How to Plan to Give: “The Future of Taxwise Philanthropy” NCF Raleigh Plan to Give Conference September 25, 2014 Don Etheridge, JD, LLM, CPA Gift Planning Attorney National Christian Foundation

Grow giving by converting tax dollars to giving dollars. Taxes Giving Lifestyle / Savings Give more, pay less tax Tax Benefit #1: Enjoy an immediate charitable income tax deduction for the gifted property. Tax Benefit #2: Reduce tax on income and proceeds of sale of the gifted property 2

3 Problems Size of Government:

4 Problems Size of Debt:

5 Growing Tax Inefficiencies: 1.3% Floor (Pease provision) 2.3.8% Obamacare tax on TII (AGI) 3.Proposed Cap on Charitable Deductions 4.Camp Reform proposals a.Basis deduction on property gifts b.Deduction ceilings lowered (50%/30%) 5.Denial of Exempt Status & Charitable Deduction a.Discrimination against protected class b.‘Separation of church and state’ doctrine

Your Estate Charity Family and Friends Taxes Giving it all away in the end … 6

Planning Strategies: FIRST: Give ahead now - max 50% limit with DAF stockpile, including “30% of AGI” giving SECOND: Off-line giving arrangements - income not reported by Donor - income exempted, deferred or taxed at lower rate 7

1.Give Cheerfully & Generously 2.No estate/gift tax 3.No net Capital Gain tax 4.Lifestyle limited income tax Gift Planning Fundamentals 8

Offline: Maximize charitable giving, minimize taxes 1.Real Estate Gifts 2.Intellectual Property Gifts 3.Faucet CRUT 4.Non-Grantor CLAT 5.Operating Business DAF 6.Other 9

10 NCF Giving Fund Marketable Securities Real Estate Oil and GasIntellectual Property Interest, Dividends, and Capital Gains Royalties Rental Income Non-UBTI Producing Assets

11 Offline: Maximize charitable giving, minimize taxes 1.Real Estate Gifts 2.Intellectual Property Gifts 3.Faucet CRUT 4.Non-Grantor CLAT 5.Operating Business DAF 6.Other

Donor Property: $1M Gift of R.P. LP 12  Obtain tax deduction on current value of investment property  Lower effective tax rate  Avoid future taxation on charitably held LP int. (income & estate)  Control of invested assets  Preserve charitable advisory rights  Obtain tax deduction on current value of investment property  Lower effective tax rate  Avoid future taxation on charitably held LP int. (income & estate)  Control of invested assets  Preserve charitable advisory rights RP LP 1% voting 99% non- voting RP LP 1% voting 99% non- voting Donor Property Donor Property Donor DAF Donor DAF Parents (during their lifetimes) Children (thereafter) Concept Business LLC Control- Family Steps 1.Create/fund Invest LP w/Prop.& cash 2.Transfer desired int. to Charity 3.LP leases property to Business 4.Distributions/proceeds to DAF shared w/charity % interest ($1,000,000+) Charities Property & Cash $2,000,000+ Lease of prop.,

Proposed Offline Advantage Obamacare Tax:3.8% on AGI not TI 50% Ceiling: Full taxation on Giving beyond Deductibility cap: 28% proposed 13 Current Current Deduction of Gifted Interest No Obamacare Tax:3.8% on AGI not TI 100% deductibility ‘beyond 50%’

Dealing with Debt Property Owner GP 1% Problem with Debt: 1.Lower Deduction 2.Debt Relief Income to Giver 3.Unrelated Debt Financed Income to Charity Solutions: Subordinated Leasing: Tenant Land Lease (subordinated) Charity Int. Subordinated Lending: DevCo Lender Investors Owner Mezz Loan (subordinated) Charity Int. DevCo Lender Investors Property Tenant 14

15 Pre-Sale Gift of Property Interest The Smiths Smith Giving Fund $700,000 20% Smith CRT $2,100,000 60% Smith Family $700,000 20% Charities / Ministries / Churches$157,500 to Smiths for Life At Death to Charity Tax Deduction: $700,000 Tax Deduction: $538,251

16 Offline: Maximize charitable giving, minimize taxes 1.Real Estate Gifts 2.Intellectual Property Gifts 3.Faucet CRUT 4.Non-Grantor CLAT 5.Operating Business DAF 6.Other

17 Gift Of IP Interest IP CO LLC IP CO LLC OP CO, LLC OP CO, LLC GIFT Fund GIFT Fund Giver (during lifetime) Children / Family (thereafter)  Obtain deduction(s) for gift of IP Royalty payments  Avoid tax on allocable income  Lower taxes allow for greater giving  Charitable advisory rights  Obtain deduction(s) for gift of IP Royalty payments  Avoid tax on allocable income  Lower taxes allow for greater giving  Charitable advisory rights Concept Charities Advisory Control- Family Steps 1.OP CO assigns royalty income producing IP to IP CO, LLC 2.Portion of IP interest shared with Gift Fund 3.Portion of Royalty income distributed to Gift Fund 4.Gift Fund gives to ‘advised’ charities % interest 4

18 Offline: Maximize charitable giving, minimize taxes 1.Real Estate Gifts 2.Intellectual Property Gifts 3.Faucet CRUT 4.Non-Grantor CLAT 5.Operating Business DAF 6.Other

FAUCET CRUT (charitable remainder unitrust) Mom & Dad have O&G Royalty Interest producing significant income which they do not plan to sell. Minimize tax… Invest proceeds… Maintain lifestyle Flexible charitable giving… give to charity at death $10M Value $1.25M annual income (rise then fall) 43% taxation…. 10% giving to charity Faucet Trust allows them to lower taxation to a level commensurate with lifestyle & choose how much to share with charity &/or take in for future lifestyle purposes. 19

The Charitable Remainder Unitrust Giving Fund Charitable Remainder Trust Asset after death 5%+ annual payment during life -Deduction - Gain deferral on sale - Tax exempt trust 20

The Faucet Charitable Remainder Unitrust Asset LLC Giving Fund CRT - Deduction - Gain deferral on sale - Distribute as desired - Stockpile tax free - Diversify LLC investments - Discretionary gifts to charity - Exceed 50% AGI limit - Future deduction for gift of income interest Buyer up to 90% of income 10%+ income 21

22 Offline: Maximize charitable giving, minimize taxes 1.Real Estate Gifts 2.Intellectual Property Gifts 3.Faucet CRUT 4.Non-Grantor CLAT DAF 5.Operating Business 6.Other

Non-Grantor Charitable Lead Trust Charitable Lead Trust After Death Annual Lead Payment to Charity During Life Income Producing Asset Giver NCF Giving Fund Income Remainder Interest to Children If charitable lead payment is equal to or greater than income, CLT avoids income tax, essentially providing a 100% AGI charitable deduction. 23

24 Offline: Maximize charitable giving, minimize taxes 1.Real Estate Gifts 2.Intellectual Property Gifts 3.Faucet CRUT 4.Non-Grantor CLAT 5.Operating Business DAF 6.Other

25 $1M Income $401,400 Taxes $498,600 $100,000 $10M Business Current Situation: 10% AGI Giving Lifestyle, Investment, etc. Charity

26 $1M Income $267,600 Taxes $133,800 Personal Income Tax Savings $133,800 Personal Income Tax Savings $300,000 (30% of AGI) Solution: 10% to 40% AGI Giving $10M Business NCF Giving Fund NCF Giving Fund Proposed Business Interest Gift $632,400 $100,000 Lifestyle, Investment, etc. Charity

27 $1M Income $223,000 Taxes $178,400 Personal Income Tax Savings $178,400 Personal Income Tax Savings Solution: 40% to 50% AGI Giving $10M Business NCF Giving Fund NCF Giving Fund $300,000 (30% of AGI) Business Interest Gift Cash Gift from Tax Savings $100,000 (10% of AGI) $577,000 $200,000 Lifestyle, Investment, etc. Charity

28 Proposed** Comparison Results Taxes: Charity: Family: $401,400 $100,000 $499,000 Results: $223,000 $200,000 ($300k stock) $577,000 Current* *$1M Income; 10% cash to Charity **3% gift of Stock to Charity; 20% cash to Charity

29 Offline: Maximize charitable giving, minimize taxes 1.Real Estate Gifts 2.Intellectual Property Gifts 3.Faucet CRUT 4.Non-Grantor CLAT 5.Operating Business DAF 6.Other

30 Potential Problem with Outright Gifts of: Giver* Reduced charitable tax deduction Giver taxed on debt gain Charity owes UBI tax on gain over giver’s basis Reduced charitable tax deduction Giver taxed on debt gain Charity owes UBI tax on gain over giver’s basis Issues* buyer UBTI Asset UBTI Asset Taxes* Giving Fund Charity - S Corp Stock - Operating LP’s/LLC’s - Encumbered Entities/Assets

31 Benefits of Transfer to Charitable Gift Annuity Giver Tax upon gift &/or sale reduced 70-80% Gain to Giver on annuity portion is deferred until payments begin Charity gets stepped-up basis on annuity portion Most UBI tax to charity is avoided Tax deduction for charitable gift portion More potentially available for charity Tax upon gift &/or sale reduced 70-80% Gain to Giver on annuity portion is deferred until payments begin Charity gets stepped-up basis on annuity portion Most UBI tax to charity is avoided Tax deduction for charitable gift portion More potentially available for charity Benefits buyer UBTI Asset UBTI Asset Giver Gift Annuity Charity - S Corp Stock - Operating LP’s/LLC’s - Encumbered Entities/Assets Annuity/Sale 75%+/- Gift 25%+/-

32 Income from Charitable Gift Annuity Taxes Charity Gift Annuity giver Giving Fund Deferred income from CGA taxed according to its initial character Payments may be deferred (increased for each year deferred) Additional charitable tax deduction for full annuity value if Giver decides to gift CGA contract in the future Deferred income from CGA taxed according to its initial character Payments may be deferred (increased for each year deferred) Additional charitable tax deduction for full annuity value if Giver decides to gift CGA contract in the future Benefits deduction

33 Comparison: Post-sale tax results (‘000’s) * total tax: total giving: total family: $54 $1,066 $3,132 gift aftercurrentgift before CGA before $540 $0 $3,460 $540 $3,460 $1,211 $270 $3,730 $1,260 *S-corp stock gift $4m fmv, 10% basis 15% tax rate

34 After Death Assets distributed to charity Tax deferred income becomes tax avoided During Life Assets available to giver (taxed upon distribution) Income otherwise deferred Marketable Securities Giver NCF Giving Fund Private Placement Deferred Annuity Private Placement Deferred Annuity

35 Offline: Maximize charitable giving, minimize taxes 1.Real Estate Gifts 2.Intellectual Property Gifts 3.Faucet CRUT 4.Non-Grantor CLAT 5.Operating Business 6.Other

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