates Investment income 35% 44.4% Earned income 36.4% 43.0% (wages – 1.45% health) LT Capital Gains 15% 24.8%

$ Benefits Max Federal Taxes Saved Person in the Year % << 15%* LTCG Tax Rate << 35% Marginal Tax Rate * 25% RE Dep Recap * 28% Collectibles

$ Benefits Max Federal Taxes Saved Person in the Year % << 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

PROPOSALS TO CHANGE THE INCOME TAX DEDUCTION FOR FOR CHARITABLE GIFTS CHARITABLE GIFTS

Obama Budget Proposal: TAX BENEFIT FROM CHARITABLE GIFTS & MORTAGE INTEREST LIMITED TO 28% Example: Rich person has $100 income $ 44 <<-- Pay tax at 44% [39.6%+surtax] -28 <<-- Tax savings from $100 gift $ 16 <<-- Cost of making $100 gift

2012 Presidential Candidate Mitt Romney Proposal: ITEMIZED DEDUCTIONS LIMITED TO A MAXIMUM OF $17,000 (or $25,000 or $50,000 or …) BOTTOM LINE: When there is serious tax reform, itemized deductions are the first target.

HOUSE WAYS & MEANS CMTEE: PROPOSALS TO CHANGE CHARITABLE DEDUCTION February, 2013 “Options for Changing the Tax Treatment of Charitable Giving” Eleven proposals – examine impact on : -- charitable giving and -- tax collections

2013 WAYS & MEANS CMTEE: PROPOSALS TO CHANGE CHARITABLE DEDUCTION “FLOOR” PROPOSAL – can only deduct when gifts exceed dollar amount [$500/$1,000 joint] or percent of income [2% of income] “would reduce gifts, but add incentive for increased charitable giving”

THE FEDERAL ESTATE TAX

FUTURE OF ESTATE TAX ? Year Threshold 2001 $ 675, $ 1,000, $ 1,500, $ 2,000, $ 3,500, REPEALED ! [* carryover basis] $ 5,000,000 inflation indexed 2013$ 5,250,000 inflation indexed

Federal Estate Tax Returns Filed 2012 [exclud portab] 8,300 (estim) 26% charit ,000 20% ,700 18% ,000 17% ,900 17% ,780 19% ,200 19%

OTHER TRANSFER TAX RULES Gift Tax -$5 + million inflation indexed GST - $5 + million inflation indexed 40% estate & gift tax rate Portability for married couples permanent