1 Leveraging Generosity Beyond Giver Expectations: Strategic Case Studies Advisors in Philanthropy Conference April , 2015 Michael King, J.D. V.P., Gift Planning Services (678)

2 Grow giving by converting tax dollars to giving dollars. Taxes Giving Lifestyle / Savings Give more, pay less tax

3 Maximize charitable giving, minimize taxes 1.Do NOT Pay Estate Tax 2.Maximize Annual Charitable Income Tax Deductions 3.Avoid Capital Gain Tax Upon Sale of Appreciated Assets 4.Leverage Tax Benefits Beyond 30%/50% AGI Giving

4 Maximize charitable giving, minimize taxes 1.Do NOT Pay Estate Tax 2.Maximize Annual Charitable Income Tax Deductions 3.Avoid Capital Gain Tax Upon Sale of Appreciated Assets 4.Leverage Tax Benefits Beyond 30%/50% AGI Giving

5 Maximize charitable giving, minimize taxes 1.Do NOT Pay Estate Tax 2.Maximize Annual Charitable Income Tax Deductions 3.Avoid Capital Gain Tax Upon Sale of Appreciated Assets 4.Leverage Tax Benefits Beyond 30%/50% AGI Giving

6 The Problem with How We Give What we haveWhat we give

7 Maximizing Annual Charitable Deductions The Objective: - 50% AGI Deduction for Cash Gifts - 30% AGI Deduction for Non-cash Gifts Minimize Income Tax Liability on an Annual Basis and over the Lifetime of the Taxpayer. Take Full Advantage of the Charitable Income Tax Deduction Benefits Provided by the Tax Laws.

8 Appropriate Assets for Consideration: Business Interests –S Corporations –C Corporations –Limited Liability Companies –Partnerships Real Estates Marketable Securities Cash Maximizing Annual Charitable Deductions

9 “Charitable Shareholder” Strategy Gifts of privately-owned business interests

10 Immediate (and maximum) charitable income tax deduction Reduced income tax liability on annual operating income Avoided / reduced income tax liability upon ultimate sale of business Three distinct tax benefits Maximizing Annual Charitable Deductions

11 1 Annual adjusted gross income (AGI): $1,000,000 2 Current charitable giving: $100,000 3 Tax rates Ordinary income: 44.6% Capital gain: 25% 4 Business fair market value: $10,000,000 Prescription: Leveraged Giving Gift of pharmaceutical distribution company 11

12 $1M Income $401,400 Taxes $498,600 $100,000 $10M Business 12 Current Situation: 10% AGI Giving Lifestyle, Investment, etc. Charity

13 What’s Wrong with This Picture? Government Pay 4 times more in taxes then give to charity Government 2 Charity 1 $100,000 charitable gift vs. $401,400 of taxes 1 2

14 $1M Income $267,600 Taxes $133,800 Personal Income Tax Savings $133,800 Personal Income Tax Savings $300,000 (30% of AGI) Solution: 10% to 40% AGI Giving $10M Business NCF Giving Fund Donor Advised Fund Proposed Business Interest Gift $632,400 $100,000 Lifestyle, Investment, etc. Charity

15 Maximizing Charitable Deductions 50% AGI Total Giving 10% AGI cash gifts (current giving) 30% AGI business interest gift 10% AGI cash gifts (tax savings from gift of business)

16 $1M Income $223,000 Taxes $178,400 Personal Income Tax Savings $178,400 Personal Income Tax Savings Solution: 40% to 50% AGI Giving $10M Business NCF Giving Fund Donor Advised Fund $300,000 (30% of AGI) Business Interest Gift Cash Gift from Tax Savings $100,000 (10% of AGI) $577,000 $200,000 Lifestyle, Investment, etc. Charity

17 $1M Income $223,000 Taxes DOUBLE CASH GIVING DOUBLE CASH GIVING “Double Cash” Solution: 40% to 50% $10M Business NCF Giving Fund Donor Advised Fund $300,000 (30% of AGI) Business Interest Gift Cash Gift from Tax Savings $100,000 (10% of AGI) $577,000 $200,000 Lifestyle, Investment, etc. Charity

18 Government Pay 4 times more in taxes then give to charity Government 2 Charity 1 $100,000 charitable gift vs. $401,400 of taxes 1 2 Misalignment: Giving and Taxes

19 Heart Alignment: Giving and Taxes 1 2 Government 2 Charity 1 Before $100,000 charitable gift vs. $401,400 of taxes After $500,000 charitable gift vs. $223,000 of taxes Charity Government

20 Observations 1 30% AGI gift generally requires a gift of 2% to 4% of the value of the giver’s business 2 Value of business generally increases at a higher rate, therefore, only giving a portion of the annual appreciation to charity 3 Additional tax benefits realized from annual income and upon eventual sale of the business 20 4 Most families make repetitive gifts on an annual basis

21 Technical Issues and Considerations Charitable entity Private foundation v. donor advised fund/public charity Trust v. corporate entity structure Nature of business entity Generally give non-voting / non-controlling interests Charitable income tax deduction Fair market value -- valuation discounts; put option Qualified appraisal “Hot assets” Excess business holdings Recommended 5% distribution Unrelated business taxable income (UBTI)

22 Maximize charitable giving, minimize taxes 1.Do NOT Pay Estate Tax 2.Maximize Annual Charitable Income Tax Deductions 3.Avoid Capital Gain Tax Upon Sale of Appreciated Assets 4.Leverage Tax Benefits Beyond 30%/50% AGI Giving

23 Give Before Sale Secure Charitable Deduction and Avoid Capital Gain Tax Assets to Consider: Marketable Securities Real Estate Privately-Owned Businesses Consider Split-Interest Arrangements: Charitable Remainder Trusts Charitable Gift Annuities

24 Give then Sell Strategy Real Estate 24

25 Assumptions 1 Fair Market Value: $2,500,000 2 Adjusted Basis: $500,000 3 Tax Rates Ordinary Income: 46.05% Capital Gain: 26.45% Depreciation Recapture: 31.45% Obamacare Medicare Tax: 3.8% 4 Intended Charitable Gift: $500,000 Give Fresh! Valuation Discount: 10% 5

26 $0 Charity $655,000 Taxes Base Case: “No Gift” Buyer Sale $2,500,000 Proceeds $1,845,000 Family Real Estate $2.5m Real Estate $2.5m

27 Scenario 1: “Gift after Sale” $369,000 Charity $485,076 Taxes $1,645,925 Family  After sale, gift 20% of after-tax proceeds = $369,000 ($500,000 - $131,000 of capital gain tax)  $369,00 cash gift saves the Giver $169,925 in taxes  After sale, gift 20% of after-tax proceeds = $369,000 ($500,000 - $131,000 of capital gain tax)  $369,00 cash gift saves the Giver $169,925 in taxes Assumptions $2,500,000 Proceeds $169,925 Total Tax Savings $169,925 Total Tax Savings Real Estate $2.5m Real Estate $2.5m

28 $1,683,225 Family  20% gift before sale = $500,000 to charity  Giver’s charitable deduction reduced by 10% valuation discount ($500,000 - $50,000 = $450,000)  Gift before sale saves the Giver $338,225 in taxes $207,225 deduction tax savings $131,000 avoided capital gains tax  20% gift before sale = $500,000 to charity  Giver’s charitable deduction reduced by 10% valuation discount ($500,000 - $50,000 = $450,000)  Gift before sale saves the Giver $338,225 in taxes $207,225 deduction tax savings $131,000 avoided capital gains tax Assumptions $338,225 Total Tax Savings $168,301 Tax Savings from Giving Before Sale $338,225 Total Tax Savings $168,301 Tax Savings from Giving Before Sale $500,000 Scenario 2: “Gift before Sale” $316,775 Taxes $2,500,000 Proceeds Donor Advised Fund Real Estate $2.5m Real Estate $2.5m ($450,000 Charitable Deduction)

29 Scenario 3: The “Three Bucket” Approach Family $ 500,000 $ 1,000,000 20% 40% Donor Advised Fund Real Estate $2.5m Real Estate $2.5m Charitable Remainder Trust ($450,000 Deduction) ($90,000 Deduction)

30 Tax Treatment Upon Sale CRT Buyer No Tax Capital Gain Taxed at 32.75% (but $540,000 of deduction) Donor Advised Fund

31 The Charitable Remainder Unitrust Charitable Remainder Trust After Death Initial Unitrust Payout -- $95,880 During Life Assumptions: Ages – 62, 60 Unitrust Payout – 9.588% 7520 Rate – 2.4% Assumptions: Ages – 62, 60 Unitrust Payout – 9.588% 7520 Rate – 2.4% Real Estate $1M Real Estate $1M Buyer Donor Advised Fund

32 Charitable Gift: Comparison Results $1.845m $1.646m $1.683m $1.897m* Family Current: (No Charitable Gifts) Scenario 1: (Sell then Give 20%) Scenario 2: (Give 20% then Sell) Scenario 3: (20% Gift/ 40% CRT/ 40% Retained) Totals $0 $369k $500k $590k** Charity Taxes $655k $485k $317k $13k * This amount includes the after-tax proceeds retained directly by the family, and the present value of the CRT annual payments paid over the donors’ joint lifetimes. ** This amount includes the outright charitable gift, and the present value of the CRT charitable remainder interest.

33 Maximize charitable giving, minimize taxes 1.Do NOT Pay Estate Tax 2.Maximize Annual Charitable Income Tax Deductions 3.Avoid Capital Gain Tax Upon Sale of Appreciated Assets 4.Leverage Tax Benefits Beyond 30%/50% AGI Giving

34 Move Income to a Tax-free or Tax-deferred Environment Move assets from the taxable side of the fence to the tax-free or tax- deferred side of the fence Ultimately, one’s annual income tax bill can be commensurate with lifestyle spending

35 1 Estate valued at $1.5 billion, with the publicly- traded stock representing about $1.2 billion 2 Estate plan: $750 million to children, $750 million to charity 3 Husband built business that eventually went public Tax Savings Beyond 30%/50% AGI Giving Concentrated Publicly-traded Stock 35 Annual adjusted gross income in excess of $30 million Charitable giving equals or exceeds 50% of AGI 5 4

36 Off-line Giving Strategies Strategies for Giving Champions (50%+ AGI Givers) Strategies for a “No Charitable Deduction” Environment Faucet Net Income with Make-up Charitable Remainder Unitrust (NIMCRUT) Non-Grantor Charitable Lead Trust (CLT) Gifts of Income Producing Assets Exempt from Unrelated Business Taxable Income (UBTI) Investing through Private Placement Deferred Annuities (PPDA)

37 Faucet Net Income with Make-up CRUT Asset LLC Donor Advised Fund CRT - Deduction - Gain deferral upon sale - Defer tax on income - Distribute as desired - Stockpile tax free - Discretionary gifts to charity - Exceed 50% AGI limit - Future deduction for gift of income interest - Preserve excess charitable deductions Buyer up to 90% of income 10%+ income

38 Faucet CRUT Publicly-traded Stock with 3.3% Dividend Asset LLC Donor Advised Fund CRT Joint CRUT—Ages 76 and 74 Joint Life Expectancy—15 Years 7520 Rate—2.4% Total Return—8% Dividend Yield—3.3% Appreciation—4.7% Growth in Dividend—2% Tax Rate—28.7% Federal—20% State—4.9% Net Investment Income—3.8% $100M $3.3M Dividends (3.3% Yield) 5% Unitrust Payout Charitable Deduction--$48M Charitable Remainder-- $317M (15 Years) Dividend Income--$57M Tax Savings--$16.4M

39 Non-Grantor Charitable Lead Trust Charitable Lead Trust Upon Expiration of Term Annual Lead Payment to Charity During Term Income Producing Asset Giver Donor Advised Fund Income Remainder Interest to Children If charitable lead payment is equal to or greater than income, CLT avoids income tax, essentially providing a 100% AGI charitable deduction.

40 Non-Grantor Charitable Lead Trust Publicly-traded Stock with 3.3% Dividend Charitable Lead Trust Upon Expiration of Term Lead Payments to Charity: Annual--$6.235M 20 Year Term--$125M During Term Income Producing Asset Giver Donor Advised Fund Income Remainder Interest to Children--$180M $100M $3.3M Dividend (3.3% Yield) Income Tax Avoided--$36M: Dividends--$23M Capital Gains--$13M Term—20 Years 7520 Rate—2.2% Total Return—8% Dividend Yield—3.3% Appreciation—4.7% Growth in Dividend—2% Tax Rate—28.7% Federal—20% State—4.9% Net Investment Income—3.8%

41 Donor Advised Fund Marketable Securities Real Estate Oil and GasIntellectual Property Interest, Dividends, and Capital Gains Royalties Rental Income Non-UBTI Producing Assets

42 Non-UBTI Producing Assets Rental Income Large distributor of Fortune 100 company’s products Warehouse facilities and office building owned by the owner and leased to the company Real estate unencumbered, valued at $18 million, and produces $1.5 million in annual rental income Giver’s tax rate is 48.65% on rental income Charitable giving equals or exceeds 50% of AGI Gift of real estate: Avoid $729,750 of tax on annual rental income Over 10 years – avoid over $7 million in taxes

43 Donor Advised Fund Marketable Securities Real Estate Oil and GasIntellectual Property Interest, Dividends, and Capital Gains Royalties Rental Income Non-UBTI Producing Assets

44 Non-UBTI Producing Assets Royalty Income Commercial security related business Numerous patents related to security products Four related business entities One LLC entity owns all of the intellectual property Annual adjusted gross income of $6 million $1 million representing royalty income to the IP entity Reverse tither—give 90% of income each year, live on remaining 10% Charitable gift of 99% interest in IP entity to charity (donor advised fund) Fairness opinion: reasonable royalty payments could be tripled to $3 million Giver’s tax rate is 43.4% on royalty income Avoid $1.3 million on annual royalty income Over 10 years – avoid over $13 million in taxes

45 After Death Assets distributed to charity Tax deferred income becomes tax avoided During Life Assets available to giver (taxed upon distribution) Income otherwise deferred Marketable Securities Giver Donor Advised Fund Private Placement Deferred Annuity Private Placement Deferred Annuity

46 Maximize charitable giving, minimize taxes 1.Do NOT Pay Estate Tax 2.Maximize Annual Charitable Income Tax Deductions 3.Avoid Capital Gain Tax Upon Sale of Appreciated Assets 4.Leverage Tax Benefits Beyond 30%/50% AGI Giving

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