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2011 Charitable Taxes & Trends
1. Charitable Giving 2011 Tax Tips, Techniques, Trends and Tomorrow Russell James, J.D., Ph.D., CFP® Associate Professor and Director of Graduate Studies in Charitable Financial Planning Division of Personal Financial Planning - Texas Tech University www.EncourageGenerosity.com
4. On-campus or on-lineFree CFRE or CFP continuing education hours online Coming Soon: Research in Fundraising Podcasts
5. 2011 special tax opportunities IRA qualified charitable distributions (QCDs) Roth IRA conversions Low interest rates
6. Life stages of a retirement account Early distribution (before 59 ½) Regular distribution (59 ½ to 70 ½) Required minimum distribution (after 70 ½)
7. Giving after 70 ½ After age 70 ½ participants must take required minimum distributions (account balance / remaining life expectancy) or pay 50% penalty $10,000 IRA $10,000 income
8. Giving after 70 ½ For 2011, congress extended the Qualified Charitable Distribution (QCD): counts toward required minimum distribution without income or deduction $0 income $0 deduction IRA $10,000
9. Qualified Charitable Distribution (QCD) No private foundations, donor advised funds, charitable trusts, or charitable gift annuities IRAs or IRA rollovers only; no 401(k), 403(b), SEP, SIMPLE, pension or profit sharing plans Participant 70 ½ or older $0 income $0 deduction IRA $100,000 per person maximum $10,000
10. Tax Free Roth Conversion Taxable $1MM in standard IRA (withdraws are taxable) $1MM in Roth IRA (withdraws are tax free) In 2011 no income limits for Roth conversions
11. Tax Free Roth Conversion Taxable $1MM in standard IRA (withdraws are taxable) $1MM in Roth IRA (withdraws are tax free) Conversion creates $1MM in immediate taxable income
12. Roth conversions and charitable planning can work together to match Deductions Income
13. Tax Free Roth Conversion Taxable $1MM in standard IRA (withdraws are taxable) $1MM in Roth IRA (withdraws are tax free) Conversion creates $1MM in immediate taxable income
21. Charitable deductions may be limited (with five year carryover) to 20%, 30%, or 50% of income depending on gift and recipient
22. If I have unused deductions, how can I pull future income into current year?
23. If I have unused deductions, how can I pull future income into current year? With a Roth conversion
24. Tax Free Roth Conversion Taxable $1MM in standard IRA (withdraws are taxable) $1MM in Roth IRA (withdraws are tax free) Conversion creates $1MM in immediate taxable income
25. Roth conversions and charitable planning can work together to match Deductions Income
33. A remainder interest gives the right to own the property after a set time or after the death of a person OK, you can have my stuff now. Charles A. Donor
40. 12.5% 25% Can I give a remainder interest of an undivided share in farmland?
41. 12.5% 25% Yes, donor may deduct a remainder interest shared by charity and others as tenants in common (Rev. Rule 87-37)
42. 12.5% 25% However, IRS may deduct cost of partitioning (of forcing a sale or division)
43. No deduction for remainder just in mineral rights because it is not a “farm” Reg. 1.170A-7(b)(4) Can gift remainder in entire “fee simple” farm (even if land and mineral rights go to separate charities) PLR 8316037 Can gift remainder in farm without mineral rights if you don’t owned them mineral rights
44. How do you calculate the deduction for a remainder interest in farmland? Find the §7520 interest rate (http://www.irs.gov/businesses/small/article/0,,id=112482,00.html) Multiply value of land by remainder percentage in IRS Pub. 1457 (one or two lives or specific term) (http://www.irs.gov/retirement/article/0,,id=206601,00.html)
45. Ex: A remainder interest in $100,000 of farmland given by a 59 year old donor 12/10 Find the §7520 interest rate (http://www.irs.gov/businesses/small/article/0,,id=112482,00.html) 1.8%
46. Ex: A remainder interest in $100,000 of farmland given by a 59 year old donor 12/10 Find the §7520 interest rate (http://www.irs.gov/businesses/small/article/0,,id=112482,00.html) Multiply value of land by remainder percentage in IRS Pub. 1457 (one or two lives or specific term) (http://www.irs.gov/retirement/article/0,,id=206601,00.html) 1.8% $100,000 X 0.68233 = $68,233
47. Leaving land to charity by will Revocable $0 income tax deduction Impacts charity after death Leaving land to charity by remainder interest Irrevocable $68,233 immediate income tax deduction Impacts charity after death or immediately if charity sells remainder interest
51. Age 59 wealthy donor with $100,000 farmland on 12/10 remainder interest in farmland given to charity will divides farmland 10% to charity 90% to children $68,233 tax deduction x 35% combined tax rate = $23,881 $23,881 buys est. $70,000 paid up ILIT life insurance farmland worth $125,000 at death children receive $70,000 (tax free from ILIT) charity receives $12,500 (10% x $125,000) children receive $50,625 (90% x 125,000 = 112,500, less 55% for post ‘12 estate taxes) charity receives $125,000 farmland
52. Gifts of remainder interests in personal residences can also be deducted Remainder Interest
53. Includes second homes, vacation homes, even a boat with bathroom, cooking, and sleeping facilities, if used by the donor as a residence
54. Deduction for a house is reduced because, unlike land, it is depreciable (it wears out) Rules in IRS Pub. 1459 http://www.irs.gov/pub/irs-pdf/p1459.pdf
55. 59 year old donor giving on 9/6/10 Remainder interest in $100,000 farm .68233 x $100,000 $68,233 Deduction Remainder interest in $100,000 home .68233 x $20,000 (land) .68233 x $10,000 (salvage) .41412*x $70,000 $49,458 Deduction *.68233 less .26821 depreciation reduction calculated on next slide
56. Depreciation reduction factor R factor age now – R factor age after useful life of house D factor age now X Useful life of house Appraiser can estimate. IRS examples use 45 years. 263478.6-60.91156 21825.1-45 =.26821 Table C at http://www.irs.gov/retirement/article/0,,id=206601,00.html
58. What if the donor leaves? Give life estate to charity Agree with the charity to a joint sale and divide proceeds Give life estate to charity in exchange for a gift annuity Rent property Sell life estate
59. What if I make improvements to the property after giving a remainder interest?
60. You can deduct the remainder value of major improvements as additional gifts PLR 9329017; PLR 8529014 $8,000 for new HVAC
61. Charitable Remainder Trusts Anything Left at Death Initial Transfer Donor Charity CRT Payments During Life Dr. Russell James Texas Tech University
62. The donor sets aside money from which he takes payments, with any remaining amount going to charity Anything Left at Death Initial Transfer Donor Charity CRT Payments During Life
63. Payments can go to the donor, other people, or other people and charity Anything Left at Death Initial Transfer Donor Charity CRT 5% of trust assets
64. Payments can be for donor’s life or for as many lives as desired or for 20 years or less Anything Left at Death Initial Transfer Donor Charity CRT Payments during life or lives
65. Payments can be a fixed dollar amount: Charitable Remainder Annuity Trust (CRAT) Anything Left at Death Initial Transfer Donor Charity CRT $1,000 Per Year for Life
66. Payments can be a fixed percentage (5%-50%) of all trust assets: Charitable Remainder UniTrust (CRUT) Anything Left at Death Initial Transfer Donor Charity CRT 5% of trust assets
67. The donor can give cash or property (usually appreciated securities) Anything Left at Death Initial Transfer Donor Charity CRT 5% of trust assets
68. The rules of a Charitable Remainder Trust cannot be changed Anything Left at Death Initial Transfer Donor Charity CRT 5% of trust assets
69. The donor may act as CRT trustee and manage the assets
70. The donor may keep the right to change which charity receives money
71. The donor receives an immediate tax deduction for the present value of the amount that may go to charity Anything Left at Death Initial Transfer Donor Charity CRT Payments During Life
73. There are no capital gains taxes when the donor makes a transfer to the CRT.
74. A CRT is itself a nonprofit entity and pays no capital gains tax when it sells appreciated property
75. A client holds a large, highly appreciated asset that generates little income (like developable land or non-dividend paying stock). How can she convert it to income generating property?
76. Option 1: Sell it. Pay the capital gains tax. Invest the remaining amount. $1,000,000 stock $900,000 gain (if $100,000 cost) $135,000 tax (15% fed) $865,000 left to invest
77. Option 2: Transfer to a CRT $1,000,000 stock $900,000 gain (if $100,000 cost) _____$0 tax (CRT pays no tax) $1,000,000 left to invest
78. Charitable Lead Trusts Initial Transfer Anything Left Over CLT Donor Donor’s heirs Payments for Life/Years Charity Dr. Russell James Texas Tech University
79. Like a CRT where charitable and non-charitable beneficiaries switch places Charitable Remainder Trust Initial Transfer Anything Left Over Charity Donor Donor or heirs Payments for Life/Years Initial Transfer Anything Left Over Donor or heirs Charitable Lead Trust Donor Payments for Life/Years Charity
80. A CLT locks in a stream of charitable gifting without requiring continuing requests
81. Non-Grantor CLT: donor gives money from which charity receives payments, remaining amount returns to donor Initial Transfer Anything Left Over CLT (Grantor) Donor Payments for Years Charity
82. The donor can immediately deduct the present value of all future projected payments to charity in a grantor CLT Initial Transfer Projected Value of Future Charitable Gifts Anything Left Over Donor Payments for Life or Years Charity
83. I give property to fund $10,000/year gifts for 20 years through a 20-year grantor CLAT that returns remainder to me. I deduct present value of $10,000/year for 20 years based on §7520 rate. At 2%, deduction is $163,515 At 8%, deduction is $98,181 Initial Transfer Anything Left Over Donor $10,000 Payments for 20 years Charity
88. Increases in charitable planning are driven by increases in childlessness and education Time trend disappears when including childlessness and education Time trend exists Probit analysis of all respondents age 55-65 in 1996-2006 HRS. Outcome variable is the presence of charitable estate planning.
90. Regression: Compare only otherwise identical people Example: The effect of differences in education among those making the same income, with the same wealth, same family structure, etc.
91. Likelihood of having a charitable plan(comparing otherwise identical individuals) Graduate degree (v. high school) +4.2 % points Gives $500+ per year to charity +3.1 % points Volunteers regularly +2.0 % points College degree (v. high school) +1.7 % points Has been diagnosed with a stroke +1.7 % points Is ten years older +1.2 % points Has been diagnosed with cancer +0.8 % points Is married (v. unmarried) +0.7 % points Diagnosed with a heart condition +0.4 % points Attends church 1+ times per month +0.2 % points Has $1,000,000 more in assets +0.1 % points Has $100,000 per year more income not significant Is male (v. female) not significant Has only children (v. no offspring) -2.8 % points Has grandchildren (v. no offspring) -10.5 % points
93. An Australian study by Christopher Baker including 1729 wills: “Australian will-makers without surviving children are ten times more likely to make a charitable gift from their estate”
94. Both childlessness and college education among women entering the 55-65 age group over the next decade will be substantially higher
95. After making their plan, charitable estate donors grew their estates 50%-100% faster than did others with same initial wealth
96. Big trend “take-aways” Don’t recruit estate givers just by giving level, also know your childless donors After making their intention, charitable estate donors grew their estates 50%-100% faster than did others Future demographics are positive based on population, childlessness, and education
97. Check out the new program! EncourageGenerosity.com Online Graduate Certificate in Charitable Financial Planning Free CFRE & CFP Continuing Education Coming Soon: Latest Academic Research and Theory in Fundraising Russell James, J.D., Ph.D., CFP®, Associate Professor, Texas Tech University