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Estate Planning & Charitable Giving: Peanut Butter Meets Jelly

BY BRIAN Y. CHOU, ESQ

Barbara

Age 85 Net worth: $2m

House: $1m

IRA: $500K

Brokerage Acct: $500K

Daughter is trustee of her trust Wants to leave a charitable bequest to her Alma

Mater but doesn’t trust daughter to make the distribution

What to do?

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Today’s Goal

To build a better understanding of how charitable giving and estate planning intersect

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Why do we give?

Gifts with benefits … why donors give …

Makes us feel good, duh Tax benefits (income tax, estate tax, capital

gains) Build a legacy Build goodwill or good PR Create a lifetime income stream (retirement

planning) Teach or support our children

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How do donors give?

Present day gifts – covered in prior session Testamentary gifts

Will Trust Beneficiary Designation – IRAs, 401Ks and other

qualified retirement accounts

Split Interest Gifts – to be covered in afternoon session Charitable Gift Annuity Charitable Remainder Trust Charitable Lead Trust

Professionals in the Estate Planning Process

Financial Advisor CPA Estate Attorney Insurance

Professional Professional

Fiduciary Planned Giving

Representative

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WHAT IS AN ESTATE?

WHY DO ESTATE PLANNING?

After Death Control Who Receives Assets

Pay Minimum Legal Fees, Taxes

At Incapacity Control Assets, Medical Decisions

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ELVIS PRESLEY

Gross Estate $ 10,165,434

Debts 3,878,539

Administrative, Legal

& Executor Fees 1,961,128

Estate Taxes 3,339,520

To Heirs $ 986,247

COMMON ESTATE PLANS

Will Doing Nothing Joint Ownership

Giving Away Assets Beneficiary TransfersRevocable Living Trust

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PLAN #1: DOING NOTHING At Death

Probate

Assets Distributed by State Law

At Incapacity Court Controls

Assets

This image cannot currently be displayed.

WHAT ISPROBATE?

Legal Process Will Validated

Debts Paid

Assets Distributed According To Will

Only Legal Way to Change Title

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PROBATE ILLUSTRATION

Assets Titled in Just Your Name Go Through Probate

PROBATEFEES

HEIRS

TAXES

PROBATE

HOME& OTHER

PROPERTY

HEIRLOOMS

STOCKS

INVESTMENTS

John SmithPay to_____________ $ _______

CHECKING ACCOUNT

BONDS

California Probate Statutory Fees

Estate Value Statutory Fee$100,000 $8,000$300,000 $18,000$500,000 $26,000$800,000 $38,000$1,000,000 $46,000$2,000,000 $66,000

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PROBATE TAKES TIME 9 Months - 2 Years

PROBATE IS PUBLIC No Privacy Easy to Contest

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PROBATE PROCESS HAS CONTROL How Your Will Is Interpreted Cost Time Privacy

PLAN #2: WILL

Expresses Your Wishes

Only Controls Assets Titled In Your Name

Enforced By Probate Court

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WILLS & INCAPACITY

Will Is No Help

Court Process

Durable Power of Attorney

PLAN #3: JOINT OWNERSHIP

Surviving joint owner has full ownership

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TOM & ANNJoint

Owners

TOM DIESANN INHERITSTOM’S SHARE

ANN DIES

ANN’S HEIRSINHERIT

NO PROBATE PROBATE

ANN MARRIESDAN

ANN DIES DAN INHERITSANN’S SHARE

TOM’S & ANN’SCHILDREN

DISINHERITED

DAN & ANNJoint

Owners

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JOINT OWNERSHIP SUMMARY

1. Only Postpones Probate2. Unintentional Disinheriting3. Incapacity = Court Interference4. Difficult To Remove Co-Owner5. Lawsuits6. Debts/Tax Problems

PLAN #4: GIVINGAWAY ASSETS You Lose Control

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STEPPED-UP

BASIS

Selling Price $ 250,000

Basis - 20,000

Gain $ 230,000

Capital Gains Tax $ 34,500

Lifetime Gifts(Your Basis)

Selling Price $ 250,000 $ 250,000

Basis ‐ 20,000 ‐ 250,000

Gain $ 230,000 $ 0

Capital Gains Tax $ 34,500 $ 0

Lifetime Gifts(Your Basis)

Transfers At Death(New, Stepped‐Up Basis)

STEPPED-UP

BASIS

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Keeping Control with aREVOCABLE LIVING TRUST

CHANGE TITLES TOYOUR LIVING TRUST

HOME& OTHER

PROPERTY

HEIRLOOMS

STOCKS

INVESTMENTS

John SmithPay to_____________ $ _______

CHECKING ACCOUNT

BONDS

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YOU KEEP CONTROL Buy/Sell Assets as

Before Change/Cancel

Any Time Trust Contains Your

Instructions

GRANTOR(You)

TRUSTEE

Creates &Controls Trust

Manages Trust

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GRANTOR(You)

TRUSTEE

SUCCESSORTRUSTEE(s)

BENEFICIARIES

Creates &Controls Trust

Manages Trust

Steps in for Trustee

Receive AssetsWhen You Die

Choosing the Right Decision-Makers

Friend or family member Professional Fiduciary Corporate Trustee

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YOU CONTROL INHERITANCE

All At Once

Installments

Income Only

WILLS & MINOR CHILDREN

Court

Appoints Guardian

Controls Finances

Child Inherits All At Legal Age

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Special Needs

Supplemental Income

Minors

Protect from Creditors/Predators

YOU CONTROLINHERITANCE

LIFETIME BENEFITS TRUST

Generation Skipping Trust Protects Child from Creditors

Protects Child from a Divorce Keeps Assets Separate

Estate Tax Reduction Assets Will Not Be Subject to Child’s Estate Tax

You determine at what age your child will inherit!

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EXPENSES THAT REDUCE YOUR ESTATE

ESTATETAXES

PROBATEINCOMETAXES

Estate Taxes: As if Death & Taxes Weren’t Fun Enough Individually, Let’s Combine Them

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What is it?

A tax on your stuff when you die The more you have, the more you have to pay This is in addition to income tax

Historical RatesYear Exemption Amount Top Rate1916 $50,000 10%1980 $161,000 70%2001 (EGTRRA) $675,000 55%2002 $1,000,000 50%2004 $1,500,000 48%2006 $2,000,000 46%2009 $3,500,000 45%2010 Unlimited 0%Kick the Can $5,000,000 35%Fiscal Cliff $1,000,000 55%

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Life After the Fiscal Cliff

Estate Tax Exemption is permanent at $5,250,000 indexed for inflation

Estate Tax Rate raised from 35% to 40% Portability

Portability

Double your pleasure – protect twice as much Need to file Estate Tax Return to claim No Liz Taylors – You can’t harvest DSUEAs For middle class estates, consider converting an

AB or ABC Trust to a flexible AB Trust.

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Gifting Opportunities

Gift tax lifetime exemption also made permanent at $5,250,000 (indexed for inflation)

Raised from $1,000,000 New Annual Gift Tax Exclusion: $14,000 More room to gift assets to move future

appreciation out of your estate

Estate Taxes and Charity

Charitable deduction for estate taxes –testamentary gifts

No limit on estate tax deduction Defined Value Clause

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BOB & SUE$7,000,000

INCOME,PRINCIPALIF NEEDED

BOB’S TRUST$3,500,000

BENEFICIARIES$3,500,000

BENEFICIARIES$3,500,000

SUE’S TRUST$3,500,000

IRREVOCABLE

AB Disclaimer Trusts

FOR MEDICAL DECISIONS

Advance Health Care Directive

Who decides for you when you can’t?

Do you want to be kept alive on life support?

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HIPAA

Health Insurance Portability and Accountability Act

New law that came into effect in 2004

Regulates Medical Privacy

Severe Penalties for Doctors that violate law.

Makes it tough for your Trustee to do his/her job

Need to create a “HIPAA Waiver” for loved ones

Overview: Components of a Basic Estate Plan

Revocable Living Trust Pour-Over Will Durable Power of Attorney Advance Health Care Directive HIPAA Waiver Transfer Documents (Deeds for Real Estate,

Assignment of Other Assets)

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Advanced Planning: Irrevocable v. Revocable

Gifts Present day gifts

Life Estates

Conditional gifts

Trusts ILITs

GRATs

QPRTs

IDGTs

Charitable Split Interest Trusts

Professionals in the Estate Planning Process

Financial Advisor CPA Estate Attorney Insurance

Professional Professional

Fiduciary Planned Giving

Representative

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Post-Death Administration

Decision-Maker must: Gather, account for, and safeguard the assets

Determine the value of the assets

Notify the beneficiaries

Pay expenses & taxes

Manage the assets

Carry out the terms of the trust

Usually involves the help of a number of professionals

Types of Testamentary Gifts

Specific Gift of Property Pecuniary Gift of $$ Amount Residual Gift Contingent Gift Discretionary Gift

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IRA Distributions

Generally, gotta recognize income and offset with charitable deduction

IRAs or Roth IRA Limited to $100K per year

Donor must be > 70&1/2

Directly to charity outright

May be used to satisfy the RMD requirement

Beneficiary Designations

Tax deferred retirement plans (IRAs, 401Ks, 403Bs, etc …) Good place to give to charity – tax free

Do not name “my estate” or “my living trust” generally

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What Can Donors Give?

The Importance of a Gift Acceptance Policy

Sets expectations for donors and fundraisers Increases transparency May create opportunities for strategic planning

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Professionals Working Together to Serve the Donor

Getting Involved

Join a local Trust Counsel Do outreach to local professional groups, like

CalCPA Reach out to existing donors or board members

who happen to be related professionals. Build relationships with these related professionals

so you have them as both resources and referral sources

Educate them on the importance of getting donors connected with the charity while they are alive to maximize their legacy and their enjoyment of their testamentary gift

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So What About Barbara?

Age 85 Net worth: $2m

House: $1m

IRA: $500K

Brokerage Acct: $500K

Daughter is trustee of her trust Wants to leave a charitable bequest to her Alma

Mater but doesn’t trust daughter to make the distribution

What to do?

I like to talk! Please Introduce Me To …

Charities that are looking to do outreach to their donors or prospective donors

Professional groups that are looking for public speakers for their meetings

Donors with charitable intent

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Fin