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For Producer or Broker/Dealer Use Only. Not For Public Distribution Charitable Tax Planning and Life Insurance For Producer or Broker/Dealer Use Only.

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Presentation on theme: "For Producer or Broker/Dealer Use Only. Not For Public Distribution Charitable Tax Planning and Life Insurance For Producer or Broker/Dealer Use Only."— Presentation transcript:

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

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

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

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

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

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

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

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

9 For Producer or Broker/Dealer Use Only. Not For Public Distribution Public - ValuationPrivate - 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% - FMV20% - 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 For Producer or Broker/Dealer Use Only. Not For Public Distribution.

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

11 For Producer or Broker/Dealer Use Only. Not For Public Distribution Gifts of Life Insurance Purpose: Create large endowment Leverage the charitable donation For Producer or Broker/Dealer Use Only. Not For Public Distribution.

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

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

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

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

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

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

18 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.

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

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

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

22 For Producer or Broker/Dealer Use Only. Not For Public Distribution IRC Section 7520 Rate IRS assumed rate of return 120% of federal midterm rate Can use current months or previous two months Generally, the higher the 7520 rate, the larger the CRT deduction For Producer or Broker/Dealer Use Only. Not For Public Distribution.

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

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

25 For Producer or Broker/Dealer Use Only. Not For Public Distribution CRT: Irrevocable Trusts What Can Be Changed: Charitable remainderman Investments in trust For Producer or Broker/Dealer Use Only. Not For Public Distribution.

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

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

28 For Producer or Broker/Dealer Use Only. Not For Public Distribution CRT: Selecting the Proper Asset Publicly traded stock Low basis Stock pays low dividends Donor seeking to defer capital gains tax Needs a source of premium dollars For Producer or Broker/Dealer Use Only. Not For Public Distribution.

29 For Producer or Broker/Dealer Use Only. Not For Public Distribution CRT: Selecting the Proper Asset Appreciated Real Estate Low basis Debt free Contribute 100% of donors 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.

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

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

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

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

34 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.

35 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.

36 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.

37 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.

38 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.

39 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.

40 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.

41 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.

42 For Producer or Broker/Dealer Use Only. Not For Public Distribution Client Objection Implementing a CRT Disinherits Our Heirs! For Producer or Broker/Dealer Use Only. Not For Public Distribution.

43 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.

44 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 donors estate May provide protection from childs 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.

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

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

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

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

49 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 For Producer or Broker/Dealer Use Only. Not For Public Distribution. L (exp11/13)


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