1.  Charitable Giving

2.  Some facts about Charitable Giving (2013) o 95.4% of American households give to charity o Average contribution per household is $2,974 o Total giving was $335.17 billion o Household giving was $241.32 billion (72%) o Bequests were $26.81 billion (8%) o Corporate giving was $16.76 billion (5%) o Foundation giving was $50.28 billion (15%)

3.  More facts about Charitable Giving (2013) o Gifts were made to Religion (31%) Education (16%) Human Services (12%) Grantmaking foundations (11%) o There are approximately 1,536,084 charitable organizations in the U.S.A. o Nonprofits accounted for 9.2% of all wages and salaries paid in the U.S.A.

4.  Charitable Giving and Nonprofit Organizations are big business in the U.S.A. o Qualified charitable giving of any size is fully deductible from income and estate assets. In general the full gift to a charity during one’s life (inter vivos) results in a deduction in taxable income up to the AGI of the individual or couple In genera the full gift to a charity at death (causa mortis) is deductible from the estate assets if the asset is included in the estate  Assets can be split with a portion going to charity

5.  What does it take to qualify an organization as a charity? o Charities are qualified by the Internal Revenue Code (Section 170(c) – most common types State or U.S. possession or any political subdivision Corporation, trust, community chest, or foundation organized for Religious, community service, scientific, literary or education Fostering national or international amateur sports competition Preventing cruelty to children or animals A post or organization of war veterans A domestic fraternal society, order, or association operating a lodge A cemetery company

6.  Examples of Charitable Organizations o Churches, Synagogues, Mosques, etc. o Public Parks (National, State, City, etc.) o Colleges and Universities o United Way o Boy Scouts and Girl Scouts of America o Salvation Army o American Heart Association o American Society for the Prevention of Cruelty to Animals  Listing of Charitable Organizations at IRS Publication 78 with updates both quarterly and weekly via bulletins

7.  Why give to charities (rather, why does your client want to give to charities)? o List three reasons – o Not on the list, tax reduction  How can your client give to charities o Outright cash o Property donation (real, tangible, or intangible) o Service  What is the benefit of the donation? o Altruism – principle or practice of concern for the welfare of others o Side benefit – some tax relief (altruism behavior encouraged by tax codes)

8.  How are the tax benefits calculated? o Gifts of Cash – amount donated less any tangible benefit received by the donor for the donation Buying season tickets to college sports team with “donation” for the seat selection process (80% of donation allowable) Benefit of relatively small value then all donation tax deductible – get a coffee mug for $100 donation to OPB, entire $100 deductible o Gifts of Service Usually only direct out of pocket expenses (not reimbursed) Cost of gas for delivery of meals on wheels Cost of uniforms required for volunteer work

9.  How are the tax benefits calculated (continued)? o Property Gifts -- Generally the fair market value of the gift at the time of donation o Property Gifts that are at adjusted basis Ordinary Income Property Any property that when sold would result in recognition of ordinary income Donation is reduced by the income produced (adjusted basis) Capital Gain Property Fair market value unless donated to nonoperating foundation Property donated for unrelated use o Limitations based on 50%, 30% and 20% AGI rules Skipping this section

10.  Special Giving Vehicle – Charitable Remainder Trust (CRT) o Current benefits of property “retained” by donor o Remainder interest in property donated to charity o Irrevocable trust o Charity is trustee of the trust o Value of donation is fair market value of property minus the beneficiary interest in the trust retained by the donor o Beneficiary interest is usually income and value is present value of income based on estimated life of the donor

11.  Example of basic Charitable Remainder Trust o Claire and Phil want to donate a stock portfolio currently worth $2,000,000 to their university foundation with basis of $500,000 o The trust is set up such that the foundation is the trustee and the remainder beneficiary o Claire and Phil take a beneficiary interest in the portfolio such that it pays an annual annuity of $50,000 to Claire and Phil for the remainder of the longer living spouse o The foundation “manages” the portfolio and as trustee can alter the stocks in the portfolio o At the death of the second to die, the portfolio will transfer to the foundation o What, if any, tax benefit do Claire and Phil get from the CRT?

12.  Example of basic Charitable Remainder Trust continued o The fair market value of the portfolio is established at the time the trust is set up – rules for valuing stock o Value of the annuity is determined by Section 7520 rates (2% for this example) Expected life tables for couple with second in death - note this would be longer than the expected life of either Claire or Phil For example, Claire is 63 and Phil is 61 and actuarial tables have second in death of 33 years Calculation: N = 33 years, I/Y = 2.0%, Payment = $50,000 and Present Value = $1,199,428 Donation benefit is $2,000,000 - $1,199,428 = $800,572 Typically estimated remainder must be greater than 10% of fair market value of donation (here it is 40.0%)

13.  Example of basic Charitable Remainder Trust continued o How are the annual $50,000 payments calculated for Claire and Phil as ordinary income and capital gains? Donation has two elements – sale element and charitable gift element SALE ELEMENT -- PV of annuity minus Pro Rata adjusted basis equals the charitable gift PV annuity = $1,199,428 Pro Rata = $500,000 x ($1,199,428 / $2,000,000) = $299,857 Capital Gain = $1,199,428 - $299,857 = $899,571 CHARITABLE GIFT ELEMENT -- $800,572 Life of Annuity produces, $50,000 x 33 = $1,650,000 Principal $299,857, Capital Gain $899,571, Interest $450,572

14.  Example of basic Charitable Remainder Trust continued Annual $50,000 is what type of income? First calculate annual change in PV for principal reduction – annuity for 33 years vs 32 and difference is principal reduction (amortization schedule) $1,199,428 - $1,173,417 = $26,011 Next ratio of basis and capital gain Basis ratio $299,857 / $1,199,428 = 25% Capital gain ratio $899,571 / $1,199,428 = 75% Interest Earned = $50,000 - $26,011 = $23,989 Capital Gain = 75% x $26,011 = $19,508

15.  Example of basic Charitable Remainder Trust continued o What is the anticipated remainder in trust for foundation? Estimate annual earnings on the portfolio – use an 8% return on stock portfolio Each year $50,000 payout takes place and additional gain (or annual loss) is added to the portfolio With expected payouts for 33 years and market return of 6%, calculate anticipated remainder benefit N = 33 I/Y = 6.0% PV = $2,000,000 PMT = -$50,000 FV = $8,814,022 o A portion of the appreciating assets avoid capital gains tax

16.  Other Trusts o Charitable Remainder Income Trusts o Charitable Remainder Unit Trusts o Charitable Remainder Trusts with Split Interest  Other Issues o Community Property in Wills with charity bequest of property o Life Insurance in Will with charity bequest of proceeds o IRAs in bequest

17.  What are the implications for Financial Planning? o What is the most efficient way to transfer property for the client to their beloved charities? o What potential events to the plan may render the transfer choice ineffective or inefficient? Pre-mature death Asset value changes Cash flow needs of the donor/grantor o Changing tax laws o IRS potential challenges to the transfer o Gift tax changes (size of one time exclusion or annual exemption) o Availability of trust maker to change mind about transfer, both assets and beneficiaries and thus tax implications of trust