for producer or broker/dealer use only. not for public distribution charitable tax planning and life...

For Producer or Broker/Dealer Use Only. Not For Public Distribution

Charitable Tax Planning and Life Insurance

For Producer or Broker/Dealer Use Only. Not For Public DistributionFor Producer or Broker/Dealer Use Only. Not For Public Distribution.


Agenda

Introduction to charitable giving Taxation issues Types of charitable organizations Charitable gifts of life insurance Charitable remainder trusts Wealth replacement trusts

This document is designed to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. Clients should consult their attorney and /or tax advisor before making financial investment or planning decisions

For Producer or Broker/Dealer Use Only. Not For Public Distribution.


Charitable Gifts: Things to Consider

Is the charity a qualified charitable organization? Is it a gift? What is the value of the gift? What is the form or structure of the gift? Are there deduction limitations placed on the gift?



Public Charity versus Private Foundation Public charities provide higher deductions at the expense

of control by the donor

Private foundations provide control but with substantially reduced deductions, and potential excise taxes



Taxation Issues

Donative Intent Transfer of money or property made without adequate

consideration

Partial Interest Generally non-deductible but various exceptions do exist

Valuing the Gift Determined by type of property gifted Gifts that exceed $5,000 must get qualified appraisal



Types of Property

Ordinary Income Property Assets held less than one year, life insurance Deduction limited to lesser of cost basis or fair market value

Long Term Capital Gain Intangible Property Capital asset held longer than one year Fair market value deduction (exception: certain appreciated

property to a private foundation limited to lesser of cost basis or fmv)



Exception: Basis Rule for Private Charities

Gifts of qualified appreciated stock valued at FMV rather than basis

Traded on exchange Capital gain property

Still limited to 20% of AGI

Types of Property



Types of Property

LTCG Tangible Personal Property Art, collectibles For public charities, deduction generally equal to fair market

value For private charities, deduction generally limited to lesser of

cost basis or fmv

Exception: Unrelated use



Public - Valuation Private - Valuation

Cash 50% - FMV 30% - FMV

Ordinary Income Property

50% - Lesser of FMV or Basis


LTCG Intangible Property (e.g. securities)

30% - FMV 20% - Lesser of FMV or Basis (unless qualified appreciated stock

LTCG Tangible Personal Property

Related: 30% FMV

Unrelated: 50% Lesser of FMV or Basis




Charitable Estate Tax Deduction Estate receives a charitable estate tax deduction for

bequests to qualified charities at death

Deduction unlimited



Gifts of Life Insurance

Purpose: Create large endowment Leverage the charitable donation



Charitable Gifts of Life Insurance

Donors

Charity

Life Insurance Policy on Donor(s)

Premiums

Death B

enefit*

*Loans and withdrawals will decrease the cash value and death benefit. Tax-favored distributions assume that the life insurance policy is properly structured, is not a modified endowment contract (MEC), and distributions are made up to the cost basis and policy loans thereafter. If the policy has not performed as expected and to avoid a policy lapse, distributions may need to be reduced, stopped and/or premium payments may need to be resumed. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences.

Access to Cash Value *



Charitable Gifts of Life Insurance

Donors

Charity

Life Insurance Policy on Donor(s)

Cash Gift

Premiums

Death B

enefit*



Gifts of Life Insurance: Existing Policy

Valuation based on replacement value Paid up policy/single premium Premium paying mode Recently issued

Deduction limited to lesser of FMV or cost basis Ordinary income property reduction Public Charity - 50% of AGI limit



Gifts of Life Insurance: New Policy

Charity needs to be owner & beneficiary in order to receive deduction for premium payments gifted to the charity

If premium is paid directly to insurance company, deduction could be reduced

Important to check insurable interest laws for state in question



Types of Charitable Gifts

Outright gifts or bequests Split interest gifts:

Charitable Remainder Trusts (CRT) Charitable Lead Trust (CLT) Gift Annuity Life Estate



Should a Client Consider a CRT?

If clients have: Stock portfolios Land Real estate

And want to: Benefit charity Sell the property Receive an income stream Create tax deductions Reduce their estate



Charitable Remainder Trust

Benefits: Convert non-income producing asset to an income stream

without immediate capital gains Generate immediate income tax deduction Remove asset and any future appreciation from estate Benefit charity




Disadvantages Not all types of property are appropriate Complicated rules Disinherits the heirs



How a CRT Works

An irrevocable trust is created by an attorney Must follow specific rules to qualify as a CRT CRT is a tax exempt trust

An income beneficiary receives an income stream for trust term

Term of 20 or less years One or more lives

Once term ends selected charity receives remainder



How a CRT Works

Donor is entitled to an income or estate tax deduction for remainder value of trust

Not dollar for dollar Deduction given up front even though actual value

passing to charity is not known Deduction based on

Term of trust Payout rate chosen Assumed rate of return (7520 rate)



IRC Section 7520 Rate

IRS assumed rate of return 120% of federal midterm rate Can use current month’s or previous two months’ Generally, the higher the 7520 rate, the larger the CRT

deduction



Gift Asset to CRT

CRT

Charity

Trust Corpus

Donor

Income

Deduction

Government




CRT: Irrevocable Trusts

What Cannot Be Changed: Income beneficiaries

Term of the trust

Payout rate

Payout frequency

Type of trust

Trust must not be a grantor trust



CRT: Irrevocable Trusts

What Can Be Changed: Charitable remainderman Investments in trust



CRT: Four-Tier Taxation

Four-tier income taxation to the extent each exists in trust:

Ordinary income Capital gains Tax-free income Corpus (return of basis)

If income recipient is not donor, gift tax may be levied on present value of income stream



Example: $1,000,000 CRT

CRT has 8% payout $80,000

Has income of 6% $60,000

CRT has $500,000 of built in capital gain $60,000 taxable as ordinary income $20,000 taxable as capital gain

This hypothetical example is for illustration purposes only and actual results may vary.



CRT: Selecting the Proper Asset

Publicly traded stockLow basis

Stock pays low dividends

Donor seeking to defer capital gains

tax

Needs a source of premium dollars



CRT: Selecting the Proper Asset

Appreciated Real EstateLow basisDebt freeContribute 100% of donor’s interest in

the property Ideally 100% interest = whole property.

100% interest in a fraction is less marketable.



CRT: Problem Assets

Debt encumbered property

Partnership/S corporation

More than 20% of business interest

Inter vivos transfer of IRA, qualified plans,

or annuity



Unrelated Business Taxable Income (UBTI)

If CRT has UBTI, the trust will pay an excise tax of 100% of the UBTI

Encumbered property Certain partnership interests More than 20% of the voting stock of a business S corporation stock



Problem: Encumbered Property

Bargain sale treatment Part sale, part gift

Potential disqualification as CRT Debt financed income

ALL trust income becomes taxable for that year Exception: If (1) the donor owned the property for more

than five years before the gift and (2) the mortgage was placed on the property more than five years before the gift, the indebtedness is not acquisition indebtedness for ten years after the gift.



Encumbered Property

Solution: Transfer debt to another property Partition property so debt is only on part not transferred Pay off debt



Trust Designs

CRAT Charitable Remainder Annuity Trust

CRUT Charitable Remainder Unitrust

NIMCRUT Net Income with Makeup Unitrust

FLIP Net Income Unitrust Switching to Straight CRUT



CRAT

Pays a fixed annuity based upon initial fair market value of trust

* Fixed percentage or dollar amount

CRUT

Pays a fixed percentage of the trust corpus Income payments may fluctuate



NIMCRUT

Payout made only if trust has net accounting income

Donor does not need funds immediately Invest in growth assets

Can makeup prior missed payments if net income is sufficient



FLIP Trust

Starts as a net income trust Upon triggering event, changes to standard CRT

Sale of asset Death Divorce

Forfeit any makeup upon “flip” Ideal for unmarketable assets



Case Study: Mike and Carol Brady

Ages 72 and 68 establish a CRUT $1,000,000 of stock, $200,000 cost basis 5 % and 7% payouts 7% return 7520 rate of 2.6% Federal income tax rate of 28% Federal capital gains tax rate of 15%



Case Study: Mike and Carol Brady

5% Payout Deduction $410,070 Total Income

$1,345,287 Remainder

$1,502,801 1st year income $50k

7% Payout Deduction $293,070 Total Income

$1,510,648 Remainder $960,345 1st year income $70k




Case Study: Sale or CRT?

Sale: Invested: $880,000 Initial After Tax

Income: $38,106 Heirs: $1,541,697 Charity: $0

5% CRT: Invested: $1,000,000 Income Tax

Deduction: $ 410,070 Initial After Tax

Income: $36,000 Heirs: $509,947 Charity: $ 1,502,801




Tax Diversification Plan

Contribute stock to CRT Creates income tax deductions

Sell enough stock so that taxable gain is offset by CRT tax deduction

Provides both income stream and cash



Client Objection

“Implementing a CRT Disinherits Our Heirs!”



Possible Solution: Wealth Replacement Trust

Value of asset transferred to CRT may be replaced for heirs with the purchase of life insurance

Premiums may be paid from CRT income stream Life insurance purchased inside wealth replacement

trust may avoid estate inclusion



Why Use a Wealth Replacement Trust

Trust document controls destiny of policy protects policy from surrender by children determines when proceeds will be paid to children

Outside donor’s estate May provide protection from child’s creditors *

* Creditor protection laws vary dependant upon governing federal and state law. The applicability of such laws also depend on the terms of the trust. One should be sure to confer with their independent tax and legal advisors prior to establishing a trust for this purpose.



Designing the Wealth Replacement Trust

Trust is owner and beneficiary of policy Insured(s) cannot be trustee Insured(s) cannot have any incidents of ownership



How Much Coverage to Purchase

Full replacement Amount equal to CRT remainder value

Equal replacement Amount equal to contributions to CRT

Net replacement Amount equal to remainder net of estate tax

Realistic replacement Amount donor(s) can afford to gift



Example

Donor, age 70, gifts $1,000,000 to CRT

At life expectancy, CRT remainder value is $1,184,304

Payout is 6% & tax rate is 33%

Estate tax bracket is 50%

Replacement value: $1,184,304

Equal value: $1,000,000

Net value: $592,152

Realistic value: Whatever the net payout of

$40,200 will buy




Questions?



Important Information

Insurance Products are:· Not A Deposit · Not FDIC-Insured · Not Insured By Any Federal Government Agency ·Not

Guaranteed By Any Bank Or Credit Union · May Go Down in Value

Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor.

MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances. MetLife life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the variable investment options in this product will meet its stated goals or objectives. The cash value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its original value. Guarantees are subject to the claims paying ability and financial strength of the issuing insurance company.

Life insurance products are issued by MetLife Investors USA Insurance Company, Irvine, CA, Metropolitan Life Insurance Company, New York, NY, and in New York only by First MetLife Investors Insurance Company, New York, NY. All guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company. Variable products are distributed by MetLife Investors Distribution Company, Irvine, CA. All are MetLife companies. July 2012

PEANUTS © 2012 Peanut Worldwide


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for producer or broker/dealer use only. not for public distribution charitable tax planning and life...

Documents

brokerdealer use

public distribution

unrelated use

lesser of fmv

lesser of cost basis

life insurance deduction

basis ltcg intangible

type of property