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“Client Focused” Charitable Planning

By: Roccy DeFrancesco, JD, CWPP, CAPP, MMBFounder: The Wealth Preservation InstituteCo-Founder: The Asset Protection Society

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Why don’t more people give to Charities?

• Most people are not of how it can benefit them as well as the charity.

• Most advisors do not understand charitable planning.

• Most advisors are not familiar with “Simplified Planned Giving” (SPG).

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Traditional Giving vs. SPG

SimplifiedPlanned Giving

TraditionalPlanned Giving

-Charity centered-Expensive-Complicated-Sensitive to market-Difficult to deliver

-Donor/client centered-No out of pocket cost-Guaranteed benefits-Quick implementation

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Understanding the Benefits

• SPG programs use life income plans and split interest gifts to help meet donor objectives.

• Benefits include:– 1. Increasing discretionary (“spendable”) income– 2. Reducing or eliminating income taxes, capital gains

taxes, and estate taxes– 3. Securing a tax free inheritance for chosen heirs– 4. Leaving a lasting family and social legacy

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Split Interest VehicleSplit Interest Vehicle

Gift assetGift asset

ClientClient

RemainderRemainderto charityto charity

Funded from incomeFunded from incomeFamilyFamily

Income and tax deductionIncome and tax deduction

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2

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Split Interest Gift Overview

•Increased incomeIncreased income

•Reduced taxesReduced taxes

•Secured net to heirsSecured net to heirs

•Creates a LegacyCreates a Legacy

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Split Interest Gift Overview

Provide IncomeUltimate Gift to Charity

• Provides for lifetime income• Generates an income tax deduction• May reduce/eliminate IRD tax burden• Removes asset(s) from taxable estate• May provide capital gain tax relief at transition• Supports charitable causes

Asset(s) Value

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Charitable Gift Annuities (CGAs)

• CGAs are among the oldest and most respected methods of charitable giving.

• Thousands are formed each year allowing donors to support churches, schools, and other charitable organizations of their choice while enjoying the significant financial advantages of a charitable gift annuity.

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Continued

• A CGA is a contract between a donor and a qualified 501(c)(3) public charity.

• A donor makes an irrevocable gift to the charity in exchange for a promise of lifetime income.

• Income typically begins immediately.

• Once reserve requirements to guarantee payments are met, the charity uses whatever remains from the original gift for its charitable purposes.

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Tax Benefits of a CGA

• 1) When gifting a highly appreciated capital asset in exchange for a CGA, the donor does not realize a lump sum capital gain tax when making the gift.– The capital gain is reduced significantly and then

amortized over the donor’s life expectancy.

• 2) The donor receives a substantial immediate income tax deduction.

• 3) The asset is removed from the estate.

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Charitable Gift Annuity (CGA)

1. Donor transfers asset to Charity.Receives immediate income tax deduction.

2. Charity uses a portion of funds to purchase a commercial annuity and (assuming insurability) a life insurance policy.

Charity 3. Commercial annuity pays Charity.Donor

InsuranceCompany

4a. (Optional) Donor may elect to use part of the income for guaranteed inheritance (Wealth Replacement). An ILIT is typically used.

5. At death, insurance policy will distribute funds to donor’s DAF at Charity. (Heirs can be advisors)

Chosen Heirs

Donor Advised Fundat Charity

4. Charity pays income beneficiaries.

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CGA Program Benefit Guarantees

1. Guaranteed Income Benefit

Total Gift

2. Legacy Benefit (DAF)

*If underwriting considerations are not favorable, charity may select an annuity settlement option or fund a deferred annuity to provide the legacy benefit.

Lifetime Income from the Charity Charity purchases

life policy for legacy benefit*

Available for Charity

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Example: Husband and wife in average health, both age 72

• Family home $ 200,000

• Personal assets $ 50,000

• CDs (paying 3%) $ 100,000 • Deferred Annuity $ 200,000• IRA $ 100,000• Net Worth $

650,000• • Wife’s teaching pension $

22,000• Husband’s part-time job $

8,000• CD income $

3,000• IRA (taking minimum distribution) $

7,000• Social Security income $ 15,000• Current Annual Income $

55,000

• Greatly concerned about Long Term Care and Medicaid Spend-down requirements.

• Like the protection of their CD investment, but aren’t happy with the relatively low return.

• Desire to pass as much value to their children.

• No specific charitable intent.

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Using a CGA

• They increased annual income by $15,000 guaranteed, for both of their lives.

• They could allocate $5,000 of this annual income to fund a Long Term Care plan.

• They could allocate $6,000 of this annual income to fund a wealth replacement life insurance policy that will pay $300,000 tax-free to their children.

• And they still had extra annual income to use vs. the do nothing scenario.

• They received an immediate tax deduction of just under $86,000.

• They established an $85,000 Donor Advised Fund.

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Wealth Replacement

• Many times the children are not happy parents give to charity.

• Wealth replacement is a fancy term for buying life insurance.

• You simply setup an ILIT and gift some of the money from the CGA income stream to the ILIT which guarantees that the death benefit will pass income and estate tax free to the heirs.

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Example

• Example: – Assume that Dr. Smith age 60 has an estate of $5 million at the

age of 60. Assume Dr. Smith owns a rental property worth $500,000. The rental property has a basis of $100,000. Assume Dr. Smith still works as a surgeon where he makes $400,000 a year.

• Dr. Smith gifts the property to a charity in exchange for a CGA.

• Dr. Smith receives an immediate income tax deduction in excess of $60,000.

• The capital gain is not immediate and is lessened.• Dr. Smith receives $28,000 a year as income (the majority

is treated as capital gains).• Dr. Smith gifts to an ILIT $4,500 a year and the ILIT buys

a $500,000 life policy.

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Summary on Charitable Planning

• Should you consider a charitable plan?

• You should especially if you have highly appreciated assets and would like to transition them and receive:

• An immediate income tax deduction,

• A reduction in capital gains taxes

• A guaranteed lifetime income

• A reduction in estate taxes

• A lasting legacy for your heirs