CHARITABLE PLANNING FOR
UPPER-INCOME DONORS
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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
Tax Planning Challenges
* Planning Strategies for the new
3.8% surtax: Net Investment Income
* Retirement Assets -- Hot Topics
-- Lifetime planning
-- Bequests of Retirement Assets
-- spouse
-- trusts -- charities
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)
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
TAX RATES paid on TAXABLE INCOME
ADJUSTED GROSS INCOME (“AGI”)

Minus: Greater of
-- Standard Deduction ($6,100)
or
-- Itemized Deductions (Mortgage interest;
charitable contributions; state & local taxes)
 Minus: Personal Exemption & Dependents
($3,900 each)
= TAXABLE INCOME
WEALTHY PAY SOME TAXES ON “AGI”
ADJUSTED GROSS INCOME(“AGI”)
 Minus: Greater of
-- Standard Deduction ($6,100)
or
-- Itemized Deductions (Mortgage interest;
charitable contributions; state & local taxes)
 Minus: Personal Exemption & Dependents
($3,900 each)
= TAXABLE INCOME
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
INCOME TAX RATES
INVEST WAGES LTCG
Income Level
-MENT (+1.45%) & Divid
 AGI < $200k/$250k 28%
29.4% 15%

AGI > $200k/$250k 33%
plus health care surtax 3.8%
34.4% 15%
0.9%
3.8%
INCOME TAX RATES
INVEST WAGES LTCG
Income Level
-MENT (+1.45%) & Divid
 AGI < $200k/$250k 28%
29.4% 15%

AGI > $200k/$250k 33%
plus health care surtax 3.8%
34.4% 15%
0.9%
3.8%
36.8% 35.3% 18.8%
0.9% MEDICARE SURTAX:
When Compensation Exceeds $200,000
($250,000 married joint return)

Compensation
-- wages & self-employment income
(Added to 1.45% Medicare/Medicaid tax )
(Employee pays entire 0.9%; no employer match)
Employer must withhold when W-2
Form compensation exceeds $200,000
 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)
INCOME TAX RATES
INVEST WAGES LTCG
Income Level
-MENT (+1.45%) & Divid
 AGI < $200k/$250k 28%
29.4% 15%

AGI > $200k/$250k 33%
plus health care surtax 3.8%
34.4% 15%
0.9%
3.8%
36.8% 35.3% 18.8%
3.8% Net Investment Income Tax
MAGI > $200,000 ($250,000 joint returns)
3.8% surtax on the lesser of:
Net Investment Income
or
 MAGI over $200,000 ($250,000 joint)
($125,000 married sep)

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
7.6% of married joint returns
86% of the returns with over $200,000*
of AGI were married joint
3.8% Net Investment Income Tax
MAGI > $200,000 ($250,000 joint returns)
3.8% surtax on the lesser of:
Net Investment Income
or
 MAGI over $200,000 ($250,000 joint)

3.8% Net Investment Income Tax
MAGI > $200,000 ($250,000 joint returns)
3.8% surtax on the lesser of:
Net Investment Income
or
 MAGI over $200,000 ($250,000 joint)
( $200k/$250k not indexed for inflation)

3.8% Net Investment Income Tax
MAGI > $200,000 ($250,000 joint returns)
3.8% surtax on the lesser of:
Net Investment Income
or
 MAGI over $200,000 ($250,000 joint)
( $200k/$250k not indexed for inflation )

Trusts and estates pay 3.8% at $12,150 !!
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)
#2 – Taxpayers with AGI near $200k ($250 jt)
-- Either reduce NII or reduce AGI
#3 - Taxpayers with AGI below $200k ($250 jt)
-- Avoid spikes in income that trigger 3.8% tax
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)
#2 – Taxpayers with AGI near $200k ($250 jt)
-- Either reduce NII or reduce AGI
#3 - Taxpayers with AGI below $200k ($250 jt)
-- Avoid spikes in income that trigger 3.8% tax
-- Charitable Remainder Trusts !!
CHARITABLE
REMAINDER
TRUSTS
CHARITABLE REMAINDER TRUSTS
 Payment
to non-charitable beneficiary
(ies) for life *or* for a term of years
(maximum 20 years)
 Remainder interest distributed to
charity
Exempt
from income tax
CHARITABLE REMAINDER TRUSTS
EXAMPLE
 Husband & wife age 65
 Sell stock or land for $1 million gain
 Other option: contribute to CRT
before sale is finalized; have CRT
make the sale
CHARITABLE REMAINDER TRUSTS
CRT PROVIDES:
 1. Charitable income tax deduction
 2. Greater cash flow for life
 3. Avoid spike in income – 3.8% tax
 4. “Wealth replacement” strategy with
life insurance.
CHARITABLE REMAINDER TRUSTS
DONATE STOCK TO C.R.T.;
KEEP THE STOCK
C.R.T. SELLS STOCK
Sales Price
Cost of Stock
Gain on Sale
$ 1,000,000
-0$ 1,000,000
$1,000,000
-0$1,000,000
Capital Gains
Tax (about 25%)
250,000
None
Remaining Proceeds $
750,000
$1,000,000
CHARITABLE REMAINDER TRUSTS
DONATE STOCK TO C.R.T.;
KEEP THE STOCK C.R.T. SELLS STOCK
Remaining Proceeds $
750,000
Interest Rate
x
Annual Income
$
5%
37,500
══════
$1,000,000
x
5%
$
50,000
══════
(33% more)
CHARITABLE REMAINDER TRUSTS
CRT PROVIDES:
 1.
Charitable income tax deduction
 2. Greater cash flow for life
 3. Avoid spike in income – 3.8% tax
 4.
“Wealth replacement”
strategy with life insurance.
3.8% Net Investment Income Tax
MAGI > $200,000 ($250,000 joint returns)
Net Investment Income
Interest & Dividends
 Annuities
 Rents & Royalties
 Profits from LLC / S Corp (if not employed)


Business of trading commodities & fin instruments

Most capital gains
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.
-- “material participation” test
(work 500+ hours during the year?)
 Gain from selling property used in trade/
business [rental property gains -> 3.8% tax]
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)
Wages & self-employment income ( 0.9% tax)
 Alimony income
 Lottery winnings

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%
INCOME TAX RATES
INVEST WAGES LTCG
Income Level
-MENT (+1.45%) & Divid
 AGI < $200k/$250k 28%
29.4% 15%

AGI > $200k/$250k

AGI >
33% 34.4% 15%
$250k/$300k 33%
34.4% 15%
-- 3% phase-out itemized deductions
-- Phase-out personal exemptions
PHASEOUTS
AGI > $250,000 ($300,000 joint returns)
[2014: > $254,200 ($305,060 joint returns)]
3% Phase-out Itemized Deductions
-- 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
-- 100% eliminated AGI > $377k ($427k jnt)
(Phase-out $254k-$377k ( $305k-$427k jnt))

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%
-- 3% phase-out itemized deductions
-- Phase-out personal exemptions
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 personal exemption phase-out means
extra tax until AGI $377,000 ($427,000 jnt)]
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%
plus health care surtax 3.8%
1 %
0.9%
1%
3.8%
37.8% 36.3% 19.8%
[plus personal exemption phase-out means
extra tax until AGI $377,000 ($427,000 jnt)]
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%
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%
plus health care surtax 3.8%
1 %
0.9%
1%
3.8%
44.4% 42.9% 24.8%
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%
plus health care surtax 3.8%
1 %
0.9%
1%
3.8%
With $12,000+ income, 44.4% 42.9% 24.8%
Trusts & Estates >> 43.4%
23.8%
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%

AGI > $250k/$300k
33% 34.4% 15%

Taxb>$400/$450
39.6% 41.0% 20%
REAL INCOME TAX RATES
INVEST WAGES LTCG
Income Level
-MENT (+1.45%) & Divid
 AGI < $200k/$250k
28% 29.4% 15%

AGI > $200k/$250k 36.8% 35.3% 18.8%

AGI > $250k/$300k 37.8% 36.3% 19.8%

Taxb>$400/$450
44.4% 42.9% 24.8%
[higher for AGI between $254-377k ($305-427k
joint) for personal exemption phase-out]
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)
and/or
#2 – Reduce Net Investment Income
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)
#2 – Taxpayers with AGI near $200k ($250 jt)
-- Either reduce NII or reduce AGI
#3 - Taxpayers with AGI below $200k ($250 jt)
-- Avoid spikes in income that trigger 3.8% tax
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
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
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
#1 – MAKE GIFTS
OF APPRECIATED STOCK
DOUBLE-TAX ADVANTAGE
 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
 Loss Property? Sell for tax loss; give cash
DOUBLE BENEFIT FROM GIFT
OF APPRECIATED L.T.C.G.
PROPERTY
<< AVOID LONG-TERM
CAPITAL GAIN TAX
<< CHARITABLE INCOME
TAX DEDUCTION
$ Benefits Max Federal Taxes Saved
Person in 2012
50%
* 25% RE Dep Recap
* 28% Collectibles
<< 15%* LTCG Tax Rate
<< 35% Marginal Tax Rate
IMPACT OF
INDIVIDUAL INCOME
TAX RATE CHANGES
in 2012 and 2013-14
FUTURE INCOME TAX RATES
Highest tax rates
 Investment income
2012
35%
2013-14
44.4%

Earned income
(wages – 1.45% health)
36.4%
43.0%

LT Capital Gains
15%
24.8%
$ Benefits Max Federal Taxes Saved
Person in the Year 2012
50%
* 25% RE Dep Recap
* 28% Collectibles
<< 15%* LTCG Tax Rate
<< 35% Marginal Tax Rate
$ Benefits Max Federal Taxes Saved
Person in the Year 2014
65.4%
* 29.8% RE Dep Recap
* 32.8% Collectibles
<< 24.8%* LTCG Tax Rate
<< 39.6*% Marginal Tax Rate
(3.8% surtax not avoided
by charitable deduction)
Reduce Net Investment Income
Shift investment income to
charity:
#1 – Make gifts of appreciated stock
#2 - Donor advised funds
& private foundations
#3 – Charitable lead trusts
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
Shift Net Investment Income
Client with $400,000+ of income says:
•
•
•
“My $100,000 investment produces
$4,000 of taxable income every year”
“I give $4,000 to charity every year”
“I want to make a charitable bequest
of $100,000”
Shift Net Investment Income
Client with $400,000+ of income says:
•
•
“My $100,000 investment produces $4,000 of taxable income
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
.
Shift Net Investment Income
Client with $400,000+ of income says:
•
•
“My $100,000 investment produces $4,000 of taxable income
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
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
Shift Net Investment Income
Client with $400,000+ of income says:
•
•
•
“My $100,000 investment produces
$4,000 of taxable income 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.”
Shift Net Investment Income
Client with $400,000+ of income says:
• “My $100,000 investment produces $4,000 of
taxable income every year”
•
•
“I give away $3,000 to charity every year”
“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 ]
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!)
Taxpayers with AGI Near $200,000
Two Ways to reduce the 3.8% surtax :
#1 - Reduce Net Investment Income
(convert NII or shift NII)
and/or
#2 – Reduce AGI to less than
$200,000 ($250,000 joint)
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)
•
Avoid large Roth IRA conversions
•
Maximize compensation deferral
-- 401(k) contributions
-- Non-qualified deferred comp (Sec. 409A)
“Charitable IRA Rollover”
•
Taxpayers with AGI Near $200,000
”Charitable IRA Rollover” - over age 70 ½
•
•
•
“QCD” – Qualified Charitable Distribution
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 can satisfy annual RMD
REQUIRED MINIMUM
DISTRIBUTIONS
*LIFETIME DISTRIBUTIONS*
Age of Account Owner Required Payout
70 1/2
3.65%
75
4.37%
80
5.35%
85
6.76%
90
8.75%
95
11.63%
100
15.88%
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
• $50,000 net investment income
• This year: first RMD from IRA: $40,000
• Intends to make charitable gift: $30,000
Taxpayers with AGI Near $200,000
”Charitable IRA Rollover” - over age 70 ½
Compensation
Investment
IRA RMD
AGI
$150,000
50,000
. << IRA income
$200,000
not subject
to 3.8% tax
Taxpayers with AGI Near $200,000
”Charitable IRA Rollover” - over age 70 ½
Compensation
Investment
IRA RMD
AGI
$150,000
50,000
40,000 << IRA income
$240,000
not subject
to 3.8% tax
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
on $40,000
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
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
Taxable Income $210,000
IRA Gift
$150,000
50,000
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 on: $40,000
IRA Gift
$150,000
50,000
10,000
$210,000
$10,000
Will Law Be Extended to 2014?
>Planning strategy for 2014
if, as in 2008, 2010 & 2012, law has not
been extended until December!:
Give

RMD to charity;
can’t lose ! (Some IRAs balk)
Will Law Be Extended to 2014?
>Planning strategy for 2014
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 !)
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)
#2 – Taxpayers with AGI near $200k ($250 jt)
-- Either reduce NII or reduce AGI
#3 - Taxpayers with AGI below $200k ($250 jt)
Retirement Assets
Proposal to liquidate inherited IRAs
in just five years
Impact on planning
charitable bequests
THREE STAGES OF A
RETIREMENT ACCOUNT
Accumulate
Retirement
Wealth
Withdrawals
Distributions
After Death
Accumulate Wealth
 Tax
deduction at contribution
 Accumulate in tax-exempt trust
 Taxed upon distribution
= Tax Deferred Compensation
TYPES OF QRPs
 1.
Sec. 401 – Company plans
 2. Sec. 408 – IRAs
-- SEP & SIMPLE IRAs
 3. Sec. 403(b) & 457–Charities
 4. Roth IRAs & 401(k)/403(b)
Roth IRA,
Roth 401(k), or Roth 403(b)
INVERSE OF TRADITIONAL:
 No tax deduction at contribution
 Accumulate in tax-exempt trust
 Not
taxed upon distribution
THREE STAGES
 Accumulate
Wealth
Retirement

Withdrawals
Distributions After Death
RETIREMENT
TAXATION
General Rule – Ordinary income
Exceptions:
-- Tax-free return of capital
-- NUA for appreciated employer
stock
-- Roth distributions are tax-free
USUAL OBJECTIVE:
Defer paying income taxes in order to get
greater cash flow
Principal
$ 100,000

Pre-Tax Amount

Income Tax
on Distribution (40%)

Amount Left to Invest
10% Yield
$ 10,000
40,000
$ 60,000
$ 6,000
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
#2 – an inherited IRA, 401(k), etc –
 beginning year after death *
REQUIRED MINIMUM
DISTRIBUTIONS
*LIFETIME DISTRIBUTIONS*
Age of Account Owner Required Payout
70 1/2
3.65%
75
4.37%
80
5.35%
85
6.76%
90
8.75%
95
11.63%
100
15.88%
ADVANTAGES OF
ROTH IRAs
 Unlike a regular IRA,
no mandatory lifetime
distributions from a
Roth IRA after age 70 ½
 Yes, there are mandatory
distributions after death
THREE STAGES
 Accumulate
 Retirement
Wealth
Withdrawals
Distributions
After Death
Distributions
After Death




Income taxation
Mandatory ERISA distributions
Estate taxation
Asset Protection – Clark v. Rameker
Collision of multiple laws at death
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 ?
Distributions
After Death
> Income taxation
> Mandatory ERISA distributions
> Estate taxation
Collision of three tax worlds at death
INCOME IN RESPECT OF A
DECEDENT - “IRD” – Sec. 691
No stepped up basis for retirement assets
 After death, payments are income in
respect of a decedent (“IRD”) to the
beneficiaries
 Common mistake in the past: children
liquidate inherited retirement accounts.

Distributions
After Death
> Income taxation
> Mandatory ERISA distributions
> Estate taxation
Collision of three tax worlds at death
Distributions
After Death
After death, must start liquidating account
• Tax planning for family members who
inherit: DEFER distributions as long as
possible – greater tax savings
• “Stretch IRA” – make payments over
beneficiary’s life expectancy
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.
REQUIRED MINIMUM
DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
Age of Beneficiary
30
40
50
60
70
80
90
Life Expectancy
83
53.3 more years
83
43.6
84
34.2
85
25.2
87
17.0
90
10.2
97
6.9
REQUIRED MIN. DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
“STRETCH IRAS”
Age of Beneficiary
30
40
50
60
70
80
90
Life Expectancy
53.3 more years
43.6
34.2
25.2
17.0
10.2
6.9
REQUIRED MIN. DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
“STRETCH IRAS”
Age of Beneficiary
Life Expectancy
30
1.9% 53.3 more years
40
2.3% 43.6
50
2.9% 34.2
60
4.0% 25.2
70
5.9% 17.0
80
10.0% 10.2
90
14.5%
6.9
SENATE PROPOSAL:
LIQUIDATE ALL INHERITED
IRAs IN FIVE YEARS
2012 – Highway Bill – not enacted
 President Obama budget proposal
 June, 2014 – Sen. Wyden adds to Highway Bill
EXCEPTIONS
 -- Spouse -- minor child -- disabled
 -- Person not more than ten years younger

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
40
2.3% 43.6
50
2.9% 34.2
60
4.0% 25.2
70
5.9% 17.0
80
10.0% 10.2
90
10.0%
6.9 * [10.2 yrs]
REQUIRED MINIMUM DISTRIBUTIONS
Example: Death at age 80?
PROPOSED: FIVE YEARS if >10 yrs younger
Age of Beneficiary
Life Expectancy
30
5 years
40
5
50
5
60
5
70
5.9% 17.0
80
10.0% 10.2
90
10.00% 6.9 * [10.2 yrs]
SENATE PROPOSAL:
LIQUIDATE ALL INHERITED
IRAs IN FIVE YEARS
EXCEPTIONS
-- Spouse -- minor child -- disabled
 -- 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?

SENATE PROPOSAL: LIQUIDATE ALL
INHERITED IRAs IN FIVE YEARS
IMPLICATIONS FOR CHARITIES
Donors more likely to consider
 Outright bequests
 Retirement assets to tax-exempt CRT
 Child:
 Spouse
income more than 5 years; then charity
only (marital estate tax deduction)
 Spouse & children (no marital deduction)
FUNDING CRTs
WITH
RETIREMENT ASSETS
2-GENERATION CHARITABLE
REMAINDER TRUST
 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
 Can operate like a credit-shelter trust
for IRD assets [no marital deduction]
2-GENERATION CHARITABLE
REMAINDER TRUST
be a solution for second
marriages when estate is top-heavy
with retirement assets. Example:
-- Half of IRA to surviving spouse
-- Other half of IRA to a CRT for 2nd
spouse and children from 1st marriage
 Can
2-GENERATION CHARITABLE
REMAINDER TRUST
TECHNICAL REQUIREMENTS
 Minimum 10% charitable deduction
-- all children should be over age 40
 CRUT – minimum 5% annual distrib
 Not eligible for marital deduction
(see 2002 article on topic)
MANDATORY DISTRIBUTIONS
[Assume inherit IRA at age 80 and die at 92]
AGE
Own Accumulation Conduit
IRA
Trust
Trust .
80
5.35%
9.80%
9.80%
85
6.76%
19.23%
13.16%
90
91
92
8.78%
9.26%
9.81%
100.00%
empty
empty
18.18%
19.23%
20.41%
MANDATORY DISTRIBUTIONS
[Assume inherit IRA at age 80 and die at 92]
AGE
Own Accumulation Conduit
IRA
Trust
Trust .
CRT
80
5.35%
9.80%
9.80%
5.00%
85
6.76%
19.23%
13.16%
5.00%
90
91
92
8.78%
9.26%
9.81%
100.00%
empty
empty
18.18%
19.23%
20.41%
5.00%
5.00%
5.00%
.
HOW TO LEAVE A
RETIREMENT
ACCOUNT TO BOTH
FAMILY & CHARITY
CHARITABLE BEQUESTS
FROM QRPs
 Best
type of bequest: taxable income !
 Easier than formality of a will: Name
charity as beneficiary on form of plan
-- no need for attorney to draft
-- no need for witnesses, etc.
“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”
LIFETIME GIFTS: ONLY IRAs
BEQUESTS: ANY QRP
 1.
Sec. 401 – Company plans
 2. Sec. 408 – IRAs
-- SEP & SIMPLE IRAs
 3. Sec. 403(b) & 457–Charities
 4. Roth IRAs & 401(k)/403(b)
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
REQUIRED MIN. DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
“STRETCH IRAS”
Age of Beneficiary
30
40
50
60
70
80
90
Life Expectancy
53.3 more years
43.6
34.2
25.2
17.0
10.2
6.9
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
WHAT CAN GO WRONG ?
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
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
WHAT CAN GO WRONG #1?
•
•
Other beneficiaries cannot do stretch
IRA if charity is beneficiary?
Solutions:
* cash out charity’s share by Sept 30
or
* separate account for charity
p. 39
WHAT CAN GO WRONG #2 ?
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
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.
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.
IRS: “Taxable income from IRA, but no
charitable deduction.” Reason: trust had no
instructions to pay income to charities


p.39
WHAT CAN GO WRONG?
 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
Caution: IRS memo on danger of using
retirement accounts to satisfy pecuniary bequests
p.41
WHAT CAN GO WRONG?
SOLUTION #2 – draft document to
get an offsetting charitable income tax
deduction in case estate or trust has
income

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
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