1. CHARITABLE PLANNING FOR UPPER-INCOME DONORS PRINTING SUGGESTIONS: If you want to print out these slides, may I suggest: #1 – AVOID PRINTING THE DARK BACKGROUND. It makes it hard to read. Suggest using the print command “BLACK and WHITE”; avoid using “color” #2 – PRINT SIX SLIDES PER PAGE. Slides contain a very large font. Six slides per page will conserve paper.

2. CHARITABLE PLANNING FOR UPPER-INCOME DONORS Advancement Network 2014 Annual Conference Cleveland, Ohio -- October 18, 2014 CHRISTOPHER R. HOYT University of Missouri - Kansas City School of Law

3. Tax Planning Challenges * Planning Strategies for the new 3.8% surtax: Net Investment Income 3.8% surtax: Net Investment Income * Retirement Assets -- Hot Topics -- Lifetime planning -- Lifetime planning -- Bequests of Retirement Assets -- Bequests of Retirement Assets -- spouse -- trusts -- charities -- spouse -- trusts -- charities

4. INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% Congratulations! Brilliant tax planning! “Bush tax cuts” remain in full effect for people with adjusted gross income under $200,000 ($250,000 on a joint return)

5. INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% 33% rate when taxable income > $186,350 -- single > $226,850 – married filing jointly

6. TAX RATES paid on TAXABLE INCOME ADJUSTED GROSS INCOME (“AGI”) Minus: Greater of Minus: Greater of -- Standard Deduction ($6,100) -- Standard Deduction ($6,100) or or -- Itemized Deductions (Mortgage interest; -- Itemized Deductions (Mortgage interest; charitable contributions; state & local taxes) charitable contributions; state & local taxes) Minus: Personal Exemption & Dependents ($3,900 each ) Minus: Personal Exemption & Dependents ($3,900 each ) = TAXABLE INCOME

7. WEALTHY PAY SOME TAXES ON “AGI” ADJUSTED GROSS INCOME (“AGI”) Minus: Greater of Minus: Greater of -- Standard Deduction ($6,100) -- Standard Deduction ($6,100) or or -- Itemized Deductions (Mortgage interest; -- Itemized Deductions (Mortgage interest; charitable contributions; state & local taxes) charitable contributions; state & local taxes) Minus: Personal Exemption & Dependents ($3,900 each ) Minus: Personal Exemption & Dependents ($3,900 each ) = TAXABLE INCOME

8. INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% plus health care surtax 3.8% 0.9% 3.8% 36.8% 35.3% 18.8%

9. 0.9% MEDICARE SURTAX: When Compensation Exceeds $200,000 ($250,000 married joint return) Compensation Compensation -- wages & self-employment income -- wages & self-employment income (Added to 1.45% Medicare/Medicaid tax ) (Added to 1.45% Medicare/Medicaid tax ) (Employee pays entire 0.9%; no employer match) (Employee pays entire 0.9%; no employer match) Employer must withhold when W-2 Form compensation exceeds $200,000 Employer must withhold when W-2 Form compensation exceeds $200,000 Married joint? Together over $250,000? Married joint? Together over $250,000? -- Pay on Form 1040, e.g. if neither spouse has over $200,000. (e.g., Husband has $100k and Wife has $160k = $260k) -- Pay on Form 1040, e.g. if neither spouse has over $200,000. (e.g., Husband has $100k and Wife has $160k = $260k)

10. 3.8% Net Investment Income Tax MAGI > $200,000 ($250,000 joint returns) 3.8% surtax on the lesser of: Net Investment Income Net Investment Income or or MAGI over $200,000 ($250,000 joint) MAGI over $200,000 ($250,000 joint) ( $200k/$250k not indexed for inflation ) Trusts and estates pay 3.8% at $12,150 !!

11. 3.8% Net Investment Income Tax MAGI > $200,000 ($250,000 joint returns) How many people are affected? 2011 Tax Returns with AGI over $200,000: 3.2% of all returns 0.7% of single returns 0.7% of single returns 7.6% of married joint returns 7.6% of married joint returns 86% of the returns with over $200,000* of AGI were married joint

12. 3.8% Net Investment Income Tax MAGI > $200,000 ($250,000 joint returns) Strategies for three different taxpayers: #1 - Richest 1% - Income over $400,000 -- Reduce NII (not likely to get AGI <200k) -- Reduce NII (not likely to get AGI <200k) #2 – Taxpayers with AGI near $200k ($250 jt) #2 – Taxpayers with AGI near $200k ($250 jt) -- Either reduce NII or reduce AGI -- Either reduce NII or reduce AGI #3 - Taxpayers with AGI below $200k ($250 jt) #3 - Taxpayers with AGI below $200k ($250 jt) -- Avoid spikes in income that trigger 3.8% tax -- Avoid spikes in income that trigger 3.8% tax -- Charitable Remainder Trusts !! -- Charitable Remainder Trusts !!

13. CHARITABLE REMAINDER TRUSTS Payment to non-charitable beneficiary (ies) for life *or* for a term of years (maximum 20 years) Payment to non-charitable beneficiary (ies) for life *or* for a term of years (maximum 20 years) Remainder interest distributed to charity Remainder interest distributed to charity Exempt from income tax Exempt from income tax

14. CHARITABLE REMAINDER TRUSTS EXAMPLE Husband & wife age 65 Husband & wife age 65 Sell stock or land for $1 million gain Sell stock or land for $1 million gain Other option: contribute to CRT before sale is finalized; have CRT make the sale Other option: contribute to CRT before sale is finalized; have CRT make the sale

15. CHARITABLE REMAINDER TRUSTS CRT PROVIDES: 1. Charitable income tax deduction 1. Charitable income tax deduction 2. Greater cash flow for life 2. Greater cash flow for life 3. Avoid spike in income – 3.8% tax 3. Avoid spike in income – 3.8% tax 4. “Wealth replacement” strategy with life insurance. 4. “Wealth replacement” strategy with life insurance.

16. CHARITABLE REMAINDER TRUSTS DONATE STOCK TO C.R.T.; DONATE STOCK TO C.R.T.; KEEP THE STOCK C.R.T. SELLS STOCK KEEP THE STOCK C.R.T. SELLS STOCK Sales Price $ 1,000,000$1,000,000 Cost of Stock -0- -0- Gain on Sale $ 1,000,000$1,000,000 Capital Gains Tax (about 25%) 250,000 None Remaining Proceeds $ 750,000$1,000,000

17. CHARITABLE REMAINDER TRUSTS DONATE STOCK TO C.R.T.; DONATE STOCK TO C.R.T.; KEEP THE STOCK C.R.T. SELLS STOCK KEEP THE STOCK C.R.T. SELLS STOCK Remaining Proceeds $ 750,000$1,000,000 Interest Rate x 5% x 5% Annual Income $ 37,500$ 50,000 ══════ ══════ (33% more)

18. 3.8% Net Investment Income Tax MAGI > $200,000 ($250,000 joint returns) Net Investment Income Interest & Dividends Interest & Dividends Annuities Annuities Rents & Royalties Rents & Royalties Profits from LLC / S Corp (if not employed) Profits from LLC / S Corp (if not employed) Business of trading commodities & fin instruments Business of trading commodities & fin instruments Most capital gains Most capital gains

19. 3.8% Net Investment Income Tax MAGI > $200,000 ($250,000 joint returns) Income Exempt from Surtax: Trade / Business income from an LLC, partnership, Subchapter S corporation or sole proprietorship, provided the recipient is employed at the business. Trade / Business income from an LLC, partnership, Subchapter S corporation or sole proprietorship, provided the recipient is employed at the business. -- “material participation” test -- “material participation” test (work 500+ hours during the year?) (work 500+ hours during the year?) Gain from selling property used in trade/ business [rental property gains -> 3.8% tax] Gain from selling property used in trade/ business [rental property gains -> 3.8% tax]

20. 3.8% Net Investment Income Tax MAGI > $200,000 ($250,000 joint returns) Other Income Exempt from 3.8% Surtax: Income that isn’t interest, rents, gains, etc : Retirement income – social security, qualified plans: IRAs, 401(k), pensions, etc – ( non-qualified annuities are subject to tax) Retirement income – social security, qualified plans: IRAs, 401(k), pensions, etc – ( non-qualified annuities are subject to tax) Wages & self-employment income ( 0.9% tax) Wages & self-employment income ( 0.9% tax) Alimony income Alimony income Lottery winnings Lottery winnings

21. INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% plus health care surtax 3.8% 0.9% 3.8% 36.8% 35.3% 18.8%

22. INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% AGI > $250k/$300k 33% 34.4% 15% -- 3% phase-out itemized deductions -- Phase-out personal exemptions

23. PHASEOUTS AGI > $250,000 ($300,000 joint returns) [2014: > $254,200 ($305,060 joint returns)] 3% Phase-out Itemized Deductions 3% Phase-out Itemized Deductions -- disguised 1% tax rate hike (3% x 33% rate) -- disguised 1% tax rate hike (3% x 33% rate) Personal and Dependent Exemptions -- $3,900 apiece for self & each dependent -- lose 2% for every $2,500 income increase AGI > $377k ($427k jnt) -- 100% eliminated AGI > $377k ($427k jnt) (Phase-out $254k-$377k ( $305k-$427k jnt))

24. INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $250k/$300k 33% 34.4% 15% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% 37.8% 36.3% 19.8% [plus personal exemption phase-out means extra tax until AGI $377,000 ($427,000 jnt)]

25. INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% Taxb>$400/$450 39.6% 41.0% 20%

26. INCOME TAX RATES INVEST WAGES LTCG Income Level - MENT (+1.45%) & Divid AGI < $200k/$250k 28% 29.4% 15% Taxb>$400/$450 39.6% 41.0% 20% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% With $12,000+ income, 44.4% 42.9% 24.8% Trusts & Estates >> 43.4% 23.8%

27. 3.8% Net Investment Income Tax MAGI > $200,000 ($250,000 joint returns) Two Ways to reduce the 3.8% surtax : #1 - Reduce AGI to less than $200,000 ($250,000 joint) ($250,000 joint)and/or #2 – Reduce Net Investment Income

28. 3.8% Net Investment Income Tax MAGI > $200,000 ($250,000 joint returns) Strategies for three different taxpayers: #1 - Richest 1% - Income over $400,000 -- Reduce NII (not likely to get AGI <200k) -- Reduce NII (not likely to get AGI <200k) #2 – Taxpayers with AGI near $200k ($250 jt) #2 – Taxpayers with AGI near $200k ($250 jt) -- Either reduce NII or reduce AGI -- Either reduce NII or reduce AGI #3 - Taxpayers with AGI below $200k ($250 jt) #3 - Taxpayers with AGI below $200k ($250 jt) -- Avoid spikes in income that trigger 3.8% tax -- Avoid spikes in income that trigger 3.8% tax

29. Reduce Net Investment Income Two Ways to reduce Net Investment Income: #1 - Convert NII into income that isn’t NII #2 – Shift NII to family and to charity that aren’t subject to tax on their NII aren’t subject to tax on their NII

30. Reduce Net Investment Income Convert NII into Income That Isn’t NII Some examples: #1 - Taxable interest to tax-free muni interest #2 – Life insurance #3 – Work 500+ hours at business #4 – Monster-size Roth IRA Conversions

31. Reduce Net Investment Income Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%] Family: Give income-generating investments Charity: #1 – Make gifts of appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts

32. #1 – MAKE GIFTS OF APPRECIATED STOCK DOUBLE-TAX ADVANTAGE Charitable Income Tax Deduction for the Full Appreciated Value of the Stock Charitable Income Tax Deduction for the Full Appreciated Value of the Stock Never Pay Income Tax on the Growth of the Value of the Stock Never Pay Income Tax on the Growth of the Value of the Stock Loss Property? Sell for tax loss; give cash Loss Property? Sell for tax loss; give cash

33. DOUBLE BENEFIT FROM GIFT OF APPRECIATED L.T.C.G. PROPERTY << AVOID LONG-TERM CAPITAL GAIN TAX << CHARITABLE INCOME TAX DEDUCTION

34. $ Benefits Max Federal Taxes Saved Person in 2012 Person in 2012 50% << 15%* LTCG Tax Rate << 35% Marginal Tax Rate * 25% RE Dep Recap * 28% Collectibles

35. IMPACT OF INDIVIDUAL INCOME TAX RATE CHANGES in 2012 and 2013-14

36. FUTURE INCOME TAX RATES Highest tax rates 2012 2013-14 Investment income 35% 44.4% Earned income 36.4% 43.0% (wages – 1.45% health) LT Capital Gains 15% 24.8%

37. $ Benefits Max Federal Taxes Saved Person in the Year 2012 Person in the Year 2012 50% << 15%* LTCG Tax Rate << 35% Marginal Tax Rate * 25% RE Dep Recap * 28% Collectibles

38. $ Benefits Max Federal Taxes Saved Person in the Year 2014 Person in the Year 2014 65.4% << 24.8%* LTCG Tax Rate << 39.6*% Marginal Tax Rate (3.8% surtax not avoided by charitable deduction) * 29.8% RE Dep Recap * 32.8% Collectibles

39. Reduce Net Investment Income Shift investment income to charity: #1 – Make gifts of appreciated stock #2 - Donor advised funds & private foundations & private foundations #3 – Charitable lead trusts

40. DONOR ADVISED FUNDS Administrative Convenience – split large gift to many charities -- anonymous gifts possible with DAFs -- one receipt from DAF/PF instead of many CWAs from many charities many CWAs from many charities

41. Shift Net Investment Income Client with $400,000+ of income says: “My $100,000 investment produces $4,000 of taxable income every year” “My $100,000 investment produces $4,000 of taxable income every year” “I give $4,000 to charity every year” “I give $4,000 to charity every year” “I want to make a charitable bequest of $100,000” “I want to make a charitable bequest of $100,000”

42. Shift Net Investment Income Client with $400,000+ of income says: “My $100,000 investment produces $4,000 of taxable income every year” “My $100,000 investment produces $4,000 of taxable income every year” “I give $4,000 to charity every year” “I give $4,000 to charity every year” SOLUTION: LIFETIME GIFT OF $100,000 TO PF or DAF; Shift income Lifetime income tax deduction produces refund; better than just estate tax bequest Investment income of PF/DAF not subject to 3.8% NII surtax Tip: Make gift to DAF of appreciated stock

43. Reduce Net Investment Income Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%] Family: Give income-generating investments Charity: #1 – Make gifts of appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts

44. Shift Net Investment Income Client with $400,000+ of income says: “My $100,000 investment produces $4,000 of taxable income every year” “My $100,000 investment produces $4,000 of taxable income every year” “I give $3,000 to charity every year” “I give $3,000 to charity every year” “I don’t want a charitable bequest of $100k. Want $100k to go to family.” “I don’t want a charitable bequest of $100k. Want $100k to go to family.”

45. Shift Net Investment Income Client with $400,000+ of income says: “My $100,000 investment produces $4,000 of taxable income every year” “My $100,000 investment produces $4,000 of taxable income every year” “I give away $3,000 to charity every year” “I give away $3,000 to charity every year” “I want family to get the $100,000 investment” “I want family to get the $100,000 investment” CONCEPT: Put $100,000 into a Charitable Lead Trust for a term of years. Whereas donor is paying 3.8% NIIT on all 4%, the CLT would pay only on undistributed 1%. [ PLUS: CLT discount on wealth transfer ]

46. Reduce Net Investment Income Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%] #1 – Donate appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts COST/BENEFIT – Is administrative cost of PF or CLT worth doing just for 3.8% tax savings? Other benefits are needed. ( Compare: DAF cheap!) ( Compare: DAF cheap!)

47. Taxpayers with AGI Near $200,000 Two Ways to reduce the 3.8% surtax : #1 - Reduce Net Investment Income (convert NII or shift NII) (convert NII or shift NII) and/or and/or #2 – Reduce AGI to less than $200,000 ($250,000 joint)

48. Taxpayers with AGI Near $200,000 and with lots of Net Investment Income Reduce AGI to less than $200k ($250 jnt) Reduce NII (see strategies listed earlier) Reduce NII (see strategies listed earlier) Avoid large Roth IRA conversions Avoid large Roth IRA conversions Maximize compensation deferral Maximize compensation deferral -- 401(k) contributions -- 401(k) contributions -- Non-qualified deferred comp (Sec. 409A) -- Non-qualified deferred comp (Sec. 409A) “Charitable IRA Rollover” “Charitable IRA Rollover”

49. Taxpayers with AGI Near $200,000 ”Charitable IRA Rollover” - over age 70 ½ “QCD” – Qualified Charitable Distribution “QCD” – Qualified Charitable Distribution Have charitable gift made directly from IRA to charity (max: $100,000 /year) Have charitable gift made directly from IRA to charity (max: $100,000 /year) QCD distribution not counted as income (Price? No itemized charitable deduction) QCD distribution not counted as income (Price? No itemized charitable deduction) QCD can satisfy annual RMD QCD can satisfy annual RMD

50. REQUIRED MINIMUM DISTRIBUTIONS *LIFETIME DISTRIBUTIONS* Age of Account OwnerRequired Payout 70 1/2 3.65% 70 1/2 3.65% 75 4.37% 75 4.37% 80 5.35% 80 5.35% 85 6.76% 85 6.76% 90 8.75% 90 8.75% 95 11.63% 95 11.63% 100 15.88% 100 15.88%

51. Taxpayers with AGI Near $200,000 and with lots of Net Investment Income ”Charitable IRA Rollover” - over age 70 ½ 71 year old professional $150,000 compensation income $150,000 compensation income $50,000 net investment income $50,000 net investment income This year: first RMD from IRA: $40,000 This year: first RMD from IRA: $40,000 Intends to make charitable gift: $30,000 Intends to make charitable gift: $30,000

52. Taxpayers with AGI Near $200,000 ”Charitable IRA Rollover” - over age 70 ½ Compensation $150,000 Investment 50,000 IRA RMD 40,000 << IRA income AGI $240,000not subject to 3.8% tax to 3.8% tax

53. Taxpayers with AGI Near $200,000 ”Charitable IRA Rollover” - over age 70 ½ Normal Gift Compensation $150,000 Investment 50,000 IRA RMD 40,000 AGI $240,000 << 3.8% surtax Taxable Income $210,000 on $40,000

54. Taxpayers with AGI Near $200,000 ”Charitable IRA Rollover” - over age 70 ½ Normal GiftIRA Gift Compensation $150,000$150,000 Investment 50,000 50,000 IRA RMD 40,000 10,000 AGI $240,000$210,000 3.8% surtax on: $40,000 $10,000

55. Will Law Be Extended to 2014? >Planning strategy for 2014 if, as in 2008, 2010 & 2012, law has not been extended until December!: if, as in 2008, 2010 & 2012, law has not been extended until December!:  Give RMD to charity ;  can’t lose ! (Some IRAs balk)  (May 29, 2014 – House Ways & Means Cmmtee voted to make retroactive & permanent !)

56. 3.8% Net Investment Income Tax MAGI > $200,000 ($250,000 joint returns) Strategies for three different taxpayers: #1 - Richest 1% - Income over $400,000 -- Need to reduce NII (won’t have AGI <200k) -- Need to reduce NII (won’t have AGI <200k) #2 – Taxpayers with AGI near $200k ($250 jt) #2 – Taxpayers with AGI near $200k ($250 jt) -- Either reduce NII or reduce AGI -- Either reduce NII or reduce AGI #3 - Taxpayers with AGI below $200k ($250 jt) #3 - Taxpayers with AGI below $200k ($250 jt)

57. Retirement Assets Retirement Assets Proposal to liquidate inherited IRAs in just five years Impact on planning charitable bequests

58. THREE STAGES OF A RETIREMENT ACCOUNT Accumulate Wealth Accumulate Wealth Retirement Withdrawals Retirement Withdrawals Distributions After Death Distributions After Death

59. Accumulate Wealth Tax deduction at contribution Tax deduction at contribution Accumulate in tax-exempt trust Accumulate in tax-exempt trust Taxed upon distribution Taxed upon distribution = Tax Deferred Compensation = Tax Deferred Compensation

60. TYPES OF QRPs 1. Sec. 401 – Company plans 1. Sec. 401 – Company plans 2. Sec. 408 – IRAs 2. Sec. 408 – IRAs -- SEP & SIMPLE IRAs -- SEP & SIMPLE IRAs 3. Sec. 403(b) & 457–Charities 3. Sec. 403(b) & 457–Charities 4. Roth IRAs & 401(k)/403(b) 4. Roth IRAs & 401(k)/403(b)

61. Roth IRA, Roth 401(k), or Roth 403(b) INVERSE OF TRADITIONAL: No tax deduction at contribution No tax deduction at contribution Accumulate in tax-exempt trust Accumulate in tax-exempt trust Not taxed upon distribution Not taxed upon distribution

62. THREE STAGES Accumulate Wealth Accumulate Wealth Retirement Withdrawals Retirement Withdrawals Distributions After Death Distributions After Death

63. RETIREMENT TAXATION General Rule – Ordinary income Exceptions: -- Tax-free return of capital -- Tax-free return of capital -- NUA for appreciated employer stock -- Roth distributions are tax-free

64. USUAL OBJECTIVE: Defer paying income taxes in order to get greater cash flow Principal 10% Yield Principal 10% Yield Pre-Tax Amount $ 100,000 $ 10,000 Pre-Tax Amount $ 100,000 $ 10,000 Income Tax Income Tax on Distribution (40%) 40,000 on Distribution (40%) 40,000 Amount Left to Invest $ 60,000 $ 6,000 Amount Left to Invest $ 60,000 $ 6,000

65. REQUIRED MINIMUM DISTRIBUTION (“RMD”) BACKGROUND: 50% penalty if not receive distribution from IRA, 401(k), etc: #1 – lifetime distributions from own IRA:  beginning after age 70 ½  beginning after age 70 ½ #2 – an inherited IRA, 401(k), etc –  beginning year after death *  beginning year after death *

66. REQUIRED MINIMUM DISTRIBUTIONS *LIFETIME DISTRIBUTIONS* Age of Account OwnerRequired Payout 70 1/2 3.65% 70 1/2 3.65% 75 4.37% 75 4.37% 80 5.35% 80 5.35% 85 6.76% 85 6.76% 90 8.75% 90 8.75% 95 11.63% 95 11.63% 100 15.88% 100 15.88%

67. ADVANTAGES OF ROTH IRAs Unlike a regular IRA, Unlike a regular IRA, no mandatory lifetime distributions from a no mandatory lifetime distributions from a Roth IRA after age 70 ½ Roth IRA after age 70 ½ Yes, there are mandatory distributions after death Yes, there are mandatory distributions after death

68. THREE STAGES Accumulate Wealth Accumulate Wealth Retirement Withdrawals Retirement Withdrawals Distributions After Death Distributions After Death

69. Distributions After Death  Income taxation  Mandatory ERISA distributions  Estate taxation  Asset Protection – Clark v. Rameker Collision of multiple laws at death

70. Inherited IRAs -- Bankruptcy US Supreme Court: Inherited IRAs are not “retirement funds” entitled to Sec. 522 bankruptcy exemption under federal or state exemption laws. Clark, et ux v. Rameker, 573 U. S. __ (Jun, 12, 2014) Solution: Name trust with spendthrift provisions as beneficiary of an IRA or other qualified plan ?

71. Distributions After Death > Income taxation > Mandatory ERISA distributions > Estate taxation Collision of three tax worlds at death

72. INCOME IN RESPECT OF A DECEDENT - “IRD” – Sec. 691 No stepped up basis for retirement assets No stepped up basis for retirement assets After death, payments are income in respect of a decedent (“IRD”) to the beneficiaries After death, payments are income in respect of a decedent (“IRD”) to the beneficiaries Common mistake in the past: children liquidate inherited retirement accounts. Common mistake in the past: children liquidate inherited retirement accounts.

73. Distributions After Death > Income taxation > Mandatory ERISA distributions > Estate taxation Collision of three tax worlds at death

74. Distributions After Death After death, must start liquidating account Tax planning for family members who Tax planning for family members who inherit: DEFER distributions as long as inherit: DEFER distributions as long as possible – greater tax savings possible – greater tax savings “Stretch IRA” – make payments over “Stretch IRA” – make payments over beneficiary’s life expectancy beneficiary’s life expectancy

75. Distributions After Death “ life expectancy“ Oversimplified: Half of population will die before that age, and half will die after Implication: For the 50% of people who live beyond L.E. date, an inherited IRA will be empty before they die.

76. REQUIRED MINIMUM DISTRIBUTIONS *LIFE EXPECTANCY TABLE* Age of Beneficiary Life Expectancy 30 83 53.3 more years 30 83 53.3 more years 40 83 43.6 40 83 43.6 50 84 34.2 50 84 34.2 60 85 25.2 60 85 25.2 70 87 17.0 70 87 17.0 80 90 10.2 80 90 10.2 90 97 6.9 90 97 6.9

77. REQUIRED MIN. DISTRIBUTIONS *LIFE EXPECTANCY TABLE* “STRETCH IRAS” Age of Beneficiary Life Expectancy 30 53.3 more years 30 53.3 more years 40 43.6 40 43.6 50 34.2 50 34.2 60 25.2 60 25.2 70 17.0 70 17.0 80 10.2 80 10.2 90 6.9 90 6.9

78. REQUIRED MIN. DISTRIBUTIONS *LIFE EXPECTANCY TABLE* “STRETCH IRAS” Age of Beneficiary Life Expectancy 30 1.9% 53.3 more years 30 1.9% 53.3 more years 40 2.3% 43.6 40 2.3% 43.6 50 2.9% 34.2 50 2.9% 34.2 60 4.0% 25.2 60 4.0% 25.2 70 5.9% 17.0 70 5.9% 17.0 80 10.0% 10.2 80 10.0% 10.2 90 14.5% 6.9 90 14.5% 6.9

79. SENATE PROPOSAL: LIQUIDATE ALL INHERITED IRAs IN FIVE YEARS 2012 – Highway Bill – not enacted 2012 – Highway Bill – not enacted President Obama budget proposal President Obama budget proposal June, 2014 – Sen. Wyden adds to Highway Bill June, 2014 – Sen. Wyden adds to Highway BillEXCEPTIONS -- Spouse -- minor child -- disabled -- Spouse -- minor child -- disabled -- Person not more than ten years younger -- Person not more than ten years younger

80. REQUIRED MINIMUM DISTRIBUTIONS Example: Death at age 80? CURRENT LAW: *Life Expectancy Table* Age of Beneficiary Life Expectancy 30 1.9% 53.3 more years 30 1.9% 53.3 more years 40 2.3% 43.6 40 2.3% 43.6 50 2.9% 34.2 50 2.9% 34.2 60 4.0% 25.2 60 4.0% 25.2 70 5.9% 17.0 70 5.9% 17.0 80 10.0% 10.2 80 10.0% 10.2 90 10.0% 6.9 * [10.2 yrs] 90 10.0% 6.9 * [10.2 yrs]

81. REQUIRED MINIMUM DISTRIBUTIONS Example: Death at age 80? PROPOSED: FIVE YEARS if >10 yrs younger Age of Beneficiary Life Expectancy 30 5 years 30 5 years 40 5 40 5 50 5 50 5 60 5 60 5 70 5.9% 17.0 70 5.9% 17.0 80 10.0% 10.2 80 10.0% 10.2 90 10.00% 6.9 * [10.2 yrs] 90 10.00% 6.9 * [10.2 yrs]

82. SENATE PROPOSAL: LIQUIDATE ALL INHERITED IRAs IN FIVE YEARS EXCEPTIONS -- Spouse -- minor child -- disabled -- Spouse -- minor child -- disabled -- Person not more than ten years younger -- Person not more than ten years younger TAX TRAP: Does naming a trust for a spouse (e.g., QTIP trust; credit shelter trust) as an IRA beneficiary mean required liquidation in 5 years?

83. SENATE PROPOSAL: LIQUIDATE ALL INHERITED IRAs IN FIVE YEARS IMPLICATIONS FOR CHARITIES Donors more likely to consider Outright bequests Outright bequests Retirement assets to tax-exempt CRT Retirement assets to tax-exempt CRT Child: income more than 5 years; then charity Child: income more than 5 years; then charity Spouse only (marital estate tax deduction) Spouse only (marital estate tax deduction) Spouse & children (no marital deduction ) Spouse & children (no marital deduction )

84. FUNDING CRTs WITH RETIREMENT ASSETS WITH RETIREMENT ASSETS

85. 2-GENERATION CHARITABLE REMAINDER TRUST Typically pays 5% to elderly surviving spouse for life, then 5% to children for life, then liquidates to charity Typically pays 5% to elderly surviving spouse for life, then 5% to children for life, then liquidates to charity Like an IRA, a CRT is exempt from income tax Like an IRA, a CRT is exempt from income tax Can operate like a credit-shelter trust for IRD assets [no marital deduction] Can operate like a credit-shelter trust for IRD assets [no marital deduction]

86. 2-GENERATION CHARITABLE REMAINDER TRUST Can be a solution for second marriages when estate is top-heavy with retirement assets. Example: Can be a solution for second marriages when estate is top-heavy with retirement assets. Example: -- Half of IRA to surviving spouse -- Half of IRA to surviving spouse -- Other half of IRA to a CRT for 2 nd -- Other half of IRA to a CRT for 2 nd spouse and children from 1 st marriage spouse and children from 1 st marriage

87. 2-GENERATION CHARITABLE REMAINDER TRUST TECHNICAL REQUIREMENTS Minimum 10% charitable deduction Minimum 10% charitable deduction -- all children should be over age 40 -- all children should be over age 40 CRUT – minimum 5% annual distrib CRUT – minimum 5% annual distrib Not eligible for marital deduction Not eligible for marital deduction (see 2002 article on topic) (see 2002 article on topic)

88. MANDATORY DISTRIBUTIONS [Assume inherit IRA at age 80 and die at 92] Own Accumulation Conduit AGE IRA Trust Trust. C R T. 80 5.35% 9.80% 9.80% 5.00% 85 6.76% 19.23% 13.16% 5.00% 90 8.78% 100.00% 18.18% 5.00% 91 9.26% empty 19.23% 5.00% 92 9.81% empty 20.41% 5.00%

89. HOW TO LEAVE A RETIREMENT ACCOUNT TO BOTH FAMILY & CHARITY

90. CHARITABLE BEQUESTS FROM QRPs Best type of bequest: taxable income ! Best type of bequest: taxable income ! Easier than formality of a will: Name charity as beneficiary on form of plan Easier than formality of a will: Name charity as beneficiary on form of plan -- no need for attorney to draft -- no need for attorney to draft -- no need for witnesses, etc. -- no need for witnesses, etc.

91. “You can’t make a charitable bequest unless you have a will” Wrong. A retirement plan is a trust with its own beneficiary designations. Like other trusts, assets can pass outside probate. Name a charity as a beneficiary - the cheapest “charitable remainder trust” - the cheapest “charitable remainder trust”

92. LIFETIME GIFTS: ONLY IRAs BEQUESTS: ANY QRP 1. Sec. 401 – Company plans 1. Sec. 401 – Company plans 2. Sec. 408 – IRAs 2. Sec. 408 – IRAs -- SEP & SIMPLE IRAs -- SEP & SIMPLE IRAs 3. Sec. 403(b) & 457–Charities 3. Sec. 403(b) & 457–Charities 4. Roth IRAs & 401(k)/403(b) 4. Roth IRAs & 401(k)/403(b)

93. Avoiding Problems With Charitable Bequests * Let Other Beneficiaries Have Stretch IRA * Keep IRD Off of Estate’s Income Tax Return * Guarantee Offsetting Charitable Income Tax Deduction if Have to Report Income

94. REQUIRED MIN. DISTRIBUTIONS *LIFE EXPECTANCY TABLE* “STRETCH IRAS” Age of Beneficiary Life Expectancy 30 53.3 more years 30 53.3 more years 40 43.6 40 43.6 50 34.2 50 34.2 60 25.2 60 25.2 70 17.0 70 17.0 80 10.2 80 10.2 90 6.9 90 6.9

95. Avoiding Problems With Charitable Bequests * Let Other Beneficiaries Have Stretch IRA * Keep IRD Off of Estate’s Income Tax Return * Guarantee Offsetting Charitable Income Tax Deduction if Have to Report Income

96. WHAT CAN GO WRONG ? TWO WAYS TO MAKE A CHARITABLE BEQUEST FROM A RETIREMENT ACCOUNT TWO WAYS TO MAKE A CHARITABLE BEQUEST FROM A RETIREMENT ACCOUNT #1 – NAME CHARITY AS BENEFICIARY OF THE ACCOUNT #2 – PAY ACCOUNT TO ESTATE OR TRUST THAT THEN MAKES A CHARITABLE BEQUEST

97. Avoiding Problems With Charitable Bequests * Let Other Beneficiaries Have Stretch IRA * Keep IRD Off of Estate’s Income Tax Return * Guarantee Offsetting Charitable Income Tax Deduction if Have to Report Income

98. WHAT CAN GO WRONG #1? Other beneficiaries cannot do stretch IRA if charity is beneficiary? Other beneficiaries cannot do stretch IRA if charity is beneficiary? Solutions: Solutions: * cash out charity’s share by Sept 30 * cash out charity’s share by Sept 30 or or * separate account for charity p. 39 * separate account for charity p. 39

99. WHAT CAN GO WRONG #2 ? TWO WAYS TO MAKE A CHARITABLE BEQUEST FROM A RETIREMENT ACCOUNT TWO WAYS TO MAKE A CHARITABLE BEQUEST FROM A RETIREMENT ACCOUNT #1 – NAME CHARITY AS BENEFICIARY OF THE ACCOUNT #2 – PAY ACCOUNT TO ESTATE OR TRUST THAT THEN MAKES A CHARITABLE BEQUEST

100. WHAT CAN GO WRONG #2? Estate or trust has taxable income from receiving IRA distribution, but maybe there is no offsetting charitable income tax deduction when the IRA check is given to a charity. Estate or trust has taxable income from receiving IRA distribution, but maybe there is no offsetting charitable income tax deduction when the IRA check is given to a charity.

101. WHAT CAN GO WRONG? IRS Chief Counsel Memorandum ILM 200848020 Decedent left his IRA to a trust that benefited his six children and several charities Trust received cash from IRA; paid entire charitable share, leaving the six children as the only remaining beneficiaries of the trust. charitable deduction.” Reason: trust had no instructions to pay income to charities p.39 IRS: “Taxable income from IRA, but no charitable deduction.” Reason: trust had no instructions to pay income to charities p.39

102. WHAT CAN GO WRONG? Solution #1 – Keep IRD off of estate’s/trust’s income tax return Solution #1 – Keep IRD off of estate’s/trust’s income tax return a. Name charity as beneficiary of IRA b. “Distribute” IRA to charity if document allows document allows Caution: IRS memo on danger of using Caution: IRS memo on danger of using retirement accounts to satisfy pecuniary bequests p.41

103. WHAT CAN GO WRONG? SOLUTION #2 – draft document to get an offsetting charitable income tax deduction in case estate or trust has income ….. P.42 I instruct that all of my charitable gifts, bequests and devises shall be made, to the extent possible, from "income in respect of a decedent" ….. P.42

104. CHARITABLE PLANNING FOR UPPER-INCOME DONORS Advancement Network 2014 Annual Conference Cleveland, Ohio -- October 18, 2014 CHRISTOPHER R. HOYT University of Missouri - Kansas City School of Law