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P R I M E R S E C T I O N I I I :

I R R E V O C A B L E P L A N N E D G I F T S

C H A R I T A B L E G I F T A N N U I T I E S

L I F E I N S U R A N C E

C H A R I T A B L E T R U S T S

S U Z A N N E Z O L F O , C S P G

����

2013 Western Regional�Planned Giving Conference

Party at 6:00 if you stay awake!

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V E R Y C O M M O N I R R E V O C A B L E P L A N N E D G I F T

E A S Y F O R A D O N O R T O U N D E R S T A N D A N D

F U N D

A N Y C H A R I T Y C A N O F F E R T H E M , E I T H E R I N D E P E N D E N T L Y O R T H R O U G H A

C O M M U N I T Y F O U N D A T I O N

Charitable Gift Annuity

Charitable Gift Annuity

CHARITYMarch 19, 2013

Gift of property

Donor

CharitableGift

AnnuityCHARITY

Rem ainder toCHARITY

Incom e tax deductionFixed payments

How it works

You transfer cash, securities, or other property to CHARITY.

You receive an incom e tax deduction and may save capital gains tax.

CHARITY pays a fixed amount each year to you or to anyone you name for life . Typically, a portion of these paym ents is tax-free.

When the gift annuity ends, its rem aining pr incipal passes to CHARITY.

Basic Elements of a CGA Contract

•  Donor •  Charity •  Income beneficiary name, birthdate, age to nearest birthday &

address •  Gift date •  Fair market value of gift •  Annuity amount •  Date payments commence, frequency, method, any prorated

amount •  Statement that gift is irrevocable and non-assignable •  Termination •  Gift designation •  Power to revoke payments (2 life) •  Governing law (state) •  Signatures of donor and an authorized signer of charity

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Deduction & the AFR

•  2 parts of deduction: immediate and tax-free income •  Amount is determined by IRS formula where a variable is

the AFR •  5-year carry forward to use up the immediate part of the

deduction if they can’t use it all in one year •  If they don’t itemize and there are no special circumstances,

probably will want more tax-free income •  Must discuss this with the donor before you draw up

documents •  Only need signed election document if they choose other

than the current month

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What is the AFR?

•  The Treasury Department issues the Applicable Federal

Rate, or AFR, every month.

•  The AFR, sometimes also called the Rate of the Month, represents 120% of the interest rates paid on medium term (3-9 years) government securities.

•  Sec. 7520 of the Internal Revenue Code allows donors to elect either the AFR in effect for the month in which the gift is made or for either of the two preceding months.

•  Generally, a higher AFR will produce a higher immediate income tax deduction for charitable gift annuities.

Additional Contract Documents

•  Attachment to Schedule A, for donor’s tax return – so make it useful •  These elements not set in stone, but should be spelled out in your gift annuity policies &

procedures •  Donor name, address & SS# •  Principal donated and asset (stock, cash, real estate, etc.) •  AFR and month •  Deduction being claimed

•  AFR Election, if required

•  Statement explaining AFR – this protects YOU! •  Month and AFR selected •  Donor signature

From Donor/Income Beneficiary (good ideas, not required in CA)

•  Photo ID with date of birth and address •  Bank account info for direct deposit payments (voided check)

Types of Annuities

Immediate •  1 or 2 income beneficiaries •  If 2, concurrent or successive Deferred •  Fund now, must wait at least 1 year to start payments •  Choose a date in the future when payments begin •  Get a higher rate based on how long you defer •  Deduction based on deferral period, use a current AFR •  Good way to set up income for retirement

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Types of Annuities (cont.)

Tuition or Commuted Payment •  A 1-life deferred annuity, usually funded by parent, grandparent or

guardian, for a young child •  Donor defers payments until child is 18 •  Child has option before payments begin to either elect lifetime

payments or much larger “commuted value” payments over a period of 4-5 years, as spelled out in the contract, then the contract terminates

•  If lifetime payments are elected, the rate would be very low because the income beneficiary is so young

•  With a low AFR, may have to reduce the annuity rate to get the annuity to qualify for the deduction under the 10% rule: there must be at least a 10% residuum calculated for the charity

Types of Annuities (cont.)

Flexible Deferred •  Like a deferred, but choose a “target date” with earliest

and latest dates selected •  Deduction based on target date •  If payments begin between earliest and target dates,

then lower rate than planned; later date, higher rate •  Inform charity prior to first payment date desired (put

timing in your policies & procedures) •  Good option if donor has not decided when to retire, or

just to give more flexibility in their planning

Gift Tax Implications

Gift tax implications depend on: •  who owns the gifted property •  whether or not it is appreciated, long-term property, and, •  who the annuitants are

Be aware of gift tax when spouses fund with separate property, or when donor funds an annuity for anyone other

than themselves or spouse.

Scenario 1: donor funds with separate property and spouse receives annuity first, then donor •  Gift tax is an issue when the marital deduction does not apply, but for spouses,

it usually does. •  This circumstance is the exception: But this does qualify for the annual

gift tax exclusion, $14,000 in 2013, which can be applied to the annual payments.

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Gift Tax Implications (cont.)

Scenario 2: Donor is first annuitant, then someone other than spouse.   Annual gift tax exclusion does not apply as the gift is of a future interest – so

the current gift tax due   However, the Donor can reserve the right to revoke annuity interest by will in

the contract, making the gift incomplete – then current gift tax is due on the income as it is paid out to the second annuitant, and it qualifies for the annual gift tax exclusion

Scenario 3: Donor funds for someone other than spouse   Gift tax is due on present value of annuity   But this does qualify for the annual gift tax exclusion of $14,000   In addition, the donor can reserve the right to revoke annuity interest by will in

the contract – then the gift that is reportable is only the present value for the donor’s life expectancy

Gift Tax – The Reality

The good news about gift tax:

  The marital exclusion almost always applies for spouses and is unlimited

  The lifetime exclusion in 2013 is $5,250,000   The annual exclusion in 2013 $14,000   You are probably not an accountant or tax advisor, so you should NOT

be calculating gift tax due for your donors   Be aware of it and know to advise your multi-millionaire donors who

you think have exceeded their lifetime gift tax exclusion to get tax counsel

SO, IN REALITY…

You will probably never have to deal with this!

CGA Prospects

AGE

•  Average age of annuitants for immediate gift annuities: 79 •  Average age of annuitants for deferred gift annuities: 64

78% of charities report having a minimum age for annuitants

•  57% require a minimum age of 60 or older for an immediate annuity

•  28% require annuitants be 65 or older to begin receiving payments on a deferred annuity, and 26% stated age 60 for the same

Source: ACGA Survey of Charitable Gift Annuities, 2009

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Minimum Funding Amount

  55.1% of charities require a minimum contribution of $10,000-$25,000, 29.6% require $5,000-$9,999

  For subsequent contributions from the same donor for an immediate annuity, 39.3% of charities require a minimum of $10,000-$25,000, and 38.5% require a minimum of $5,000-$9,999

  Results were about the same for deferred annuities   Average size of gift annuities among charities

nationwide is $43,371 Source: ACGA Survey of Charitable Gift Annuities, 2009

E A S Y G I F T T O G I V E , I F C E R T A I N C R I T E R I A A R E M E T

M A Y R E Q U I R E A D M I N I S T R A T I V E W O R K F O R

T H E C H A R I T Y

N E E D T O H A V E G O O D P O L I C I E S A N D P R O C E D U R E S I N P L A C E

Life Insurance

Donor Retains Ownership of Policy

  Revocable gift   Donor makes charity beneficiary of the policy   No administration for charity   No current tax advantage for the donor   Policy payout is excluded from the estate at death   Charity determines how to recognize gift from donor

as a revocable gift   Insurer can provide the value of the policy at any

time

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Donor Transfers Ownership of Policy

If Donor gives ownership of policy to charity, it is an irrevocable gift Paid-up policy donated to charity: 1.  Wait until insured passes to receive payment, OR, 2.  Cash out the policy when donated Gift value is as of the date it is transferred to the charity, donor gets tax deduction for that amount

Charity Owns Policy

2 Scenarios if premiums are still payable:

1.  Donor does not want to pay premiums (if any due) so charity must decide whether to continue to pay premiums out of reserves or cash it out – gift value is what policy is worth when it transfers to charity

2.  Donor continues to pay premiums and charity holds policy – donor gets deduction for each payment made since it goes to the charity, so gift value is what the policy is worth when transferred to charity PLUS the premium payments as they are made

Life Insurance Administration

If donor is paying the premiums and charity is the owner, Development and Finance must have tight procedures in place to administer

  Premium bills will go to the charity to pay, have them come into Development

  Charity pays premiums (via Finance dept)   Send a reminder to the donor to make the donation to offset

the premium (include proof of payment)   When donation is received, send acknowledgement to donor –

full amount is tax deductible   Make sure at least 2 people in Development are aware of the

donor, the premium amounts and the timing of payments so premiums do not get overlooked

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C O M P L E X G I F T S

R E Q U I R E D O N O R T O H A V E C O M P E T E N T E S T A T E , F I N A N C I A L A N D T A X C O U N S E L

R E Q U I R E C H A R I T Y T O H A V E C O M P E T E N T

C O U N S E L A N D A S S E T M A N A G E M E N T

R E M A I N D E R A N D L E A D T R U S T S

Charitable Trusts

Acronyms from Hell

CRUT CRAT

CLUT

CLAT NICRUT

NIMCRUT FLIP NIMCRUT

Charitable Remainder Trusts

Charitable Remainder Unitrusts (CRUTs)

  Pay non-charitable beneficiaries for lifetime or term of years and remainder goes to charitable beneficiaries

  Donor receives deduction at time of donation, taxation of payments depends on investments

  Can add to the principal   Pay a set percentage of the trust balance as of

January 1 each year   Must meet IRS test to qualify for deduction

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Charitable Remainder Trusts (cont.)

Charitable Remainder Annuity Trusts (CRATs) Similar to CRUTs, but:

  Pay a set dollar amount each year, regardless of portfolio performance of the trust

  Cannot add assets to a CRAT   These trusts are the ones that run out when paying

more than they are earning for a long time   Usually not a good idea unless the non-charitable

beneficiaries are elderly and want a set income stream – in this case, consider a CGA instead

Charity as Trustee

  Policies & Procedures need to address whether the charity will act as trustee or co-trustee, or not at all – different schools of thought on this

  If trustee, must manage the assets, prepare annual tax returns and make payments to beneficiaries

  If going to do this, good policy to require that your charity is XX% irrevocable in the trust

  Individual employees of charities should NOT act as trustee, conflict of interest

Charity Considerations

Ask questions when donors tell you they already have a “charitable trust” and your charity is in it – don’t assume it is a qualified trust OR that your charity is irrevocable. This is important because:

  When charity is irrevocable, can book present value of the remainder as a gift and any subsequent additions

  Must also carry liability on your books Remember, donors don’t always use the right language to describe their estate plans, and they don’t always recall the exact terms of their documents

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Charitable Lead Trusts

Charitable Lead Unitrusts (CLUTs) Charitable Lead Annuity Trusts (CLATs)   Asset is put into trust and income generated goes to

charities   At end of the term, the asset reverts to the donor   Good vehicle in a low-AFR environment

Charitable Trust Summary

  Get a good estate planning attorney who has experience drafting these trusts to advise you

  You should NEVER draft documents if you are not an attorney

  If you are an attorney, your organization needs to decide if you are allowed to draft documents

  Also need to decide if your organization will pay to draft trusts or if the donor must pay – if charity pays, must 1099 the donor for the cost

  Get help!

A M E R I C A N C O U N C I L O N G I F T A N N U I T I E S

A C G A - W E B . O R G

P L A N N E D G I V I N G D E S I G N C E N T E R P G D C . C O M

P A R T N E R S H I P F O R P H I L A N T H R O P I C P L A N N I N G

O F G R E A T E R L O S A N G E L E S P P P L A . O R G

Y O U R S O F T W A R E P R O V I D E R

Y O U R A S S E T M A N A G E R

Resources

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Q & A

Suzanne Zolfo, CSPG SZolfo@Doheny.org