CHARITABLE GIVING STRATEGIES

Aryeh Guttenberg, Esquire

410-484-7711

aryeh@guttenberglaw.com

UMMS Foundation

February 15, 2005

Charitable Giving- Background, Impetus, Challenges

Personal Story – UMMS/Shaare Zedek Lifetime Giving vs. Testamentary Giving Planned Giving- Gift that is (1) tax-advantaged, (2)

established during donor’s lifetime and (3) arranged with the donor’s active involvement

A Family Philosophy – A Family Legacy Challenge of wealth and a meticulous “mitzvah” –

Maimonides Role of Advisor Role of Charitable Partner

Estate and Gift Tax Landscape – A Moving Target

Federal (EGTRAA) – See Appendix A for Confusing Rate Structure

Maryland Decouples-Ouch!! See “The Guttenberg Press” (Fall 2004)

Politics and the Estate Tax – Repeal – See “Estate Tax Timeline” (Appendix B)

Planning Amid “Uncertainty”

Charitable Gifts-Tax Benefits Retained

Last of the Big Time Tax Savers Income, Gift and Estate Tax Benefits Leveraging Gift and Estate Transfers Income and Estate Tax Deductions/Exclusions

Charitable Giving Strategies/Vehicles

Testamentary Bequests Retirement Plan Assets Life Insurance Gift of Appreciated Property Charitable Remainder Trusts Charitable Gift Annuities Charitable Lead Trusts Private Family Foundations Donor Advised Funds

Testamentary Bequests

Provision in Will or Revocable Trust Specific Bequest, Residuary Bequest (% of estate),

Contingent Bequest Private – need not be made public until death Conditions on bequest; Caution: Beware of rigid conditions,

particularly since it may become effective far into future Revocable No effect on donor’s assets or cash flow during lifetime Reduces estate tax Loss of planned giving tax advantages

Retirement Plan Assets (e.g., IRA, 401(k), 403(b))

Designation of charity as beneficiary Full control during lifetime “I.R.D.- Hot Asset” – tax savings to heirs

(income and estate) at death of “participant” Consider wealth replacement strategy for

family – use of life insurance Selection of assets for maximum estate tax

advantage

Life Insurance- Name Charity as Owner and Beneficiary

Income tax deduction Remove policy from estate Used for (not needed) paid-up policies

Gift of Appreciated Property (e.g., Securities)

Fair market value deduction (up to 30% of AGI, excess 5-year carryforward)

Avoid capital gains tax Creative uses with closely-held stock Example:Donor holds publicly traded stock with FMV of

$100,000, which she purchased for $10,000. Benefits of contribution of stock: (1)Income tax deduction of $100,000 and (2) avoid capital gains tax on gain of $90,000 ($100,000FMV minus $10,000 basis).

Basics of Charitable Remainder Trusts (CRT’s)

CRT’s are irrevocable trusts that provide for and maintain two sets of beneficiaries.

Income Beneficiaries – donor and, if married, a spouse – who receive a set percentage of income for lifetime/term of years from the trust

Remainder Beneficiaries – named charities receive principal of the trust after the income beneficiaries pass away (or term expires)

Basic Objective: Retain income in gift to family for life (or period of time), benefit charity at death)- with significant tax benefits

CRT Benefits

Donor(s) maintains control-- change charitable beneficiaries, selection of trustee, individually managed

Donor(s) draw Income/cash flow- during donor’s lifetime- choices of annuity or unitrust –see later

Legacy to charity upon death (or after term);Consider: Make-up distribution to children upon death, i.e., legacy trust/life insurance

Tax benefits –see later Increase cash flow from unproductive assets

Annuity Trust Unitrust

Fixed stream of income based upon % of initial funding

Stable, predictable income

5% minimum payout

Stream of income based upon % of FMV revalued annually

Donor shares in appreciation—hedge against inflation

5% minimum payout

Tax Benefits to Donor

Avoid capital gains tax on sale of highly appreciated assets

Immediate income tax deduction (preset value of remainder in trust), subject to 10% test

Removal of Asset from Estate at Death (Estate Tax Charitable Deduction)

CRT Illustration- 2 Donors

Donor: age 76; spouse age 72 Amount of Funding - $200,000 in securities,

cost basis = $100,000 Return % for Donor and Spouse – 5% Annuity Payment to Donors - $10,000 for life AFR – 4.6% (2/05)

CRT ILLUSTRATION– Tax Benefits

Charitable Income Tax Deduction - $94,546 (annuity trust), $95,168 (unitrust);Savings: $33,250, based upon 35% federal and state rate

Avoidance of capital gains tax of $20,0000 on sale of securities (based upon 20% federal and state capital gains tax)

Estate tax savings-in surviving spouse’s estate (assuming a 50% rate): $100,000

Comparison of benefits

Unitrust Annuity Trust

Contribution: $200,000 $200,000

Income Rate: 5% 5%

First Year's Income:

$10,000 $10,000

Future Income: Variable $10,000

Charitable Deduction:

$95,168 $94,546

See Appendix C for Results of Illustration from Brentmark Software

Comparison-Annuity Trust v. Unitrust

CRT Wrap-Up: Benefits Summary

No Diminution of Income to Donors (possible increase with unproductive assets)

Income and Estate Tax Deductions Capital Gains Avoidance Donor Control

Charitable Gift Annuity-Basics

Contract between Donor and Charity that provides a guaranteed lifetime income for Donor and/or beneficiary. Annuity may be funded with a gift of cash or securities

See UMMS Foundation Materials

Charitable Gift Annuity- Benefits

Immediate income tax deduction (look at “AFR” – choose higher of 3 months)

Capital gains tax savings (if funded by securities, capital gains must be paid for by donor over life of annuity, but lower rate than ordinary income)

Lifetime stream of fixed Income for 1 or 2 persons Rate of return may be higher than most investments

Charitable Gift Annuity- Illustration

Donor – 75 years old Donor contributes $30,000 in cash; CD matures Assume 7.1% Annuity Rate, Donor receives annual

payment of $2,120 before taxes Donor receives current year income tax deduction of $

12,890.10 See Appendix D for UMMS Foundation Illustration for

Eileen Guttenberg

Basics of Charitable Lead Trusts (“CLT’s”)

CLT’s are irrevocable trusts that provide for and maintain 2 sets of beneficiaries(essentially a “Reverse CRT”).

Income Beneficiary – Charity Remainder Beneficiary–

family

Basic Tax Objective:Designed to reduce donor’s taxable income and estate tax by first donating a portion of trust’s income to charity, and then, after a specified period of time, transfer remainder interest to family. Provides immediate benefit to charity and larger intergenerational transfer of wealth to descendants.

CLT’s: Practical Uses and Benefits

Estate Tax Savings Predominant: for investors/entrepreneurs who are more concerned about preserving estate for children than about increased current income/cash flow

Appreciating Assets: Typically, trust holds appreciating assets (e.g., real estate) that provides income to charity and eventually passes to children

Reduction in value of asset’s gift and estate tax value: value of trust assets subject to gift and estate taxes is reduced by present value of income stream to charity

Estate Freeze-- value of asset is fixed at time of transfer to trust

CLT Illustration- Comparison with No Gift

Donors plan to otherwise make full use of lifetime gift tax exemption ($2,000,000 for couple) and annual exclusion gifts ($22,000 per person)

Proposed use of CLT to expand this gift giving further – in a leveraged manner

Amount of Funding: $500,000 (appreciated asset preferable) Term for Charity: 20 years Payout for Charity:6% (choice annuity or unitrust) AFR:4.2% Growth Rate: 8% (6% income, 2% net appreciation on total

return)

CLT Illustration- Benefits to Charity

Immediate funding of important projects for 15 years

Payout $30,000 per year. Donor can designate specific purpose

CLT Illustration- Benefits to Donor

Discounted Charitable Gift Tax Deduction of $400,000 Deduction is based on(1) Term of Trust, (2)Rate of Income Payment and (3) Applicable Federal Rate

Principal distributed to family after 20 years with significant growth-free of tax

No tax on appreciation Note: Unlike CRT, no capital gains avoidance on sale; therefore, hold

asset for ultimate distribution to children Bottom Line: Larger gift to charity without depriving family of

inheritance; possibly give more to family than before (no concern re: wealth replacement vehicle)

See Appendix E for graphic summary

Illustration- Zero-out CLAT

AFR: 4.2% (use December) Payout: 7.5% Funding: $500,000 Term: 20 years See Appendix F for results

 Result: No taxable gift upon transfer since gift tax value of Hospital’s lead interest = $500,000; gift tax value of children’s interest is $0.

Best CLT Candidates

Donor holds asset likely to appreciate over time

Donor with no cash flow concerns Donor with estate tax exposure Low interest rate environment

Private Family Foundations

Contribute to charitable causes through foundation – immediate tax deduction (up to 30% of AGI)

Minimize estate tax liability Avoid capital gains on sale of appreciated publicly-held stock Continuing employment, involvement and activity for family

members Identifies and preserves family’s name, charitable intent and goals Required payout of 5% of assets annually Tax on net investment income (1%/2%) Annual filing (990’s) Self-Dealing Rules Contrast with Donor Advised Funds