“Update on Planned Giving Tax Strategies”

1. “Update on Planned Giving Tax Strategies” Hampton Roads Gift Planning Council January 9, 2014 Mike Kirkman, Partner National Leader - Estate, Gift and Trust Services

2. Items to cover • Top Planned Giving Techniques – 2013 • Charitable Stats from 2012 • Impact of “NEW” tax law on Planned Giving • Charitable Trusts – What to do when they have run their course?

3. Planned Giving Techniques • Outright Gifts • Life Insurance Proceeds • Retention of a Life Interest • Donor Advised Fund • Charitable Gift Annuity • Charitable Lead Trusts • Charitable Remainder Trusts

4. Charitable Giving 2012 (billions) • Individuals - $228.93 72% • Foundations - 45.74 14% • Bequests - 23.41 7% • Corporations - 18.15 6% • Total - $316.23 100% • Source: IRS & Giving USA Foundation

5. Charitable Giving 2012 – Change over 2011 • Individuals - 3.9% • Foundations - 4.4% • Bequests - (7.0)% ** • Corporations - 12.2% • Overall 3.5% • Source: IRS & Giving USA Foundation ** I will comment later on this.

6. Charitable Giving Sectors (Billions) - 2012 • Religion- $101.54 [32%] • Education- $41.33 [13%] • Human Services- $40.40 [13%] • Public Society/Benefit- $21.63 [7%] • Health- $28.12 [9%] • Arts, Culture, and Humanities- $14.44 [5%] • International Affairs- $19.11 [6%] • Environment/Animals- $ 8.30 [3%]

7. Individual Giving – % of Disposable Income (40 years) Disposable Income – As defined by Bureau of Economic Analysis (US Department of Commerce) • 1972- 2.2% • 1982 - 2.0% • 1992 - 1.8% • 2002 - 2.2% • 2012 - 1.9% • Source: Giving USA Foundation

8. 2012 Itemized Deductions - Virginia • # of Returns - 3,801,986 • # Itemized - 1,513,949 • # Claiming Charitable - 1,236,419 • Value of Charitable Deduction- $5,351,793,000 • Source: IRS

9. Charitable Receipt Changes Percentage of responding organizations reporting change in charitable receipts by year, 2001 through 2012 Source: Nonprofit Research Collaborative

10. Charitable Receipts – 2013 projected Anticipated direction of change in charitable receipts, 2013 compared with 2012 Source: Nonprofit Research Collaborative

11. Impact of New Tax Law on Charitable Giving • 3.8% surtax –Net Investment Income Tax (NIIT) • Taxpayers seek deferral techniques • Fiduciaries face dilemmas • Charitable Trusts – Opportunity

12. Impact of Charitable Giving - Estate & Gift Tax • Exemption • $5 million (indexed to inflation) • $5.34 million for 2014 • Top Rate • 40% • Portability • Allows Surviving Spouse to use Deceased Spouse Unused Exemption

13. Individuals • New 39.6% rate applies… • MFJ > $450k AGI • Singles > $400k AGI • HH > $425k AGI • MFS > $225k AGI • Medicare 3.8% Surtax * applies… • Taxpayers MAGI > $200k/$250k • Net Investment Income • Supplemental Medicare Tax * .9% applies… • Taxpayers MAGI > $200k/$250k • Part of FICA (Hospital Insurance Tax) * The Patient Protection and Affordable Care Act

14. Individuals- cont. • “High Income” taxpayers $400k/450k • Capital Gain/Qualified Dividends – 20% vs. 15% • Results – 23.8% tax on LTCG/QD • Personal Exemption Phase-out/Pease Limitation • Limits deduction for personal exemption and itemized deductions • MFJ > $300k AGI • Single > $250k AGI • HH > $275k AGI • MFS > $150k AGI

15. Individuals – cont. Pease Limitation • Couple has $670,000 AGI & $45,000 itemized deductions • Thresholds - $250K (single) & $300K (MFJ) • Itemized deductions reduced to $33,000 • Mortgage interest - $5,000 • Property taxes - $5,000 • State income taxes - $20,000 • Charitable deduction - $15,000 • Reduced by lesser of: • 3% x $400K ($700K - $300K) = $12K • 80% x $45K = $36K

16. Tax Rate Changes • Since 1913 – How many rate changes have we had? • Hint: Avg. of more than one every 3 years • How many changes were increases/deceases? • Do rate increases follow decreases? • Economists – 60% probability of change in same direction • 2 periods of steeply declining rates • 1942 – Executive Order – 100% tax on salaries > ?

17. Tax Rate Changes – Impact on Charitable Giving • Discretionary Trusts • Top Rate 39.6% - > $11,950 Taxable Income • Net Investment Income Tax – 3.8% • 65 Day Rule

18. Mitigating the 3.8% Surtax -Charitable Trust • Avoiding the Surtax – 3.8% • Pre 2013 - Charitable Remainder Trust • 2013 Charitable Trust • Why It Works… • Let’s look at an example….

19. Mitigating the 3.8% Surtax -Charitable Trust (cont.) • Donors – Couple age 65/64 • Contribution - $1 million • Term – Life • Jan 2014 AFR – 2.2% (higher the better) • Annuity payout - 5% ($50,000 per year) • Charitable deduction - $108,111 • What if…annuity could be pushed out?

20. Mitigating the 3.8% Surtax -Charitable Trust (cont.) • Charitable Remainder Trust – Net Income Make-Up • NIMCRUT • Distribution • Required - 5% of trust assets FMV • If trust accounting income < 5%...then… • Deficit is accumulated for future years • Why is this a good thing?

21. Charitable Trust – End of the Road • Facts: In 1990 Tom (72) and Betty (68) established a CRAT. • $1 million @ 6% annuity, lifetime • Now in 2014 – Tom and Betty don’t need annuity income. • What options are available?

22. Charitable Trust – End of the Road (cont.) • Terminate The CRT • Assign the income interest • Divide up CRT assets • Caution! – Must follow rules (Tax and Legal) • Any other options?

23. Charitable Trust – End of the Road (cont.) • Consider a “Sale of Income Interest” • Is there a Market? • Income beneficiary has “capital gain” • Trust typically continues • Risk is shifted to buyer

24. Conclusion • Tax law does impacts charitable giving • Planning for the 3.8% • CRTs are not bad options • Charitable trusts DO have an exit strategy

25. Happy New Year! Thank You!