1. A PRIMER ON PLANNED GIVING Pathology, February 23, 2011

2. What IS a planned gift? Planned gifts are specially structured charitable contributions that are usually part of an individual’s overall financial and/or estate plan. Planned gifts often provide tax and other financial benefits allowing him or her to make a larger gift than otherwise thought possible.

3. Common Types of Planned Gifts  Gifts of remainder interest  bequests (trust or will, specific or %)  beneficial designations of retirement plans  life insurance (UM named as beneficiary)  Life income agreements  charitable gift annuities  charitable remainder trusts  Other  charitable lead trusts  charitable IRA rollover

4. Life Income Gifts  Gift made now pays income to one or more beneficiaries  Michigan does not receive benefit until contract the passing of last named beneficiary or end of specified term of years  Irrevocable  Current partial income tax deduction; capital gains tax savings, possible estate tax savings

5. CHARITABLE GIFT ANNUITIES … easy & popular!

6. Charitable Gift Annuity  A contractual agreement between the individual(s) and UM that, in exchange for a donation of cash or securities, the UM will pay the donor (or others) a fixed dollars amount for life  Suggested maximum annuity rates from the American Council on Gift Annuities  Backed by CGA reserve pool and general revenues of the University.

7. Charitable Gift Annuity  Benefits--  Fixed, guaranteed income for life of the annuitant(s)  Income tax deduction in the year it’s created, and may reduce estate taxes  Generally a portion of the payment is tax-free  Can be funded with appreciated stock (partial avoidance of capital gain)  Can defer annuity payments into the future (good retirement planning tool if other retirement plans maxed out)  Can decide when payments start and amount (flexible CGA)

9. Charitable Gift Annuity Bob and Mary Donor, ages 72 and 74, donate $25,000 in cash for a gift annuity.  Annual income: $1,400 (5.6%)  Charitable Income tax deduction: $6,462.50  Tax-free portion of annuity: $1,024.80  Ordinary income portion of annuity: $375.20

10. Charitable Gift Annuity Same example, but donation of $25,000 of appreciated stock with a cost basis of $10,000 and a dividend yield of 2%.  Annual income: $1,400 (5.6%)  Income tax deduction: $6,462.50  Tax-free portion: $257.26  Capital gain: $767.54  Ordinary income: $375.20  Increased annual income: $900 (compared with dividend from stock; before taxes)

11. Deferred Charitable Gift Annuity (the “charitable IRA”) Jenna Russ, age 58, contributes $50,000 in cash to Michigan in exchange for a gift annuity with payments to start in seven years, when she plans to retire. Because she is making the contribution now and does not receive payments for several years, she is entitled to a higher annuity rate when annuity payments begin.

12. Deferred Payment Charitable Gift Annuity  Annual income (age 65): $3,700  Income tax deduction: $9,995.50  Tax-free portion of annuity: $2,009.10  Ordinary income portion of annuity: $1,690.90  Additional benefits:  Higher fixed income when needed  Current Income Tax deduction when needed

13. U-M CGA Acceptance Criteria  Minimum amount: $10,000.  Minimum age of annuitant when payments begin: 50  Target annuitant age: 65+  Maximum number of annuitants: 2  Maximum annuity rate: ACGA rates  Acceptable contributions: cash; marketable securities

14. CHARITABLE REMAINDER TRUSTS …Powerful and Sophisticated – a great planning tool!

15. Charitable Remainder Trust  A trust arrangement between the donor and a trustee chosen by the donor (may be Michigan)  The trust pays “income” to the donor or to beneficiaries the donor designates  When the last beneficiary passes, the principal balance is distributed to the designated charities.  Two primary types:  Charitable Remainder Unitrust (variable)  Charitable Annuity Trust (fixed)

16. Charitable Remainder Trust  Benefits--  Income (or estate) tax deduction to the donor in the year the trust is funded  Income stream to the donor and/or other beneficiaries for life or a term of years  Can name multiple charitable beneficiaries  With unitrust, can benefit from investment growth of the trust assets (including U-M endowment investment returns – more later!)  Avoid realizing capital gains on donated assets

18. Charitable Remainder Trust Comparison with Charitable Gift Annuity  Requires trust document, drafted by attorney  Requires trustee to manage and administer trust  Provides for more flexibility (income beneficiaries, term, income stream)  Provides opportunity for growth in income stream (CRUT – income and charitable beneficiaries share investment risk)

19. Charitable Remainder Trust Comparison with Charitable Gift Annuity (cont’d):  Payments from trust assets, not university’s assets  Taxation of beneficiary’s distributions depend upon type of income in the trust

20. Charitable Remainder Annuity Trust (CRAT)  Pays fixed amount over life of trust (payout rate x initial funding amount)  Minimum payout rate of 5%  Life of income beneficiary(ies) or fixed term (20 years max), or combination  No additional contributions allowed

21. Charitable Remainder Unitrust (CRUT)  Pays variable amount over life of trust (payout rate x value of trust as determined annually)  Minimum payout rate of 5%  Life of income beneficiary(ies) or fixed term (20 years max), or combination  Can make additional contributions

22. Advantages and Risks of CRUT over CRAT  CRUT provides hedge against inflation  additional contributions allowed (and get additional tax deduction) without establishing another trust  Can get more creative with other funding assets  Risk: income payments can go down (both UM and income beneficiaries share risk!)

23. CRUT’s Appeal To Individuals Who:  Want to keep up with the market/inflation  Have appreciated, low-yielding assets  Need planning flexibility  Can donate $100,000 (or more)  Have some investment risk tolerance  Are concerned about asset management  Hold assets like appreciated property, unimproved real estate, closely-held stock, cash

24. MICHIGAN ENDOWMENT RETURN STRATEGY (MERS)

25. What is MERS?  Investment approach for U-M charitable remainder unitrusts (CRUTs)  Invest CRUT assets alongside endowment funds in the university’s Long Term Portfolio (LTP)  Trust benefits from asset diversification and investment expertise

26. Advantages of MERS  Historically more return for less risk  Greater remainder benefit for UM & greater life-time cash flow for income beneficiaries  Access to asset classes not generally or previously available to trusts (especially those smaller in size), i.e., private investments and absolute return investments  Investment management by Michigan’s Investment Office.

27. U-M CRT Acceptance Criteria  Minimum amount: $100,000  Minimum age of income beneficiary: 50 (unless term- of-years trust)  Minimum amount of remainder to U-M: 51%; $100,000 (except MERS, must be 100%)  Maximum payout rate: rate at which PV of remainder is at least 50% of funding amount (guideline: 10% of youngest beneficiary’s age, or 6% for a 60 year-old)

28. Charitable Remainder Unitrust Taking Care of Family Bob and Mary Wolverine want to help their daughter Kathy with their 13 year-old grandson’s college education. They would also like to create a research fund the U-M Cancer Center. They have a portfolio of highly appreciated but low yielding securities they would like to put to better use.

29. Charitable Remainder Unitrust Taking Care of Family Bob and Mary contribute $250,000 in securities with a cost basis of $100,000 to a charitable remainder unitrust that will pay 5% to Kathy for 10 years. At the end of the 10-year term, the remainder will go to the Cancer Center to establish a research fund in their names.

30. Charitable Remainder Unitrust Taking Care of Family  Total after-tax income to Kathy: $135,069  Income tax deduction for Bob and Mary: $150,845  Remainder to Cancer Center for research fund: $370,061  Total benefit from $250,000 contribution: $505,130 Assumes constant annual investment returns of 9% within trust and that Kathy’s income tax bracket is 10%, 10% for capital gains. There may be gift tax implications. Bob and Mary should consult with their professional tax advisor before completing this transaction.

31. Charitable Lead Annuity Trust  Donation of cash or other property to qualified, taxable charitable lead annuity trust  Fixed annual payments to Michigan for a term of years.  At end of term, remainder passes to others, usually heirs (non-grantor)  No income tax deduction, but significant gift tax deductions possible – can eliminate tax on transfer

32. Proving for a current gift….and transferring assets to others Ellen and Jack are likely to have a taxable estate. They are maximizing their annual gifts to their children ages 38 and 35 but do not want them to get too much too quickly. They are also interested in establishing a fund to support internships for U-M students to do community service projects.

33. Charitable Lead Annuity Trust Ellen and Jack contribute $1,000,000 in securities with a $650,000 cost basis to a charitable lead annuity trust paying 7% annually to U-M for 15 years. Assumptions:  Trust earns 8% (3% income; 5% appreciation)  Ellen and Jack are in the top tax bracket (current tax rates)  Ellen and Jack have made no taxable gifts

34. Charitable Lead Annuity Trust  Total amount to Michigan: $1,050,000  Total amount to children: $1,271,521  Total benefit from plan: $2,291,521  Total gift tax paid on amount to children: $0  Note: gift tax deductions greater during periods of low interest rates – like now!

35. Renewal of Charitable IRA Rollover Opportunity to make tax-free donations of IRA funds to qualified charities  Minimum donor age: 70 ½  Direct transfer from IRA account to charity  Only IRAs (not 401(k) or 403(b))  Maximum charitable distributions: $100,000 per year  Expires December 31, 2011

36. In Summery….. Planning options for….  Financial Stability/Income  Charitable Gift Annuity  Charitable Remainder Unitrust/MERS  Secure Future Income  Deferred Payment Gift Annuity  Transferring Wealth  Charitable Lead Annuity Trust  Maximum Flexibility  Bequest  IRA/Retirement Plan Beneficiary Designation

37. Questions?