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Planned Giving Opportunities with the Upcoming Transfer of Wealth (Pt. 1/2)



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Studies show that $9 trillion in assets will be passed in the U.S. from Baby Boomers to Gen X and millennials by 2027. It is imperative that fundraisers plan thoughtfully for this transfer of wealth because great opportunity exists to secure planned gifts. While many nonprofits focus on immediate funding needs, museums are in a unique position, responsible for long-term institutional preservation and collections care. It is not only prudent but necessary to develop sustainable revenue.

Planned Giving Opportunities with the Upcoming Transfer of Wealth (Pt. 1/2)

  1. 1. Planned Giving Opportunities with the Upcoming Transfer of Wealth WMA 2019 Heather Vihstadt, Director of Development at the High Desert Museum Stephen Pruss, Partner of Ahrens DeAngeli Law Group LLP Kris Kamann, Chief Development Officer of the Idaho Heather Mueleman, Director of Campaigns for The Peregrine Fund at The World Center for Birds of Prey
  2. 2. Why Planned Giving Matters for Museums “The traditional role of museums is to collect objects and materials of cultural, religious and historical importance, preserve them, research into them and present them to the public for the purpose of education and enjoyment. Today, museums must become agents of change and development: they must mirror events in society and become instruments of progress by calling attention to actions and events that will encourage development in the society. They must become institutions that can foster peace, they must be seen as promoting the ideals of democracy and transparency in governance in their communities, and they must become part of the bigger communities that they serve and reach out to every group in the society.” - E. Arinze, President, Commonwealth Association of Museums 1999
  3. 3. Giving USA 2019 Report Individuals 68% Foundations 18% Bequests 9% Corporations 5% PHILANTHROPY 2018 - $427.71 BILLION
  4. 4. $1 Billion in $100 bills
  5. 5. $1 Trillion in $100 bills
  6. 6. Chronicle of Philanthropy – $9 Trillion and Counting Report • Transfer of Wealth • $9 trillion in assets is expected to pass to Gen X and Millennials by 2027 • If only 5% is captured for philanthropy, it would equate to 10 Gates Foundations or $441 billion • An estimated $97 trillion will be transferred by 2067 • There is an unprecedented opportunity for bequests and other planned gifts particularly over the next 3 decades
  7. 7. Generational Giving – The Matures Credit to Classy
  8. 8. Generational Giving – Baby Boomers Credit to Classy
  9. 9. Generational Giving – Gen X (born 1965-1980) Credit to Classy
  10. 10. Generational Giving – Millennials Credit to Classy
  11. 11. Generational Giving – Gen Z/Philanthroteens Credit to Classy
  12. 12. Planned Giving Quiz • What percentage of the public believes that leaving money to charity through their will is a good idea? • A) 1 in 4 B) 1 in 2 C) 3 in 4 D) 5 in 6 • What percentage of the public actually leaves money to charity in their estate plans? • A) 1 in 4 B) 1 in 2 C) 3 in 4 • What percent of Americans die without a will? • A) 30-40% B) 10-20% C) 40-50% • Who knows the most about estate planning? • A) wealthy B) affluent C) middle class D) all are pretty uninformed • What types of organizations have the best planned giving programs? • A) hospitals B) arts orgs C) churches D) colleges Credit to Chuck Loring, CFRE
  13. 13. Planned Giving Quiz • What percentage of the public believes that leaving money to charity through their will is a good idea? • A) 1in4 B) 1 in 2 C) 3 in 4 D)5 in 6 • What percentage of the public actually leaves money to charity in their estate plans? • A) 1 in 4 B) 1 in 2 C)3 in 4 • What percent of Americans die without a will? • A) 10-20% B) 30-40% C) 40-50% • Who knows the most about estate planning? • A) wealthy B) affluent C) middle class D) all are pretty uninformed • What types of organizations have the best planned giving programs? • A) hospitals B) arts orgs C) churches D) colleges Credit to Chuck Loring, CFRE
  14. 14. Interesting Facts • Less than 1 in 10 donors over the age 50 who give $500+ list charities in their estate • The average number of charities per estate is 5-7 • Children more likely to be removed from a will than nonprofits • For every known bequest 7 more exist • Bequests triple lifetime giving – these are truly transformational! • People give because they are asked
  15. 15. How Wealth is Held For Baby Boomers and younger generations, 85% of wealth is tied to assets (real estate, life insurance, retirement, stocks, bonds, etc.) yet only 15% of giving comes from here. We should be asking for gifts from BOTH buckets! Credit to Chuck Loring, CFRE
  16. 16. Best Prospects • People who have had significant tenure • Board, staff, volunteers • Long-time, consistent supporters (not necessarily major donors) • People with accumulated assets • People with few family obligations Image from Stetler
  17. 17. Strategies to Launch a Planned Giving Program • Participate in professional development & partner with experts • Draft policies - gift acceptance, endowment spending & naming opportunities • Start a legacy circle • Hold an informative Planned Giving 101 event • Steward donors – Host annual luncheon, send targeted mailings, call and meet • Develop marketing plan • Planned giving web page with legal name, EIN, address • Create an informative brochure – convey impact • Develop a bequest intention form • Add “for more info” box to annual fund remit envelopes • Include messaging on letterhead, business cards & email signatures • Feature legacy stories in newsletters & publicize when appropriate • Recognize legacy gifts in annual report & on donor wall • Seek a challenge grant • For bequest notifications and/or dollars
  18. 18. Overcoming Challenges • For smaller organizations it can be difficult to prioritize • Costs are incurred with unpredictable returns • It is hard to measure success • Take the long view • After 12-15 years of consistently talking about planned giving, an organization can begin to budget with a 3-5 year average • Success story – The Nature Conservancy • Invested heavily in planned giving in the 1980s (even before major gifts) • Today, 20-25% of dollars given to TNC come from planned gifts • The last 5 years resulted in gifts totaling more than $100 million!
  19. 19. Gift Types & Tax Benefits Steve Pruss, Partner Stephen L. Pruss, a partner of Ahrens DeAngeli Law Group LLP (ADLG), has been blessed to be able to advise clients almost exclusively in the field of estate planning and trust and estate administration from the first day he started his legal career. Integrating his skills as an attorney and certified public accountant, Steve advises ADLG’s clients in tax, estate planning, charitable planning, tax exempt organizations, trust and estate administration and litigation, tax controversy, and guardianship and conservatorship matters. He has been and is also active as an officer and board and committee member of several nonprofit organizations. He received his law degree from the University Of Idaho College Of Law in 1985. He is licensed to practice in Idaho, Washington, and the U.S. Tax Court. He is also licensed as a Certified Public Accountant in Idaho. Steve has been recognized in field of "Trusts and Estates" as one of The Best Lawyers in America and in Seattle by the Puget Sound Business Journal and Seattle Metropolitan Magazine. He is a Fellow of the American College of Trust and Estate Counsel (ACTEC) and a member, director, or officer of other professional organizations.
  20. 20. STEPHEN L. PRUSS AHRENS DEANGELI LAW GROUP LLP 250 S. Fifth Street, Suite 660 (208) 639-7799 or (206) 652-5562 Boise, Idaho 83707-9500 and 701 5th Ave., Suite 1220 Seattle, WA 98104-7007 PLANNED GIVING TOOLBOX
  21. 21. Charity in the New Estate Tax Environment • 2017 Tax Cuts and Jobs Act • Lost Incentives: Doubling the exemption is estimated to reduce federal revenue by nearly $100 billion over ten years and lower charitable giving by $4 billion per year, according to the National Council for Nonprofits. • Creative planning, and emphasizing non-tax benefits can help offset some of these losses. • Know Donors • Who likes us • Find Potential Donors • Who should like us? • Create goals and plan to meet them • Implement plans • Measure inputs • Know Attorneys, CPAs, Other Advisors • Know What Planned Giving Techniques Fit with What Client Fact Patterns • Gifting techniques – immediate, deferred • Asset types -- retirement plans, appreciated stock, farm/other land, etc. • Example: Accelerated lifetime gifting for clients 70 ½, the donations can be qualified charitable distributions. 21
  22. 22. Charitable Bequests and Beneficiary Designations
  23. 23. Charitable Bequests and Beneficiary Designations Bequest (gift through will) • Most common way people gift to charity • Important part of nonprofit fundraising • Can serve the legacy planning purposes of the donor very well. • Allows donors to pass on more than just stuff and money at their death. • It allows a way for donors to communicate their ethics and values to their heirs, as well as leave them a community improved by philanthropy. Designation: • Life Insurance • Retirement Plans • Deferred Compensation Plans Retirement Plans, Deferred Compensation, Notes, Contracts and Accounts Receivable (remember this term: Income in Respect of a Decedent (IRD)) do not get a “stepped-up basis” at death – after taxes kids may inherit 56 cents on the dollar! Therefore, a charitable beneficiary designation costs the family 56 cents and the government 44 cents per dollar (may be more if estate tax is owed or in higher income tax states). Conclusion: Any gifts to charity should come from retirement plan first (usually – not Roth IRAs). 23
  24. 24. Retirement Plan Planned Giving
  25. 25. Retirement Plan Planned Giving (Before Death) 1. Straight Withdrawals: Withdraw an amount from retirement plan and give to charity • Zoo Lady Example: • Age 59; $60,000 per year of ordinary pension income; $40,000 IRA She gave the IRA to the Zoo • AGI was $100,000 • Deduction limit was $50,000 ($60,000 if all cash contributions) • Taxable income was the same $60,000 Potential Problems: • under age 60 penalty • charitable deduction limits • itemized deduction phase out 25 – enough other income – AMT
  26. 26. Retirement Plan Planned Giving (Before Death) 2. Pension Protection Act of 2006 (“PPA”) Distributions – I.R.C. § 408(d)(8): a) From IRAs only a) The PPA decided that you can get a tax break when you make distributions from your traditional or Roth IRA to charity. b) This temporary tax break eventually became permanent with the Protecting Americans from Tax Hikes (PATH) Act of 2015. c) You must be at least 70½ at the time of the distribution. b) By the Trustee only c) An amount up to $100,000 per year d) To any donor advised fund or public charity but not to an affiliated foundation thereof (if the foundation is a “supporting organization”) e) Not included in income, also not deductible, but it needs to be “otherwise deductible” f) Donor is over age 70 ½ g) Practicalities  IRA Trustees were not set up to do direct transfers to charities  Age limits  Time limits  Distribution limits (§ 509(a)(3)) 26
  27. 27. Retirement Plan Planned Giving (After Death) “You’re Going to Give It To Us” 1. Designate Charity as Beneficiary of Any Retirement Plan Asset!  Easy!  No Lawyers!  Give it all!  Family loses around 56¢/per dollar  Government loses around 44¢/per dollar *Note, an individual also may designate a charitable remainder trust as the beneficiary of a retirement plan or IRA. This will be addressed in the charitable remainder trust slides.
  28. 28. Retirement Plan Planned Giving After Death – “You’re Going to Give It To Us” 2. Spouse a) Spousal Rollovers: Name spouse as a primary and charity as secondary beneficiary. Under a spousal rollover, spouse can change the beneficiary from time to time. Is this OK? b) Split Beneficiaries: Spouse and Charity – “Ten percent to Charity and ninety percent to spouse” • Spouse would need to take out his or her ninety percent of the plan over 5 years (if owner dies before approximately 71 years old) or the pretend life expectancy of the recently deceased owner (if the owner died after the magic age of 71) UNLESS • Accounts are split • Owner then charity as to 10% = Account #1 • Owner then Spouse as to 90% = Account #2 OR • Charity is cashed out by September 30th of the year after the year in which the account owner died. Tax Code: grieving = nine to twenty-one months. 28
  29. 29. Retirement Plan Planned Giving After Death – “You’re Going to Give It To Us” 3. Kids a) Give kids other assets and give charity retirement plan assets • Kids get to use the $11.4M estate tax exemption and they get stepped up basis on other assets • Kids will always pay income tax on retirement plan assets and they may pay estate tax if owner’s assets exceed $11.4M – can pay up to 44¢ on the dollar in income taxes b) Split IRAs – one for kids to stretch and one for charity (remember September 30th rule) c) Kids need “principal” – use a “wealth replacement trust” – life insurance money in a trust goes to kids estate-tax free and retirement plan assets distribute to charity – see next slide d) Kids need “income” only – can use a charitable remainder trust. 29
  30. 30. IRD Remainder Trusts 30 Retirement Plans Beneficiary Designation: Charity John Irrevocable Life Insurance Trust (ILIT) Annual Withdrawals Net Withdrawal Proceeds Income Tax Amounts Above Insurance Withdrawals Estate Taxes $2,000,000$101,085 $2,101,085 Charities & Charitable Purposes Charity John’s Death
  31. 31. Gift of Appreciated Property
  32. 32. Gift of Appreciated Property Instead of Cash A donor can either sell stock at fair market value and contribute the proceeds or contribute the stock to a qualified charitable organization. 32 Gift of Cash Proceeds Gift of Stock Stock Value $5,000 $5,000 Stock Basis 1,000 --------- Gain on Sale 4,000 Blended Tax Rate x .20 --------- 800 Net Proceeds Donated to Charity (Deduction) $4,200 $5,000 ===== =====
  33. 33. Gifts of Securities Instead of Cash
  34. 34. Life Insurance
  35. 35. Life Insurance – Donor as Owner 35 Designate charity as beneficiary of existing policies  Saves estate taxes  No income tax deduction  Easy!
  36. 36. Life Insurance – Charity Owned Life Insurance 36 Initial Issue – May a charity own life insurance on the life of a donor?  Traditionally, the answer was no. Must have an insurable interest  In Idaho the answer is yes under I.C. § 41-1805.  Varies from state to state.
  37. 37. Life Insurance – Charity Owned Life Insurance 37 Gifts of Existing Policies to Charity 1. Paid Up Policies – Donor receives income tax deduction for replacement value, limited to the “basis” in the policy (usually equal to the total premiums paid) if basis is lower than replacement cost. In certain cases, the deduction is limited to cash value if the charity cashes in the policy rather than holds the policy. 2. Policies with Premiums Remaining to be Paid – Deduction to donor for “interpolated terminal reserve” (close to cash surrender value), but no more than tax basis in the policy. 3. More deduction may be available if donor’s health is in question at the time of donation.
  38. 38. Life Insurance – Charity Owned Life Insurance 38 Gifts of New Policies – Charity as initial owner 1. Donor must sign off on issuance of policy under I.C. § 41-1805(2). 2. Premiums – If Donor provides annual funding for the payment of premiums then the Donor gets a deduction for the amount of the donation. Finally – any gift of a life insurance policy must be without “strings”, such as the right to designate the beneficiary of the policy, the right to modify, surrender or cancel the policy, etc. – retaining these “incidents of ownership” will nullify the income tax deduction.
  39. 39. Charitable Gift Annuities
  40. 40. Charitable Gift Annuities • Transfers of cash or property to charity in return for an annuity for the life of the donor. • American Council on Gift Annuities • Determines an advisable payout • Designed to guarantee at least one-half of the original payment to the charity at donor’s death • Charitable Deductions to Donor • Value determined using “§ 7520 rates” - 120% mid-term AFR • Current or previous two months • Tables in Publication 1457 (Tables Updated May 2009) • Determine present value of annuity payments • Amount paid in excess of present value of annuity payment is charitable deduction (Reg. § 1.170A-1(d)(1)) 40
  41. 41. Charitable Deduction to Donor 41 Annual Annuity for Life Cash or Property Donor Annual Annuity for Life Immediate or Deferred Cash or Property Donor Cash or Property Donor Charity
  42. 42. Charitable Gift Annuities (continued) • Charity is Liable to Pay Annuity Each Year • Each Annuity Payment will be Part Return of Principal (tax-free) and Part Ordinary Income (taxable) • Life Expectancy Tables 1.72-9, Tables V and VI • After All Principal is Paid Out, Remainder is All Ordinary Income • If Capital Gain Property is Contributed, Each Payment will be Part Principal, Ordinary Income and Capital Gain if: • Non Assignable • Donor and Designated Survivor Only Annuitant (See Treasury Regs under IRC § 1011) • State Law Registration Requirements – Idaho Code § 41-120 • “Not engaged in the business of insurance” • Notice to Donor – not insurance • Notice to Department of Insurance – upon issuance of first charitable gift annuity • Not an Unfair or Deceptive Act • Three year/ $100,000 Liquid Asset rule 42
  43. 43. Charitable Gift Annuities (Continued) Estate Taxes • Donor as Annuitant • Another as Annuitant § 2035(c) Gift Taxes • Spouse as Annuitant §§ 2523(a) & (b)(1) • Another as Annuitant § 2503 Federal Antitrust Immunity • Charitable Donation Antitrust Immunity Act of 1997 – Anyone who works with Charitable Gift Annuities (and Charitable Remainder Trusts) is immune from federal antitrust liability 43
  44. 44. Charitable Gift Annuities (Continued) Estate Taxes • Donor as Annuitant • Another as Annuitant § 2035(c) Gift Taxes • Spouse as Annuitant §§ 2523(a) & (b)(1) • Another as Annuitant § 2503 Federal Antitrust Immunity • Charitable Donation Antitrust Immunity Act of 1997 – Anyone who works with Charitable Gift Annuities (and Charitable Remainder Trusts) is immune from federal antitrust liability 44
  45. 45. Charitable Gift Annuities (Continued) • Immediate Annuity: Payments commence immediately upon contribution. • Deferred Annuity: Payments commence at designated future date. Sometimes referred to as “charitable IRA” and offers these advantages over traditional retirement plans: • No contribution limitations • Payments can start at any age • No requirements to include other employees if donor is a business owner • Part of annuity payments will likely be tax free return of principal or capital gain versus all ordinary income 45
  46. 46. Charitable Remainder Trusts
  47. 47. Features (the very basics) • Three Basic Features • “Income Payment” to Donor (at least 5% payout) • Capital Gains Tax Avoidance • Income, Gift and Estate Tax Charitable Deduction • 10% minimum remainder interest • Tax Exempt Entity Under Internal Revenue Code § 664 • Designate a Charitable Remainder Trust (CRT) as beneficiary of retirement plans. • The CRT will not be taxed on the income when the distribution is received from the plan or IRA in any year in which it qualifies as a tax-exempt trust. • All of the distributions from the trust to the income beneficiaries will be ordinary income, but the income tax will be paid only as the annuity or unitrust amounts are received. In the meantime, the trustee can invest the distributed IRA or retirement plan assets for additional tax-free growth. • Plan will pay to CRT over five years or pretend life expectancy • CRT will pay an amount to spouse for spouse’s life with the remainder to charity designated by the owner. • CRAT vs. CRUT (fixed vs. variable) 47
  48. 48. Charitable Remainder Unitrust 48 Joseph & Mauveen Public Charities The Splivek Family Foundation The Joseph & Mauveen Splivek Unitrust 6% distribution Appreciated Assets Option 1 Death of Survivor Option 2 Death of Survivor
  49. 49. What Assets Can Be Contributed? • Stock • Land • Mortgaged Property – but watch out for UBTI • Tangible Personal Property (e.g., farmers crops or equipment) • Business – Watch out for Pre-Arranged Sale!! • C Corporation • S Corporation (but the charitable remainder trust cannot hold S Corporation stock) 49
  50. 50. Charitable Lead Trusts
  51. 51. Charitable Lead Trusts Split-Interest Trusts – I.R.C. § 170(f)(2)(B) • Basic Concept: During the lead period distributions are made on a monthly, quarterly, semi-annual or annual frequency to the charitable lead beneficiary. • Reversion/Remainder Distribution: At the end of the lead period, the remainder of the trust may revert to the Donor or be distributed to other non- charitable beneficiaries (family). • Comparison to Charitable Remainder Trusts: Charitable lead trusts and charitable remainder trusts are designed with charitable and non-charitable beneficiaries in opposite orders, and they are not tax exempt trusts. 51 Remainder Donor $ $ Reversion after Lead Period CLAT Children CLUT Lead Period Distributions Charity
  52. 52. Grantor vs. Non-Grantor CLTs When are They Used There are two types of CLTs, generally Grantor and Non- Grantor: • Non-Grantor CLTs are usually used in estate tax planning. • Discounted gifts • Existing foundation/charitable intent • Remainder sales to trusts • Used especially when there is little or no GST and estate tax exemptions left • Goal is maximizing remainder value • Grantor CLTs are usually used in income tax planning. • Spike year income – upfront charitable deduction • Subsequent years will generate phantom income • Carry forward charitable deduction • Goal is to maximize charitable deduction 52
  53. 53. Private Foundation (vs. Donor Advised Fund) • What is a Private Foundation? • Donations from a Small Number of People • Usually Grant Making (vs. Operating) • Whatever Tax Code says! • Limitation on Inheritance • Specific Charitable Objectives • Control • Family Legacy • Benefits Descendants • Control • Training • Relief of Obligations 53
  54. 54. Partner with Your Community Foundation Kris Kamann, Chief Development Officer Kris joined the Idaho Community Foundation in 2016. He works with individuals, families and organizations to help them accomplish their philanthropic goals. This includes meeting with professional advisors to discuss how ICF can help clients satisfy their charitable intent through estate gifts. Prior to joining ICF, Kris served as a Director of Development at Boise State University. Kris has a bachelor’s degree and a master’s degree from Ashland University. He serves on the board of the Southwest Idaho Council of Charitable Gift Planners and is a member of the Magic Valley Estate Planning Council and AdNet.
  55. 55. Stories that Inspire Heather Mueleman, Campaign Director Heather is the Director of Campaigns for The Peregrine Fund at The World Center for Birds of Prey. She has worked in the nonprofit sector for 15+ years. Heather studied at The Toulan School of Urban Studies and at Portland State University and has worked for interest areas including special transportation, conservation, special education, and the arts. She’s led multi-million dollar advancement programs including a $7 million capital campaign. She currently sits on the Board of Dance for Parkinson’s Idaho, is a founding board member of Boise Hive, and was the founding chair of the Radio Boise community advisory board
  56. 56. Resources • • • • • acceptance-policies • content/uploads/2017/06/Bequest-Intention-Form_Final.pdf