Reading Between the Tea Leaves: How Tax Reform Could Impact … Sympoisum/Reading... ·...

Reading Between the Tea Leaves: How Tax Reform Could Impact Future Charitable PlanningPresentation for Chicago Council on Planned Giving Annual Symposium – May 25, 2017

Kirk A. HoopingarnerQuarles & Brady LLP300 N. LaSalle St., Suite 4000Chicago, IL 60654(312) [email protected]

mailto:[email protected]

• Planned giving needs to be cognizant of potential tax reform legislation and related regulatory trends in the charitable sector when assisting donors in designing their planned gifts

• It is clear that a major legislative goal for President Trump and the Republican controlled Congress is major tax reform and many proposals certainly impact planned giving

• The following discusses various tax reform proposals with the greatest impact on charitable planned giving and also trends in federal regulation of tax exempt organizations and how such proposals and trends could affect the tax and related benefits of planned charitable gifts in the future.

Introduction

2

• Repeal of federal estate tax

– For most Americans, there is currently no federal estate tax, so this is not a major change in tax benefits associated with charitable bequests; still have income tax savings of IRA charitable beneficiary designations

– But for high net worth individuals who have estates well in excess of current federal exclusion ($10,980,000 for a married couple), this repeal could have very significant effect on their tax savings

– And for those who were interested in use of testamentary charitable remainder or testamentary charitable lead trusts to save estate taxes, a total repeal that results in no tax savings from such trusts may cause high net worth individuals to revisit use of such trusts.

– With all this said, if donors want tax savings from charitable bequests, most can turn to naming charities as beneficiaries of retirement accounts which do not escape income taxation at death of owner.

President Trump's tax reform proposals

3

• Key for planning for possible estate tax repeal appears to be flexibility

• May need to anticipate possible permanent estate tax repeal and how that would impact the allocation of the estate, especially when the allocation is based on a zero tax formula that results in charitable bequests or funding of charitable split interest trusts which result in zero estate tax.

• What happens if there is repeal?

• And what happens if the federal estate tax later returns?


4

• And what about the federal gift tax?

• If gift tax not repealed, high net worth individuals interested in making substantial gifts during lifetime but not paying gift tax, may want to utilize the leverage of charitable split interest trusts.


5

• In his proposal last summer for estate tax repeal, he mentioned the concept of a tax at death for over 10 million of unrealized capital gain in a decedent's estate and said that this could not be avoided by bequests to "private charities."

• It is not clear what this means and what it was intended to address, but suggests that bequests to private foundations would be considered a potential abuse and should be subject to this special tax on unrealized capital gain on death.


6

• Proposal to limit itemized deductions to $200,000 for married filing jointly and $100,000 for singles

– Could certainly have negative impact on major donations and substantial multi-year pledges

– Tax Policy Center estimates that this plan would reduce individual giving by 4.5% to 9%, or between $13.5 billion and $26.1 billion if effective in 2017.

– Best that donors are made aware of potential caps so they are not surprised if future gifts made through a multi year grant yield a much lower tax benefit.

– For major giving, may require more planning and spreading of gifts among the donor's favorite charities.


7

• Reduction in federal individual income tax rates to a schedule of 12%, 25% and 35%

– Results in less tax savings from charitable contributions

– Fundraisers used this in last quarter of 2016 to promote accelerating charitable contributions to 2016 to get biggest tax savings.

– But because of uncertainty of tax reform, not clear that this had as much traction with donors; may have caused at least some small incremental increases in year end donations in 2016

– Also for donors interested in increased tax benefit, but not willing to make direct donations, contributions to donor advised funds became popular option


8

• Will the line between the non-profit sector and the for profit sector become more gray?

• President Trump was highly critical of the Clinton Foundation for allegedly obtaining contributions and then giving favored governmental treatment to donors?

• How will Trump approach ethical conflict questions that often arise in the charitable sector when collaborating with for profit enterprises?

• Will the IRS' policing of such arrangements be reduced?

President Trump's private business mindset

9

• Generally President Trump's tax reform proposals are consistent with overall Republican party's tax platform as proposed by House Speaker Paul Ryan and others

• But certain leaders of the party seem to be more critical of the philanthropic sector and willing to propose legislation that could substantially reduce the charitable deduction and also effect the operations of tax exempt organizations.

• For example, former House Ways and Means Chair David Camp in 2014 proposed to limit the charitable deduction for property to the donated property's adjusted tax basis which would greatly reduce the tax benefits of donating highly appreciated property.

Republican Controlled Congress- additional considerations

10

• And Senator Grassley of Iowa has frequently expressed serious concerns over what he perceives is excessive accumulation of charitable funds in university and hospital endowments and through use of the donor advised fund

• Congressional hearings in recent years suggested that several members of the Republican party did not sincerely believe that the public was given the maximum benefit from the billions of dollars in tax benefits given for charitable deductions and for tax exempt of earnings of charitable organizations.

• A former aide to Grassley, Dean Zerbe, when commenting on a proposal by the Obama administration for caps on the charitable deduction said "the proposed limitation on deductions for charitable giving does provide an opportunity for Congress to bring leadership to bear and reexamine what should be the priorities for tax incentives for charitable giving


11

• One irony after the outcry over the politicization of the Tea Party organizational 501(c)(4) applications, is the suggestion that the Republican Party may be greatly interested in more substantive control over how charitable dollars are spent

• An example is the hotly debated issue over Federal funding of Planned Parenthood

• Does this expand to other controls over the philanthropic sector and will that sector no longer be able to call itself the "Independent Sector"


12

• And during a time when President Trump is calling for less regulations, will Congress call for more in the philanthropic sector?

• Will charities need to provide additional reporting to provide evidence that their programs are providing real impact?

• Will there be increasing demands to reduce infrastructure costs?

• And will this just further strap the administrative capacities of charities that are stretched so very thin already?


13

• Could expand possible recipients of charitable rollovers to include donor advised funds

• Currently restricted to public charities

• At least for now the charitable rollover does seem permanent, and with possible caps on itemized deductions and lowering of income tax rates, the tax advantages of such rollovers are greater.

Additional legislative initiatives- expanding use of IRA charitable rollovers

14

• Individuals are increasingly looking to charitable giving tools that are user friendly and thus decrease administrative costs

• Donor Advised Funds are becoming a popular tool for charitable giving where donors can set aside a fund, reserve the right to “advise” over its distribution to charities, but not be required to deal with costs of administration, including tax return filings.

• Also, such funds can be managed relatively efficiently and investments can be relatively conservative.

• More fund sponsors are giving donors much flexibility, including allowing them to continue to use there personal financial advisors with respect to investment management.

Use of Donor-Advised Funds

15

• But with such increased popularity also comes increased scrutiny by Congress and the IRS

• Critics view donor advised funds as convenient ways for donors to get charitable deductions while not having to actually distribute charitable dollars to charities.

• Calls for more regulations of donor advised funds and in the least providing for requiring annual distributions similar to those rules that have been applicable to private foundations for almost 40 years.

Use of Donor Advised Funds

16

• As we recently experienced the first federal rate hike in two years and it is anticipated that there will be more increases in the next two years, we are reminded of the impact on such hikes on the leverage resulting from charitable split interest trusts

• The federal IRC section 7520 rate jumped from 1.8 to 2.4% from December, 2016 to January, 2017.

• Charitable lead trusts provide the greatest tax savings when interest rates are low

• Charitable remainder annuity trusts provide the greatest tax savings when interest rates are high

• Charitable remainder unitrusts also provide the greatest tax savings when interest rates are high, but not as significant as charitable remainder annuity trusts

Interest rates and charitable split interest trusts

17

• Charitable deduction for $1,000,000 contribution and a 10 year trust with a 5% payout:

Interest rates and charitable split interest trusts

18

Type of trust 1.8% 7520 rate 2.4% 7520 rate

CLAT 453,865 439,875

CRAT 546,135 560,125

CRUT 600,837 601,536

• As stated earlier, it is very likely that even if the estate tax is repealed, the gift tax will not be repealed and high net worth individuals will still be looking for ways to maximize their lifetime gift tax exemption (currently $5,490,000) in the transfer of wealth to the next generation

• Charitable split interest trusts can provide this leverage.

Charitable split interest trusts

19

• With the economic turmoil, people may be justifiably reluctant to make substantial lifetime gifts

• But they may be less reluctant to remember their favorite charities in their estate plans, because it will not effect their own standards of living and they will not need to worry about running out of money

• While it is true that their children may be in financial need of inheritances, decreasing such inheritances by a relatively small amount by giving to charity should not have a major impact on the financial security of their children and the charitable bequest can provide a meaningful legacy for the donor and the donor’s family.

• Even without estate tax savings (if the estate tax is repealed), they can still receive income tax savings if designated charities as IRA beneficiaries and many will still consider charity an important part of their estate plan.

Planned Gifts at Death

20

• In the end, we are approaching a whole new world with many uncertainties.

• Tax reform could have substantial impact on the tax benefits associated with charitable giving and donors certainly are entitled to know the net tax benefit of their planned giving.

• Donors will be looking to advisors to ensure they understand the effect of such legislation and likely will want maximum flexibility in their estate planning, including any long term planned giving.

• While we will likely continue to be a society with a strong charitable tradition, donors will be increasingly looking for ways to make sure their giving is as impactful and tax efficient as possible .

Conclusion

21

Reading Between the Tea Leaves: How Tax Reform Could Impact … Sympoisum/Reading... ·...

Documents

Transcript of Reading Between the Tea Leaves: How Tax Reform Could Impact … Sympoisum/Reading... ·...