Charitable Remainder Trusts presented by Tim Mezhlumov, EA, CFP, CLU, CFS, CLTC

▪ Strategic wealth transfer and wealth conservation are high priorities for many individuals. ▪ These individuals are seeking solutions to: ▪ Recapture tax dollars. ▪ Fulfill philanthropic objectives. ▪ Address broader planning concerns. ▪ Enter strategic charitable planning... A Solution !

▪ Financial products play an integral role in charitable planning strategies: ▪ Life insurance. ▪ Tax deferred annuities. ▪ Single premium immediate annuities. ▪ Stocks, bonds, mutual funds and other investments. Role of Financial Products in Charitable Planning Strategies

The Charitable Remainder Trust

▪ “Split-interest” tax exempt trust: ▪ Both charitable and non-charitable beneficiaries. ▪ Donors, or other individuals, receive income (fixed % payout) during trust term: ▪ Tax character of income payments is based upon CRT 4 tier system of tax accounting: (1) ordinary income; (2) capital gain; (3) tax free income; (4) tax free return of principal. ▪ Trust term based upon: ▪ One or more individual’s lifetimes. ▪ Term of years. ▪ Charities receive remainder following trust term. Charitable Remainder Trust Tax and Non Tax Advantages

▪ Charitable Remainder Annuity Trust (“CRAT”): ▪ Payments based upon fixed dollar amount; or fixed % of initial value of trust property. ▪ Additional contributions not permitted. ▪ Charitable Remainder Unitrust (“CRUT”): ▪ Payments based upon fixed % of current value of trust property (re-valued annually). ▪ Additional contributions permitted. ▪ Net Income With Make-Up Charitable Remainder Unitrust (“NIMCRUT”): ▪ Payments based upon lesser of fixed % payout, or actual amount of trust income. Charitable Remainder Trust Tax and Non Tax Advantages (cont.)

▪ CRT is income tax exempt trust: ▪ Permits sale or disposition of appreciated property without capital gains tax. ▪ Unlimited gift and estate tax charitable deductions for value of charity's remainder interest. ▪ charitable income tax deduction for net present value of charity’s remainder interest: ▪ Subject to AGI limits. ▪ 5 year carry forward for unused deduction. ▪ Intervivos CRT; testamentary CRT. Charitable Remainder Trust Tax and Non Tax Advantages (cont.)

Investment and Retirement Planning

▪ Clients ages 45 and 45. ▪ Marketable securities and mutual funds: ▪ Value $500,000; basis $150,000. ▪ underperforming portfolio. ▪ Planning objectives: ▪ Diversify investments. ▪ Build resources for retirement; college funding; survivor needs. ▪ Minimize or defer taxation. ▪ Benefit community. Hypothetical Clients

▪ Permits sale or disposition of appreciated or underperforming assets without capital gains tax: ▪ Diversifies investment portfolio. ▪ Enhances current income. ▪ Allows deferral of income; retirement planning opportunity (NIMCRUT). ▪ Ensures survivor resources. ▪ Reduces income taxes. ▪ Reduces estate and inheritance taxes. ▪ Fulfills charitable intent. CRT for Appreciated Investments

Wealth Replacement Proceeds CRUT- Marketable Stock (6% 7520 Rate) Donors Ages 45/45 Purchaser CRT Tax Exempt Charity 6% $30,000; $2,178,722 Total; Charitable Deduction $55,270 Stock $500,000; Basis $150,000 Sells Stock Sales Proceeds $500,000 Remainder 2% Net Growth $1,226,241 (45 Yrs) Premiums

▪ Net Income with Make-Up Charitable Remainder Unitrust (NIMCRUT): ▪ Variation of standard CRUT. ▪ Retirement planning and funding vehicle. ▪ permits deferral of annual payments in “make-up account” until future need arises. ▪ Tax deferred annuity makes an ideal NIMCRUT funding candidate: ▪ Operates as income faucet and creates “income” through policy withdrawals. NIMCRUT

Wealth Replacement Proceeds NIMCRUT - Marketable Stock (6% 7520 Rate ) Donors Ages 45/45 Purchaser CRT Tax Exempt Charity Deferral 25 Yrs; Value $3,492,722 6% $205,454; $5,083,586 Total; Charitable Deduction $55,270 Stock $500,000; Basis $150,000 Sells Stock Sales Proceeds $500,000 Remainder 2% Net Growth $5,118,766 (45 Yrs) Premiums

▪ Wealth replacement legacy for heirs: ▪ “Equalizes” bequests passing to charity and heirs. ▪ Proceeds of properly structured policy pass: ▪ Undiminished by income taxes. ▪ Undiminished by estate taxes. ▪ Policy premiums can be funded with: ▪ Increased income from CRT. ▪ Tax savings generated from CRT contributions. Role of Life Insurance 14

Distribution Planning For IRA

▪ IRA owner (age 75). ▪ IRA value $1,000,000. ▪ Favorite local charities included in Will. ▪ Planning objectives: ▪ Reduce or defer income taxes (IRD) upon death. ▪ Minimize estate or inheritance taxes. ▪ Provide legacy for children and grandchildren. ▪ Assist children and grandchildren with planning and saving for retirement, education, etc. Hypothetical Client

▪ Eliminates income tax (IRD) upon owner’s death: ▪ CRT is an income tax exempt beneficiary. ▪ Term beneficiary pays income tax on payments received from CRT: ▪ NIMCRUT permits deferral of payments. ▪ No required minimum distributions. ▪ “Stretch” IRA alternative. ▪ No IRD deduction (IRD eliminated). ▪ Estate taxes are minimized or eliminated upon IRA owner’s death. Testamentary CRT for IRA 17

Testamentary CRUT - IRA (6% 7520 Rate) Decedent IRA Owner Term Beneficiary Age 50 CRT Tax Exempt Charity IRA $1,000,000 Remainder 2% Net Growth $1,968,519 (35 Yrs) Premiums Wealth Replacement Proceeds 6% $60,000; $2,905,556 Total IRA Beneficiary Discounted Bequest $764,900

Testamentary NIMCRUT- IRA (6% 7520 Rate) Decedent IRA Owner Term Beneficiary Age 50 CRT Tax Exempt Charity IRA $1,000,000 Remainder $6,537,848 2% Net Growth (35 Years) Premiums Wealth Replacement Proceeds Deferral 20 Yrs; Value $5,134,510 6% $302,030; $4,512,042 Total IRA Beneficiary Discounted Bequest $764,900

Testamentary CRUT - IRA (6% 7520 Rate) Decedent IRA Owner Term Beneficiary Age 30 CRT Tax Exempt Charity IRA $1,000,000 Remainder 3% Net Growth $4,833,526 (53 Yrs) Premiums Wealth Replacement Proceeds 5% $50,000; $6,389,210 Total IRA Beneficiary Discounted Bequest $866,400

Testamentary NIMCRUT- IRA (6% 7520 Rate) Decedent IRA Owner Term Beneficiary Age 30 CRT Tax Exempt Charity IRA $1,000,000 Remainder 3% Net Growth $29,934,638 (53 Yrs.) Premiums Wealth Replacement Proceeds Deferral 40 Yrs; Value $20,115,298 5% $1,407,749; $19,416,466 Total IRA Beneficiary Discounted Bequest $866,400

▪ Wealth replacement legacy for heirs: ▪ Replaces value passing to charity for heirs. ▪ Proceeds of properly structured policy pass: ▪ Undiminished by income taxes. ▪ Undiminished by estate taxes. ▪ Policy premiums can be funded with: ▪ Lifetime distributions (RMD) from IRA. ▪ Income from non IRA assets. Role of Life Insurance 22

Business Succession Planning

▪ Clients ages 65 and 65. ▪ C corporation: ▪ Value $5,000,000; basis $1,000,000. ▪ Family members with “active” roles in business; “non-active” family members. ▪ Non-family member key employees. ▪ Desire to mitigate taxation on transfer of business. ▪ Require adequate post retirement resources and survivor resources. ▪ Increasing interest and involvement in charitable and civic causes. Hypothetical Clients

▪ Properly structured, permits sale of stock without: ▪ Capital gains tax. ▪ Gift tax. ▪ Estate tax. ▪ Generates charitable income tax deduction. ▪ Ensures post-retirement and survivor income. ▪ NIMCRUT offers enhanced retirement planning opportunity. ▪ Sale cannot be “pre-arranged”. CRT for Sale of Closely Held Stock

Wealth Replacement Proceeds CRUT- Closely Held Stock (6% 7520 Rate) Business Owners Ages 65/65 Purchaser CRT Tax Exempt Charity 6% $300,000; $10,201,677 Total; Charitable Deduction $1,484,850 Stock $5,000,000; Basis $1,000,000 Sells Stock Sales Proceeds $5,000,000 Remainder 2% Net Growth $8,400,559 (26 Yrs) Premiums

This presentation has been prepared based on Penn Mutual's current understanding of federal estate, gift, GST and income tax laws. Any changes in these laws may result in a conclusion different than what is represented. Please consult qualified legal and tax advisor regarding the client’s specific situation. Before implementing any plans based on specific circumstances and objectives, the client should consult with a personal legal, tax, and financial advisor. For advisor use only. Not for use in sales situations. Penn Mutual Life Insurance Company 600 Dresher Road, Horsham PA