2013 Western Regional Planned Giving Conference

1. 2013 Western RegionalPlanned Giving Conference Primer Section III: Irrevocable Planned Gifts Charitable Gift Annuities LIFE INSURANCE CHARITABLE TRUSTS Suzanne Zolfo, cspg

3. Party at 6:00 if you stay awake!

4. Charitable Gift Annuity Very common irrevocable planned gift Easy for a donor to understand and fund Any charity can offer them, either independently or through a community foundation

6. Basic Elements of a CGA Contract • Donor • Charity • Income beneficiary name, birthdate, age to nearest birthday & address • Gift date • Fair market value of gift • Annuity amount • Date payments commence, frequency, method, any prorated amount • Statement that gift is irrevocable and non-assignable • Termination • Gift designation • Power to revoke payments (2 life) • Governing law (state) • Signatures of donor and an authorized signer of charity

9. Deduction & the AFR • 2 parts of deduction: immediate and tax-free income • Amount is determined by IRS formula where a variable is the AFR • 5-year carry forward to use up the immediate part of the deduction if they can’t use it all in one year • If they don’t itemize and there are no special circumstances, probably will want more tax-free income • Must discuss this with the donor before you draw up documents • Only need signed election document if they choose other than the current month

10. What is the AFR? • The Treasury Department issues the Applicable Federal Rate, or AFR, every month. • The AFR, sometimes also called the Rate of the Month, represents 120% of the interest rates paid on medium term (3-9 years) government securities. • Sec. 7520 of the Internal Revenue Code allows donors to elect either the AFR in effect for the month in which the gift is made or for either of the two preceding months. • Generally, a higher AFR will produce a higher immediate income tax deduction for charitable gift annuities.

11. Additional Contract Documents • Attachment to Schedule A, for donor’s tax return – so make it useful • These elements not set in stone, but should be spelled out in your gift annuity policies & procedures • Donor name, address & SS# • Principal donated and asset (stock, cash, real estate, etc.) • AFR and month • Deduction being claimed • AFR Election, if required • Statement explaining AFR – this protects YOU! • Month and AFR selected • Donor signature • From Donor/Income Beneficiary (good ideas, not required in CA) • Photo ID with date of birth and address • Bank account info for direct deposit payments (voided check)

12. Types of Annuities • Immediate • 1 or 2 income beneficiaries • If 2, concurrent or successive • Deferred • Fund now, must wait at least 1 year to start payments • Choose a date in the future when payments begin • Get a higher rate based on how long you defer • Deduction based on deferral period, use a current AFR • Good way to set up income for retirement

13. Types of Annuities (cont.) • Tuition or Commuted Payment • A 1-life deferred annuity, usually funded by parent, grandparent or guardian, for a young child • Donor defers payments until child is 18 • Child has option before payments begin to either elect lifetime payments or much larger “commuted value” payments over a period of 4-5 years, as spelled out in the contract, then the contract terminates • If lifetime payments are elected, the rate would be very low because the income beneficiary is so young • With a low AFR, may have to reduce the annuity rate to get the annuity to qualify for the deduction under the 10% rule: there must be at least a 10% residuum calculated for the charity

14. Types of Annuities (cont.) Flexible Deferred • Like a deferred, but choose a “target date” with earliest and latest dates selected • Deduction based on target date • If payments begin between earliest and target dates, then lower rate than planned; later date, higher rate • Inform charity prior to first payment date desired (put timing in your policies & procedures) • Good option if donor has not decided when to retire, or just to give more flexibility in their planning

15. Gift Tax Implications Gift tax implications depend on: • who owns the gifted property • whether or not it is appreciated, long-term property, and, • who the annuitants are Be aware of gift tax when spouses fund with separate property, or when donor funds an annuity for anyone other than themselves or spouse. Scenario 1: donor funds with separate property and spouse receives annuity first, then donor • Gift tax is an issue when the marital deduction does not apply, but for spouses, it usually does. • This circumstance is the exception: But this does qualify for the annual gift tax exclusion, $14,000 in 2013, which can be applied to the annual payments.

16. Gift Tax Implications (cont.) Scenario 2: Donor is first annuitant, then someone other than spouse. Annual gift tax exclusion does not apply as the gift is of a future interest – so the current gift tax due However, the Donor can reserve the right to revoke annuity interest by will in the contract, making the gift incomplete – then current gift tax is due on the income as it is paid out to the second annuitant, and it qualifies for the annual gift tax exclusion Scenario 3: Donor funds for someone other than spouse Gift tax is due on present value of annuity But this does qualify for the annual gift tax exclusion of $14,000 In addition, the donor can reserve the right to revoke annuity interest by will in the contract – then the gift that is reportable is only the present value for the donor’s life expectancy

17. Gift Tax – The Reality The good news about gift tax: The marital exclusion almost always applies for spouses and is unlimited The lifetime exclusion in 2013 is $5,250,000 The annual exclusion in 2013 $14,000 You are probably not an accountant or tax advisor, so you should NOT be calculating gift tax due for your donors Be aware of it and know to advise your multi-millionaire donors who you think have exceeded their lifetime gift tax exclusion to get tax counsel SO, IN REALITY… You will probably never have to deal with this!

18. CGA Prospects AGE • Average age of annuitants for immediate gift annuities: 79 • Average age of annuitants for deferred gift annuities: 64 78% of charities report having a minimum age for annuitants • 57% require a minimum age of 60 or older for an immediate annuity • 28% require annuitants be 65 or older to begin receiving payments on a deferred annuity, and 26% stated age 60 for the same Source: ACGA Survey of Charitable Gift Annuities, 2009

19. Minimum Funding Amount 55.1% of charities require a minimum contribution of $10,000-$25,000, 29.6% require $5,000-$9,999 For subsequent contributions from the same donor for an immediate annuity, 39.3% of charities require a minimum of $10,000-$25,000, and 38.5% require a minimum of $5,000-$9,999 Results were about the same for deferred annuities Average size of gift annuities among charities nationwide is $43,371 Source: ACGA Survey of Charitable Gift Annuities, 2009

20. Life Insurance EASY GIFT TO GIVE, IF CERTAIN CRITERIA ARE MET MAY REQUIRE ADMINISTRATIVE WORK FOR THE CHARITY NEED TO HAVE GOOD POLICIES AND PROCEDURES IN PLACE

21. Donor Retains Ownership of Policy Revocable gift Donor makes charity beneficiary of the policy No administration for charity No current tax advantage for the donor Policy payout is excluded from the estate at death Charity determines how to recognize gift from donor as a revocable gift Insurer can provide the value of the policy at any time

22. Donor Transfers Ownership of Policy If Donor gives ownership of policy to charity, it is an irrevocable gift Paid-up policy donated to charity: Wait until insured passes to receive payment, OR, Cash out the policy when donated Gift value is as of the date it is transferred to the charity, donor gets tax deduction for that amount

23. Charity Owns Policy 2 Scenarios if premiums are still payable: Donor does not want to pay premiums (if any due) so charity must decide whether to continue to pay premiums out of reserves or cash it out – gift value is what policy is worth when it transfers to charity Donor continues to pay premiums and charity holds policy – donor gets deduction for each payment made since it goes to the charity, so gift value is what the policy is worth when transferred to charity PLUS the premium payments as they are made

24. Life Insurance Administration If donor is paying the premiums and charity is the owner, Development and Finance must have tight procedures in place to administer Premium bills will go to the charity to pay, have them come into Development Charity pays premiums (via Finance dept) Send a reminder to the donor to make the donation to offset the premium (include proof of payment) When donation is received, send acknowledgement to donor – full amount is tax deductible Make sure at least 2 people in Development are aware of the donor, the premium amounts and the timing of payments so premiums do not get overlooked

25. Charitable Trusts COMPLEX GIFTS REQUIRE DONOR TO HAVE COMPETENT ESTATE, FINANCIAL AND TAX COUNSEL REQUIRE CHARITY TO HAVE COMPETENT COUNSEL AND ASSET MANAGEMENT REMAINDER AND LEAD TRUSTS

26. Acronyms from Hell CRUTCRAT CLUT CLATNICRUT NIMCRUTFLIP NIMCRUT

27. Charitable Remainder Trusts Charitable Remainder Unitrusts (CRUTs) Pay non-charitable beneficiaries for lifetime or term of years and remainder goes to charitable beneficiaries Donor receives deduction at time of donation, taxation of payments depends on investments Can add to the principal Pay a set percentage of the trust balance as of January 1 each year Must meet IRS test to qualify for deduction

28. Charitable Remainder Trusts (cont.) Charitable Remainder Annuity Trusts (CRATs) Similar to CRUTs, but: Pay a set dollar amount each year, regardless of portfolio performance of the trust Cannot add assets to a CRAT These trusts are the ones that run out when paying more than they are earning for a long time Usually not a good idea unless the non-charitable beneficiaries are elderly and want a set income stream – in this case, consider a CGA instead

29. Charity as Trustee Policies & Procedures need to address whether the charity will act as trustee or co-trustee, or not at all – different schools of thought on this If trustee, must manage the assets, prepare annual tax returns and make payments to beneficiaries If going to do this, good policy to require that your charity is XX% irrevocable in the trust Individual employees of charities should NOT act as trustee, conflict of interest

30. Charity Considerations Ask questions when donors tell you they already have a “charitable trust” and your charity is in it – don’t assume it is a qualified trust OR that your charity is irrevocable. This is important because: When charity is irrevocable, can book present value of the remainder as a gift and any subsequent additions Must also carry liability on your books Remember, donors don’t always use the right language to describe their estate plans, and they don’t always recall the exact terms of their documents

31. Charitable Lead Trusts Charitable Lead Unitrusts (CLUTs) Charitable Lead Annuity Trusts (CLATs) Asset is put into trust and income generated goes to charities At end of the term, the asset reverts to the donor Good vehicle in a low-AFR environment

32. Charitable Trust Summary Get a good estate planning attorney who has experience drafting these trusts to advise you You should NEVER draft documents if you are not an attorney If you are an attorney, your organization needs to decide if you are allowed to draft documents Also need to decide if your organization will pay to draft trusts or if the donor must pay – if charity pays, must 1099 the donor for the cost Get help!

33. Resources American Council on Gift Annuities Acga-web.org Planned Giving Design Center Pgdc.com Partnership for Philanthropic Planning of Greater Los Angeles Pppla.org Your software provider Your asset manager

34. Q & A Suzanne Zolfo, CSPG SZolfo@Doheny.org