Charitable Legacy Planning

1. CharitableLegacy Planning 1-Hour CE Seminar | November 2008

2. This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here. For producer use only. Not for presentation to the public.

3. Identifying the Client’s Legacy • Leaving a lasting legacy • Family • Charity • Tax deductions • Leveraging a life insurance policy • Split-interest gifts • Other charitable giving strategies For producer use only. Not for presentation to the public.

4. Charitable Tax Deductions • Charitable income tax deduction factors • Public or private charity • Present interest or future interest • Type of asset • Ordinary income property or capital gain property • Entire asset or split-interest asset • Income deduction limits of 50%, 30% or 20% of donor’s AGI • 5-year carryforward • Some deductions limited to cost basis • Dollar-for-dollar charitable deduction for estate taxes and gift taxes For producer use only. Not for presentation to the public.

5. Charitable Legacy Life Insurance Planning • “I have an old policy that I no longer need.Can I give it to charity?” • “I would like to leave something to charitable cause or my alma mater. How can I leave a significant bequest to charity without depleting the legacy leave for my loved ones?” • Designating charity as policy’s beneficiary • Gifting old policy to charity • Purchasing life insurance policy for charity For producer use only. Not for presentation to the public.

6. Irrevocable Gift of Assets to Trust Donor Trust Income Payments RemainingTrust Principal Split-Interest Gifts • “I want to benefit a charity, but I am not ready or able to part with the entire asset.” • Split ownership of asset into two parts: • Income interest • Remainder interest • Gift to charity of one interest For producer use only. Not for presentation to the public.

7. Understanding the Different Types of Charitable Remainder Trusts • “I would like to donate an asset to charity, but I need a stream of income from the asset during my life.” “I have an asset with a low basis. How can I sellthe asset and minimize the tax consequences?” • Charitable Remainder Annuity Trust (CRAT) • Charitable Remainder Unitrust (CRUT) • Net Income Charitable Remainder Unitrust (NICRUT) • Net Income Make-up Charitable Remainder Unitrust (NIMCRUT) For producer use only. Not for presentation to the public.

8. Charitable Remainder Annuity Trust • Established and funded with single contribution • One-time valuation of trust— initial fair market value • Specified annuity benefit paid at least annually • Fixed amount, or • Fixed percentage based on initial fair market value • Annuity must be between 5% and 50% of the trust’s initial fair market value • 5% probability test For producer use only. Not for presentation to the public.

9. Charitable Remainder Annuity Trust • Income payout will not vary with trust investment performance • Must make payments to beneficiaries whether or not there is enough trust income • Trustee can deplete trust principal to make income payments to income beneficiaries • Payout period not to exceed 20 years or life/lives of income beneficiary(ies) • At trust term, remaining trust principal passes to charity(ies) For producer use only. Not for presentation to the public.

10. Charitable RemainderUnitrust (CRUT) Features • Can accept multiple contributions • Trust valued annually • Pays specified fixed percentage of trust valuebased on annual valuation of trust • Payout must be between 5% and 50% of trust value • NICRUT (Net Income CRUT) • NIMCRUT (Net Income Make-up CRUT) For producer use only. Not for presentation to the public.

11. Asset Replacement: Life Insurance and CRTs • What is asset replacement? • Gifts to a CRT are irrevocable • Loved ones do not have claim to donated assets • Benefits of using life insurance • Life insurance provides way to “replace” what loved ones would have received • Potential payment of insurance premiums with CRT income distributions • Removal of life insurance death benefit from donor’s estate if held within an asset replacement trust For producer use only. Not for presentation to the public.

12. Taxation of CRT Income • “Four-tiered” tax system of CRT income: • Ordinary income • Capital gains • Tax-free income • Return of cost basis • Factors affecting charitable deduction: • Duration of the payment • Initial value of the asset contributed to CRT • Payout rate and frequency • Section 7520 rate For producer use only. Not for presentation to the public.

13. CRUT Example – Background Facts • John Startup, 47 years old • John is ready to sell his business • Started business with $100,000 investment 10 years ago • Approximate current value is $5 million • He wants to provide a large donation to charity • John doesn’t want to deplete his estate that he plans to pass on to his children For producer use only. Not for presentation to the public.

14. CRUT Donor Charity How a CRUT Works (1) John contributes $5 million business to CRT (2) John receives tax deduction of $1.2 million and an annual income equal to 5% of the trust’s value (3) Annual income from trust goes to pay premiums (4) Upon John’s death, trust remainder goes to charity Life Insurance For producer use only. Not for presentation to the public.

15. Charitable Lead Trusts • “I would like to benefit a charity, but I want my loved ones to receive the asset.” “I don’t need the income from this asset.Can I give the income to charity but keep the rest for my loved ones?” • CLT – opposite of CRT • Charity receives stream of income • Grantor’s loved ones get remainder interest • Two types: • CLAT – fixed dollar amount • CLUT – percentage of trust value For producer use only. Not for presentation to the public.

16. Tax Consequences of CLTs • Gift Taxes – only on remainder interest • Income Tax Deduction – Two types of trusts • Grantor Trust: • Charitable income tax deduction at creation • Trust income taxable to grantor • Non-Grantor Trust: • No charitable income tax deduction • Non-taxable trust income For producer use only. Not for presentation to the public.

17. How the CLT Works CLAT Mr. Johns Charity Beneficiaries Assets Annual Payout Tax Deduction Remainder Interest For producer use only. Not for presentation to the public. For producer use only. Not for presentation to the public.

18. Enhanced Charitable Trust • “I don’t need this asset and I would like to receive a charitable income tax deduction for my gift. Can I leverage his asset to provide a benefit to a charity and my loved ones?” • Deferred charitable lead annuity trust (CLAT) • Small annual lead payout to charity • Enhanced final payout to charity and trust beneficiary through use of life insurance For producer use only. Not for presentation to the public.

19. A New Approach to an Old Challenge • Challenge • Provide client with income tax deduction to offset significant non-recurring taxable event • Large bonus or commission • Sale of real estate • Sale of business • Opportunity • Leverage donated assets through purchase of life insurance policy • Provide current income tax deduction • Make meaningful contribution to charity • Pass on significant wealth to loved ones For producer use only. Not for presentation to the public.

20. CLAT Charity Beneficiaries Enhanced CLAT: Donor’s View (2) Grantor receives charitable deduction to help offset income taxes due Non-recurring Taxable Item (1) Individual gifts asset to CLAT Charitable Deduction (3) CLAT uses donated asset to purchase life insurance (4b) Remainder of death benefit paid to non-charitable trustbeneficiary (subject to gift tax), plus remaining trust assets* (4a) Upon death ofinsured, a portion of death benefit is paid to charity LifeInsurance * Gift tax based on original gift amount less charitable income tax deduction For producer use only. Not for presentation to the public.

21. Fixed Income Option(Municipal bonds) CLAT Charity Enhanced CLAT: Charity’s View • CLAT purchases fixed income vehicle to provide annual income to charity • Majority of contribution to the charity stems from the life insurance proceeds • Small annual leadpayments to charity LifeInsurancePolicy For producer use only. Not for presentation to the public.

22. Client Profile • Individual with significant taxable non-recurring income • Considerable commission or bonus • Sale of business or real estate • Highly appreciated asset with no/low basis (IRA or annuity) • Aged 60 or older • Desires large tax deduction • Wants to create legacy for spouse or future generation • Charitably inclined For producer use only. Not for presentation to the public.

23. Enhanced Charitable TrustExample – Background Facts • 60-year-old male executive: • Receiving a bonus of $1,000,000 • Goals: • Maximize wealth transfer to loved ones • Minimize impact of taxes due to bonus • Provide benefit to charity • Current and future tax implications: • 45% income tax rate • 55% estate tax rate • 3.8% Section 7520 rate For producer use only. Not for presentation to the public.

24. Option 1: No Planning $1,000,000 bonus Immediately reduced by 45% income tax $550,000 Assuming 5% after-tax growth... In 20 Years…$1,459,314 For producer use only. Not for presentation to the public.

25. $1,000,000 bonus $1 million giftedto CRT CRT $50,000annual income to grantor $22,500income taxes Option 2: CRT • Current Income Tax Deduction: $331,270 • Assumes: • Annual CRT payout of 5% • 7520 rate of 3.8% Annual 5% payout $1,726,000 life insurancedeath benefit Remaining proceedsof $27,500 purchasea universal lifeinsurance policy Grantor pays taxes on CRT income of 45% For producer use only. Not for presentation to the public.

26. Muni bondsearning 4% $1,000,000 bonus CLAT Charity Non-charitable Trust Beneficiaries Option 3: Enhanced CLAT Current charitable income tax deduction: $300,000 $1M bonus gifted to CLAT* $900,000 purchasessingle premiumuniversal lifeinsurance policy $100,000 purchases muni bonds Upon grantor’s deathnon-charitable trustbeneficiaries receive$3,301,000* Upon grantor’s death charity receives $500,000 Universal lifeinsurancepolicy $3,801,000death benefit $4,000 annual income generated for charity *$700,000 subject to gift tax For producer use only. Not for presentation to the public.

27. Comparing the Three Options…MaximizingWealth to Loved Ones–20 Years Later No Planning With CRT With ECLAT $2,726,000(includes universal life insurance policy in ILIT) $3,801,000 universal life insurance policy Value of asset $1,459,314 Income tax deduction $0 $331,270 $300,000 Annual income to charity $0 $0 $4,000 Annual income to grantor $0 $50,000 $0 Subject to gift/estate tax $459,314 $0* $700,000 Amount to charity $500,000 $0 $1,000,000(assuming 5% annual return) Amount to loved ones $1,206,691 $1,726,000 $3,301,000 *Assumes no gift taxes due to Crummey powers For producer use only. Not for presentation to the public. For producer use only. Not for presentation to the public.

28. Comparing the Three Options…MaximizingGift to Charity–20 Years Later No Planning With CRT With ECLAT $2,726,000(includes universal life insurance policy in ILIT) $3,801,000 universal life insurance policy Value of asset $1,459,314 Income tax deduction $0 $331,270 $900,000 Annual income to charity $0 $0 $4,000 Annual income to grantor $0 $50,000 $0 Subject to gift/estate tax $459,314 $0* $100,000 Amount to charity $2,150,000 $0 $1,000,000(assuming 5% annual return) Amount to loved ones $1,206,691 $1,726,000 $1,651,000 For producer use only. Not for presentation to the public.

29. Loved Ones Charity/ Deduction Charity/ Deduction Loved Ones Flexible Design • Ability to customize a strategy tailored to meet client’s specific goals/needs • Amount passed on to charity • Amount passed on to loved ones (subject to gift tax) • Amount of income tax deduction desired For producer use only. Not for presentation to the public.

30. Other Charitable Gifting Strategies • Pooled Income Funds • Charitable Gift Annuities • Private Foundations • Donor-Advised Funds For producer use only. Not for presentation to the public.

31. Donor Charity Pooled Income Fund • “I don’t have enough assets to set up a CRT, however I would still like to contribute an asset to charity, but retain a stream of income.” Assets PIF Annual Payments Income Tax Deduction For producer use only. Not for presentation to the public.

32. Donor Charity Charitable Gift Annuity • “I don’t have enough assets to set up a CRT, however I would still like to contribute an asset to charity, but retain a stream of income.” Asset Annual Payments Income Tax Deduction For producer use only. Not for presentation to the public.

33. Private Foundations • “I want to do more than just give to a charity. How do I create a charitable entity that my loved ones can carry on after I pass away?” • “I want to benefit a charity, but I do not want to lose control over the money I donate and the ability to decide what charitable causes it will benefit.” • Created as either a corporation or trust • Run by family members • Deductions depend upon property given and whether given during life or at death For producer use only. Not for presentation to the public.

34. Donor-Advised Funds • “I want to retain some control over the assets I donate, but private foundations are too complicated.” • Contribution to a fund run by a charity • Donor makes recommendations as to distributions • Less administrative cost and exposure to excise taxes for donor • Income tax deduction similar to contributions to public charities For producer use only. Not for presentation to the public.

35. Benefits of Charitable Legacy Planning • Support a cause or charity one believes in • Advantageous tax planning • Share one’s wealth with family or others For producer use only. Not for presentation to the public.

36. Transamerica Insurance & Investment Group (“Transamerica”) and its representatives do not give tax or legal advice. This presentation is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. • Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of this presentation. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica’s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects. • Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of November 2008. • Transamerica Insurance & Investment Group is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN 37219-2417. Web site: www.nasba.org. • In the state of New York, Transamerica Life Insurance Company is an approved provider of continuing education courses (Provider Organization Approval Number NYPO-100366). For producer use only. Not for presentation to the public.

37. CharitableLegacy Planning 1-Hour CE Seminar | November 2008