Post on 26-Mar-2015
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Charitable Tax Planning and Life Insurance
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For 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
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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?
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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)
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
Public - Valuation Private - Valuation
Cash 50% - FMV 30% - FMV
Ordinary Income Property
50% - Lesser of FMV or Basis
30% - 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
20% - Lesser of FMV or Basis
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
Charitable Estate Tax Deduction Estate receives a charitable estate tax deduction for
bequests to qualified charities at death
Deduction unlimited
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
Gifts of Life Insurance
Purpose: Create large endowment Leverage the charitable donation
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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 *
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
Charitable Gifts of Life Insurance
Donors
Charity
Life Insurance Policy on Donor(s)
Cash Gift
Premiums
Death B
enefit*
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
Types of Charitable Gifts
Outright gifts or bequests Split interest gifts:
Charitable Remainder Trusts (CRT) Charitable Lead Trust (CLT) Gift Annuity Life Estate
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
Charitable Remainder Trust
Disadvantages Not all types of property are appropriate Complicated rules Disinherits the heirs
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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)
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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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
Gift Asset to CRT
CRT
Charity
Trust Corpus
Donor
Income
Deduction
Government
Charitable Remainder Trust
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
CRT: Irrevocable Trusts
What Can Be Changed: Charitable remainderman Investments in trust
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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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.
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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.
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
CRT: Problem Assets
Debt encumbered property
Partnership/S corporation
More than 20% of business interest
Inter vivos transfer of IRA, qualified plans,
or annuity
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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.
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
Encumbered Property
Solution: Transfer debt to another property Partition property so debt is only on part not transferred Pay off debt
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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%
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
This hypothetical example is for illustration purposes only and actual results may vary.
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
This hypothetical example is for illustration purposes only and actual results may vary.
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
Client Objection
“Implementing a CRT Disinherits Our Heirs!”
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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.
For Producer or Broker/Dealer Use Only. Not For Public Distribution.
For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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
This hypothetical example is for illustration purposes only and actual results may vary.
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
Questions?
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For Producer or Broker/Dealer Use Only. Not For Public Distribution
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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L0912280754 (exp11/13)