Top 10 charitable planning strategies for financial advisors

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Post on 29-Jun-2015



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The top ten techniques in charitable planning financial planners should know to improve their practice and their advice


1. Russell James, J.D., Ph.D., CFPTexas Tech UniversityDept. of Personal Financial PlanningTop 10 CharitablePlanning Strategies forFinancial Advisors 2. 1. Never give cash 3. $100k CashDonor CharityDonor CharityIncome tax deduction($100,000 x 39.6%)$39,600Income tax deduction($100,000 x 39.6%)$39,600+Avoid capital gains tax($90,000 x 23.8%)$21,240$100k Stock 4. The Charitable Swap$100k lowbasis stockDonor Charity$100kcashimmediately buyidentical stock(100% basis)No wash sale rulebecause this is gainproperty, not lossproperty 5. The Charitable SwapDonorCharities$100kcashSimplifiedDonorAdvisedFund$$$$100k lowbasis stockimmediately buyidentical stock(100% basis) 6. A FREE tax benefit you loseevery time you give cashDonorCharities$100kcashDonorAdvisedFund$$$$100k lowbasis stockimmediately buyidentical stock(100% basis) 7. Did you pay capital gains taxes last year?Did you make cash gifts to charity?If so,You need a newfinancial planner.John Competitor, CFPFinancial Planning Services for the Charitably 8. 2. Give retirement RMDfirst and more at death 9. Life stages of a retirement accountEarly distribution (before 59 )Regular distribution (59 to 70 )Required minimum distribution (after 70 ) 10. Giving after 70 After age 70 participants must take requiredminimum distributions (account balance /remaining life expectancy) or pay 50% penalty$10,000IRA $10,000 income 11. Giving after 70 If the income is not needed, a charitable giftdeduction might offset the income(if itemizing and no income giving limitationsexceeded and no pease limitation effects and nonegative effects from increased AGI and not in thewrong state)$10,000$10,000IRA $10,000 income $10,000 deduction 12. Giving after 70 In some years, congress has allowed a QualifiedCharitable Distribution (QCD), eliminating boththe income and deduction$10,000$0 incomeIRA$0 deduction 13. Qualified Charitable Distribution (QCD)$10,000Participant70 or$0 incomeIRA$0 deductionolder$100,000per personmaximumNo privatefoundations, donoradvised funds,charitable trusts, orcharitable giftannuitiesIRAs or IRArollovers only; no401(k), 403(b),SEP, SIMPLE,pension or profitsharing plans 14. IRA(child); House(charity)$1,000,000 House$1,000,000 to charity$1,000,000 IRA-$396,000 (39.6% federalincome tax)-$110,000 (11% Oregon stateincome tax)IRA(charity); House(child)$1,000,000 IRA$1,000,000 to charity$1,000,000 House-$0 (no income tax) 15. Retirement plan charitable beneficiaries A public charity A private familyfoundation A charitableremainder trust 16. Bad retirement plan death beneficiaries Not Charitable Lead Trusts(because they arent taxexempt) Avoid naming estate asbeneficiary with instructions inestate documents (estate itselfmay have to pay income taxes) 17. Simple solutions to a potential trapCharities are not designatedbeneficiaries, so couldaccelerate RMDs for otherbeneficiaries. Solutions: Separate IRAs into a 100% charitableand 100% non-charitable accountbefore death (+ RMDs can be takenfrom either to match desired plans) Beneficiaries can separate accounts byend of year following participantdeath1 Payout charity share beforeSeptember 30 of year followingparticipant death.2 If spouse is beneficiary, simply rollthat share into spouses IRA1. Treas. Reg. sec. 1.401(a)(9)-8 Q&A 2(a) 2. Treas. Reg. sec. 1.401(a)(9)-4 Q&A 4(a) 18. 3. Take deductions todayfor transfers tomorrow 19. A remainderinterest in a homeor farm gives theright to own theproperty after aset time or afterthe death of aperson 20. Charitable deduction forremainder interest deed in$1,000,000 of farmland by age 59donor1.0% (Jan 13)$804,79011.6% (May 89)$156,840 21. Leaving land to charityby will Revocable $0 income tax deduction Impacts charity after deathLeaving land to charityby remainder deed Irrevocable $804,790 immediate incometax deduction Impacts charity after deathor immediately if charitysells remainder interest Immediately increases cashassets available forinvestments (AUM) 22. Charitable Remainder Trusts generatean immediate tax deduction, eventhough donor can manage assets andreceive income for lifeInitialTransferAnything Leftat DeathDonor CRT CharityPaymentsDuring Life 23. 4. Match Deductionswith Roth conversions 24. Roth conversions and charitable planningcan work together to matchIncome Deductions 25. $1MM in standardIRA (withdrawsare taxable)RothConversion$1MM in RothIRA (withdrawsare tax free) 26. Where can I find offsetting deductions? 27. Where can I find offsetting deductions?Put money into a Charitable remainder trust Charitable lead trust(grantor) Charitable gift annuity Donor advised fund Private foundationOr give a remainder interestin a residence or farmland toa charity 28. Charitable deductions maybe limited (with five yearcarryover) to 20%, 30%, or50% of income dependingon gift and recipient 29. If I have unuseddeductions, how can Ipull future income intocurrent year? 30. If I have unuseddeductions, how can Ipull future income intocurrent year?With a Roth conversion 31. $1MM in standardIRA (withdrawsare taxable)RothConversion$1MM in RothIRA (withdrawsare tax free) 32. Roth conversions and charitable planningcan work together to matchIncome Deductions 33. 5. Buy life insurance withnew tax deductions 34. Charitable planningdevices such asCharitable GiftAnnuities, Gifts ofRemainder Interests inHomes and Farms, andCharitable RemainderTrusts produceamazing taxadvantages, reducingincome taxes, capitalgain taxes, and estatetaxes 35. But, they also reduce heirs inheritanceHeir Charity Donor 36. Life insurance can diminish this concern 37. Can it pay to becharitable?Priscilla wants to sell a$1,000,000 non-incomeproducing zero-basis assetthen spend the interestincome of 5% whileleaving principal for heirs.Her combined state andfederal tax rates are:capital gains (23.8%)income (39.6%)estate (40%) 38. Sale$1,000,000 asset-$238,000 capital gains taxClient uses $38,100/year($762,000 X 5% return)Heirs receive $457,000($762,000-$304,800 est. tax)CRUT$1,000,000 asset$0 capital gains tax$1,000,000 in 5% unitrustpays $50,000 annually + acharitable tax deduction of$300,000 worth $120,000+ ILITClient pays $120,000 initiallyand $10,000 annually for a$400,000 ILIT-owned policy(including post-crummey gift taxes)Client uses $40,000/yearCharity receives $1,000,000remainderHeirs receive $400,000(tax free from ILIT) 39. John, age 59, at 39.6% income tax rate, owns$100,000 of farmland which he would like to use forthe rest of his life then leave to charity, but he alsowants to benefit his heirs. 40. Giving the remainder interest to charity creates adeduction of $80,479 worth $32,869. Suppose thiswill purchase a paid-up policy of about $50,000+.John keeps lifetime use of farmCharity gets 100% of farm at deathHeirs get $50,000+ (estate tax free) 41. 6. Earn more income byavoiding capital gains tax 42. A client holds a large,highly appreciated assetthat generates littleincome (like developableland or non-dividendpaying stock). How canshe convert it to incomegenerating property? 43. Option 1: Sell it. Pay the capital gainstax. Earn income on the remainingamount. $1,000,000 stock$1,000,000 gain (if zero basis)$238,000 tax (23.8% fed + ?% state)$762,000 left to invest AUM 44. Option 2: Transfer to a CRT. Earnincome for life on the full amount.$1,000,000 stock$1,000,000 gain (if $100,000 cost)_____$0 tax (CRT pays no tax)$1,000,000 left to invest AUM 45. A client holds a highly appreciated asset that generates littleincome (like developable land or non-dividend paying stock).How can she convert it to income generating investments?Simple Sale$1,000,000 asset$1,000,000 gain (if zero basis)$288,000 tax (23.8% fed + 5% state)$722,000 left to invest-AUMOr California $670,000 leftCharitable Remainder Trust$1,000,000 asset$1,000,000 gain (if $100,000 cost)$0 tax (CRT pays no tax)$1,000,000 left to invest-AUM& $100,000+ tax deduction 46. 7. Prevent your clientsfrom dying (ever) 47. Client death is highly inconvenientfor financial planners1. The government takes achunk of the assets2. The kids divide up therest into smaller pools You CANT manage the money(because you dont have thebusiness relationships witheach of the kids) You DONT WANT to managethe money (because eachremaining pool is too small) 48. A donor advised fund or privatefoundation holds money anddistributes charitable grants 49. Multi-generational managementInheritance Small pools after division by1/n children and estate tax Individual relationships witheach heir High maintenance / personallossesPrivate Foundation/DAF Big pool with no division andno estate tax Preexisting position as poolmanager Low maintenance /charitable org. losses 50. Donor Advised Fund No minimum payout Minimal setup &administrative expense Expected control of grants Investment managementallowed with manyfinancial institutions Legislatively newerPrivate foundation 5% minimum payout Significant setup &administrative expense Actual control of grants Investment managementalways allowed Legislatively stable 51. Advanced charitablestrategies topreserve wealth Lifetime and testamentarytransfers to privatefoundation CRT (spigot) paying for life (ifdesired for consumption)then to family foundation Zeroed out CLT that payscharitable interest to familyfoundation, excess growth tochildren Multi-generational:Testamentary CRT, income tokids, then to privatefoundation run by grandkids 52. 8. Grow tax free 53. Tax Free Growth Environments Growth inside adonor advised fundis tax free Growth inside acharitable remaindertrust is tax free (onlydistributions aretaxed) Growth inside aprivate foundation istax limited (either2% or 1% rate) 54. Standard Account10% growth, 39.6% federal, 5% stateYear 1 $10,000Year 2 $10,554Year 3 $11,139Year 4 $11,756Year 5 $12,407 Year 18 $25,009Year 19 $26,394Year 20 $27,856Donor Advised Fund/PF10% growth, 39.6% federal, 5% stateYear 1 $10,000Year 2 $11,000Year 3 $12,100Year 4 $13,310Year 5 $14,641 Year 18 $50,544Year 19 $55,599Year 20 $61,159 55. 9. Make your wealthyclients want to save More 56. Once my family and Iare provided for, whywould I keep workingto build wealth? 57. Do the estates ofpeople whomake charitableestate plans growdifferently thanthe generalpopulation? 58. After making their plan, charitable estate donors grewtheir estates 50%-100% faster than did others withsame initial wealth 59. 10. Be in a growingmarket for good clients 60. 45%40%35%30%25%20%15%10%5%0%Estates including charitable planning$2.0 million


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