A PRIMER ON PLANNED GIVING

Pathology, February 23, 2011

What IS a planned gift?

Planned gifts are specially structured charitable contributions that are usually part of an individual’s overall financial and/or estate plan.

Planned gifts often provide tax and other financial benefits allowing him or her to make a larger gift than otherwise thought possible.

Common Types of Planned Gifts

Gifts of remainder interest bequests (trust or will, specific or %) beneficial designations of retirement plans life insurance (UM named as beneficiary)

Life income agreements charitable gift annuities charitable remainder trusts

Other charitable lead trusts charitable IRA rollover

Life Income Gifts

Gift made now pays income to one or more beneficiaries

Michigan does not receive benefit until contract the passing of last named beneficiary or end of specified term of years

Irrevocable Current partial income tax deduction;

capital gains tax savings, possible estate tax savings

CHARITABLE GIFT ANNUITIES

… easy & popular!

Charitable Gift Annuity

A contractual agreement between the individual(s) and UM that, in exchange for a donation of cash or securities, the UM will pay the donor (or others) a fixed dollars amount for life

Suggested maximum annuity rates from the American Council on Gift Annuities

Backed by CGA reserve pool and general revenues of the University.

Charitable Gift Annuity

Benefits-- Fixed, guaranteed income for life of the

annuitant(s) Income tax deduction in the year it’s created,

and may reduce estate taxes Generally a portion of the payment is tax-free Can be funded with appreciated stock (partial

avoidance of capital gain) Can defer annuity payments into the future

(good retirement planning tool if other retirement plans maxed out)

Can decide when payments start and amount (flexible CGA)

Charitable Gift AnnuityUNIVERSITY OF MICHIGANOffice of Gift Planning3003 S. State Street, Suite 9000November 10, 2010

Gift of property

Donor

CharitableGift

AnnuityUM

Remainder toUM

Income tax deductionFixed payments

How it works

You transfer cash, securities, or

other property to UM.

You receive an income tax

deduction and may save capital

gains tax.

UM pays a fixed amount each

year to you or to anyone you

name for life. Typically, a portion

of these payments is tax-free.

When the gift annuity ends, its

remaining principal passes to

UM.

Charitable Gift Annuity

Bob and Mary Donor, ages 72 and 74, donate $25,000 in cash for a gift annuity.

Annual income: $1,400 (5.6%) Charitable Income tax deduction:

$6,462.50 Tax-free portion of annuity:

$1,024.80 Ordinary income portion of annuity:

$375.20

Charitable Gift Annuity

Same example, but donation of $25,000 of appreciated stock with a cost basis of $10,000 and a dividend yield of 2%.

Annual income: $1,400 (5.6%) Income tax deduction: $6,462.50 Tax-free portion: $257.26 Capital gain: $767.54 Ordinary income: $375.20 Increased annual income: $900

(compared with dividend from stock; before taxes)

CHARITABLE REMAINDER TRUSTS

…Powerful and Sophisticated – a great planning tool!

Charitable Remainder Trust

A trust arrangement between the donor and a trustee chosen by the donor (may be Michigan)

The trust pays “income” to the donor or to beneficiaries the donor designates

When the last beneficiary passes, the principal balance is distributed to the designated charities.

Two primary types: Charitable Remainder Unitrust

(variable) Charitable Annuity Trust (fixed)

Charitable Remainder Trust

Benefits-- Income (or estate) tax deduction to the donor

in the year the trust is funded Income stream to the donor and/or other

beneficiaries for life or a term of years Can name multiple charitable beneficiaries With unitrust, can benefit from investment

growth of the trust assets (including U-M endowment investment returns – more later!)

Avoid realizing capital gains on donated assets

Charitable Remainder Unitrust

UNIVERSITY OF MICHIGANOctober 6, 2009

Gift of property

Donor

Unitrust UM

Remainder toUM

Income tax deductionVariable income

How it works

You transfer cash, securities, or

other property to a trust.

You receive an income tax

deduction and pay no capital

gains tax.

During its term, the trust pays a

percentage of its value each year

to you or to anyone you name.

When the trust ends, its

remaining principal passes to

UM.

Charitable Remainder UnitrustUNIVERSITY OF MICHIGANOffice of Gift Planning3003 S. State Street, Suite 9000November 10, 2010

Gift of property

Donor

Unitrust UM

Remainder toUM

Income tax deductionVariable payments

How it works

You transfer cash, securities, or

other property to a trust.

You receive an income tax

deduction and pay no capital

gains tax on transfer to trust.

During its term, the trust pays a

percentage of its value each year

to you or to anyone you name.

When the trust ends, its

remaining principal passes to

UM.

Charitable Remainder Annuity Trust (CRAT)

Pays fixed amount over life of trust (payout rate x initial funding amount)

Minimum payout rate of 5% Life of income beneficiary(ies) or fixed

term (20 years max), or combination No additional contributions allowed

Charitable Remainder Unitrust (CRUT) Pays variable amount over life of trust

(payout rate x value of trust as determined annually)

Minimum payout rate of 5% Life of income beneficiary(ies) or fixed

term (20 years max), or combination Can make additional contributions

CRUT’s Appeal To Individuals Who:

Want to keep up with the market/inflation Have appreciated, low-yielding assets Need planning flexibility Can donate $100,000 (or more) Have some investment risk tolerance Are concerned about asset management Hold assets like appreciated property,

unimproved real estate, closely-held stock, cash

MICHIGAN ENDOWMENT RETURN STRATEGY (MERS)

What is MERS?

Investment approach for U-M charitable remainder unitrusts (CRUTs)

Invest CRUT assets alongside endowment funds in the university’s Long Term Portfolio (LTP)

Trust benefits from asset diversification and investment expertise

Advantages of MERS

Historically more return for less risk Greater remainder benefit for UM &

greater life-time cash flow for income beneficiaries

Access to asset classes not generally or previously available to trusts (especially those smaller in size), i.e., private investments and absolute return investments

Investment management by Michigan’s Investment Office.

Charitable Remainder Unitrust Taking Care of Family

Bob and Mary Wolverine want to help their daughter Kathy with their 13 year-old grandson’s college education. They would also like to create a research fund the U-M Cancer Center. They have a portfolio of highly appreciated but low yielding securities they would like to put to better use.

Charitable Remainder Unitrust Taking Care of Family

Bob and Mary contribute $250,000 in securities with a cost basis of $100,000 to a charitable remainder unitrust that will pay 5% to Kathy for 10 years. At the end of the 10-year term, the remainder will go to the Cancer Center to establish a research fund in their names.

Charitable Remainder Unitrust Taking Care of Family

Total after-tax income to Kathy: $135,069

Income tax deduction for Bob and Mary: $150,845

Remainder to Cancer Center for research fund: $370,061

Total benefit from $250,000 contribution: $505,130

Assumes constant annual investment returns of 9% within trust and that Kathy’s income tax bracket is 10%, 10% for capital gains.

There may be gift tax implications. Bob and Mary should consult with their professional tax advisor before completing this transaction.

Charitable Lead Annuity Trust Donation of cash or other property to

qualified, taxable charitable lead annuity trust

Fixed annual payments to Michigan for a term of years.

At end of term, remainder passes to others, usually heirs (non-grantor)

No income tax deduction, but significant gift tax deductions possible – can eliminate tax on transfer

Proving for a current gift….and transferring assets to others

Ellen and Jack are likely to have a taxable estate. They are maximizing their annual gifts to their children ages 38 and 35 but do not want them to get too much too quickly. They are also interested in establishing a fund to support internships for U-M students to do community service projects.

Charitable Lead Annuity TrustEllen and Jack contribute $1,000,000 in

securities with a $650,000 cost basis to a charitable lead annuity trust paying 7% annually to U-M for 15 years. Assumptions: Trust earns 8% (3% income; 5%

appreciation) Ellen and Jack are in the top tax bracket

(current tax rates) Ellen and Jack have made no taxable gifts

Charitable Lead Annuity Trust Total amount to Michigan: $1,050,000 Total amount to children: $1,271,521 Total benefit from plan: $2,291,521 Total gift tax paid on amount to children:

$0

Note: gift tax deductions greater during periods of low interest rates – like now!

Renewal of Charitable IRA Rollover

Opportunity to make tax-free donations of IRA funds to qualified charities

Minimum donor age: 70 ½ Direct transfer from IRA account to

charity Only IRAs (not 401(k) or 403(b)) Maximum charitable distributions:

$100,000 per year Expires December 31, 2011

In Summery…..Planning options for….

Financial Stability/Income Charitable Gift Annuity Charitable Remainder Unitrust/MERS

Secure Future Income Deferred Payment Gift Annuity

Transferring Wealth Charitable Lead Annuity Trust

Maximum Flexibility Bequest IRA/Retirement Plan Beneficiary Designation

Questions?