Charitable Tax Planning and Life Insurance
For Producer orFor
Broker/Dealer
Use Use
Only.
For
Public
Distribution.
Producer or Broker/Dealer
Only.Not
Not For
Public
Distribution
Agenda






Introduction to charitable giving
Taxation issues
Types of charitable organizations
Charitable gifts of life insurance
Charitable remainder trusts
Wealth replacement trusts
This document is designed to provide introductory information on the subject matter. MetLife does not provide tax and legal
advice. Clients should consult their attorney and /or tax advisor before making financial investment or planning decisions
For Producer orFor
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For
Public
Distribution.
Producer or Broker/Dealer
Only.Not
Not For
Public
Distribution
Charitable Gifts: Things to Consider





Is the charity a qualified charitable organization?
Is it a gift?
What is the value of the gift?
What is the form or structure of the gift?
Are there deduction limitations placed on the gift?
For Producer orFor
Broker/Dealer
Use Use
Only.
For
Public
Distribution.
Producer or Broker/Dealer
Only.Not
Not For
Public
Distribution
Public Charity versus Private Foundation

Public charities provide higher deductions at the expense
of control by the donor

Private foundations provide control but with substantially
reduced deductions, and potential excise taxes
For Producer orFor
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Use Use
Only.
For
Public
Distribution.
Producer or Broker/Dealer
Only.Not
Not For
Public
Distribution
Taxation Issues

Donative Intent


Partial Interest


Transfer of money or property made without adequate
consideration
Generally non-deductible but various exceptions do exist
Valuing the Gift


Determined by type of property gifted
Gifts that exceed $5,000 must get qualified appraisal
For Producer orFor
Broker/Dealer
Use Use
Only.
For
Public
Distribution.
Producer or Broker/Dealer
Only.Not
Not For
Public
Distribution
Types of Property

Ordinary Income Property



Assets held less than one year, life insurance
Deduction limited to lesser of cost basis or fair market value
Long Term Capital Gain Intangible Property


Capital asset held longer than one year
Fair market value deduction (exception: certain appreciated
property to a private foundation limited to lesser of cost basis or
fmv)
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Producer or Broker/Dealer
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Public
Distribution
Types of Property
Exception: Basis Rule for Private
Charities

Gifts of qualified appreciated stock valued at FMV rather
than basis



Traded on exchange
Capital gain property
Still limited to 20% of AGI
For Producer orFor
Broker/Dealer
Use Use
Only.
For
Public
Distribution.
Producer or Broker/Dealer
Only.Not
Not For
Public
Distribution
Types of Property

LTCG Tangible Personal Property



Art, collectibles
For public charities, deduction generally equal to fair market
value
For private charities, deduction generally limited to lesser of
cost basis or fmv
 Exception:
Unrelated use
For Producer orFor
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Use Use
Only.
For
Public
Distribution.
Producer or Broker/Dealer
Only.Not
Not For
Public
Distribution
Public - Valuation
Private - Valuation
Cash
50% - FMV
30% - FMV
Ordinary Income
Property
50% - Lesser of FMV or 30% - Lesser of FMV or
Basis
Basis
LTCG Intangible
30% - FMV
Property (e.g. securities)
LTCG Tangible
Personal Property
20% - Lesser of FMV or
Basis (unless qualified
appreciated stock
Related: 30% FMV
20% - Lesser of FMV or
Unrelated: 50% Lesser of Basis
FMV or Basis
For Producer orFor
Broker/Dealer
Use Use
Only.
For
Public
Distribution.
Producer or Broker/Dealer
Only.Not
Not For
Public
Distribution
Charitable Estate Tax Deduction

Estate receives a charitable estate tax deduction for
bequests to qualified charities at death

Deduction unlimited
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For
Public
Distribution.
Producer or Broker/Dealer
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Public
Distribution
Gifts of Life Insurance

Purpose:


Create large endowment
Leverage the charitable donation
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Only.
For
Public
Distribution.
Producer or Broker/Dealer
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Public
Distribution
Charitable Gifts of Life Insurance
Premiums
Access to Cash Value *
Donors
Life Insurance
Policy on
Donor(s)
Charity
*Loans and withdrawals will decrease the cash value and death benefit.
Tax-favored distributions assume that the life insurance policy is
properly structured, is not a modified endowment contract (MEC), and
distributions are made up to the cost basis and policy loans thereafter.
If the policy has not performed as expected and to avoid a policy lapse,
distributions may need to be reduced, stopped and/or premium
payments may need to be resumed. Should the policy lapse or be
surrendered prior to the death of the insured, there may be tax
consequences.
For Producer or Broker/Dealer
Only. Use
NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Charitable Gifts of Life Insurance
Cash Gift
Donors
Charity
Life Insurance
Policy on
Donor(s)
For Producer or Broker/Dealer
Only. Use
NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Gifts of Life Insurance: Existing Policy

Valuation based on replacement value




Paid up policy/single premium
Premium paying mode
Recently issued
Deduction limited to lesser of FMV or cost basis


Ordinary income property reduction
Public Charity - 50% of AGI limit
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For
For Producer orUse
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For PublicDistribution.
Distribution
Gifts of Life Insurance: New Policy



Charity needs to be owner & beneficiary in order to
receive deduction for premium payments gifted to the
charity
If premium is paid directly to insurance company,
deduction could be reduced
Important to check insurable interest laws for state in
question
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Distribution
Types of Charitable Gifts
Outright gifts or bequests
 Split interest gifts:





Charitable Remainder Trusts (CRT)
Charitable Lead Trust (CLT)
Gift Annuity
Life Estate
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For
For Producer orUse
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For PublicDistribution.
Distribution
Should a Client Consider a CRT?

If clients have:




Stock portfolios
Land
Real estate
And want to:





Benefit charity
Sell the property
Receive an income stream
Create tax deductions
Reduce their estate
For Producer or Broker/Dealer
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For
For Producer orUse
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NotPublic
For PublicDistribution.
Distribution
Charitable Remainder Trust

Benefits:




Convert non-income producing asset to an income stream
without immediate capital gains
Generate immediate income tax deduction
Remove asset and any future appreciation from estate
Benefit charity
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For
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For PublicDistribution.
Distribution
Charitable Remainder Trust

Disadvantages



Not all types of property are appropriate
Complicated rules
Disinherits the heirs
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For
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For PublicDistribution.
Distribution
How a CRT Works

An irrevocable trust is created by an attorney



An income beneficiary receives an income stream for
trust term



Must follow specific rules to qualify as a CRT
CRT is a tax exempt trust
Term of 20 or less years
One or more lives
Once term ends selected charity receives remainder
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For
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For PublicDistribution.
Distribution
How a CRT Works

Donor is entitled to an income or estate tax deduction
for remainder value of trust



Not dollar for dollar
Deduction given up front even though actual value
passing to charity is not known
Deduction based on



Term of trust
Payout rate chosen
Assumed rate of return (7520 rate)
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For
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For PublicDistribution.
Distribution
IRC Section 7520 Rate




IRS assumed rate of return
120% of federal midterm rate
Can use current month’s or previous two months’
Generally, the higher the 7520 rate, the larger the CRT
deduction
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For
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Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Charitable Remainder Trust
Gift Asset to CRT
Income
CRT
Donor
Charity
Government
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
CRT: Irrevocable Trusts

What Cannot Be Changed:

Income beneficiaries

Term of the trust

Payout rate

Payout frequency

Type of trust

Trust must not be a grantor trust
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For
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Broker/Dealer
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For PublicDistribution.
Distribution
CRT: Irrevocable Trusts

What Can Be Changed:


Charitable remainderman
Investments in trust
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
CRT: Four-Tier Taxation

Four-tier income taxation to the extent each exists in
trust:





Ordinary income
Capital gains
Tax-free income
Corpus (return of basis)
If income recipient is not donor, gift tax may be levied
on present value of income stream
For Producer or Broker/Dealer
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NotOnly.
For
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Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Example: $1,000,000 CRT

CRT has 8% payout


Has income of 6%




$80,000
$60,000
CRT has $500,000 of built in capital gain
$60,000 taxable as ordinary income
$20,000 taxable as capital gain
This hypothetical example is for illustration purposes only and actual results may vary.
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For
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For PublicDistribution.
Distribution
CRT: Selecting the Proper Asset
Publicly traded stock
 Low
basis
 Stock
pays low dividends
 Donor
seeking to defer capital gains
tax
 Needs
a source of premium dollars
For Producer or Broker/Dealer
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
CRT: Selecting the Proper Asset
Appreciated Real Estate
 Low
basis
 Debt free
 Contribute 100% of donor’s interest in
the property
 Ideally 100% interest = whole property.

100% interest in a fraction is less marketable.
For Producer or Broker/Dealer
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
CRT: Problem Assets

Debt encumbered property

Partnership/S corporation

More than 20% of business interest

Inter vivos transfer of IRA, qualified plans,
or annuity
For Producer or Broker/Dealer
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Unrelated Business Taxable Income (UBTI)

If CRT has UBTI, the trust will pay an excise tax of
100% of the UBTI




Encumbered property
Certain partnership interests
More than 20% of the voting stock of a business
S corporation stock
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For
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Broker/Dealer
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For PublicDistribution.
Distribution
Problem: Encumbered Property




Bargain sale treatment
 Part sale, part gift
Potential disqualification as CRT
Debt financed income
 ALL trust income becomes taxable for that year
Exception: If (1) the donor owned the property for more
than five years before the gift and (2) the mortgage was
placed on the property more than five years before the
gift, the indebtedness is not acquisition indebtedness for
ten years after the gift.
For Producer or Broker/Dealer
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Encumbered Property

Solution:



Transfer debt to another property
Partition property so debt is only on part not transferred
Pay off debt
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Distribution
Trust Designs

CRAT
Charitable Remainder Annuity Trust

CRUT
Charitable Remainder Unitrust

NIMCRUT
Net Income with Makeup Unitrust

FLIP
Net Income Unitrust Switching to
Straight CRUT
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
CRAT

Pays a fixed annuity based upon initial fair market value of
trust

* Fixed percentage or dollar amount
CRUT

Pays a fixed percentage of the trust corpus

Income payments may fluctuate
For Producer or Broker/Dealer
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
NIMCRUT

Payout made only if trust has net
accounting income



Donor does not need funds immediately
Invest in growth assets
Can makeup prior missed payments if
net income is sufficient
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
FLIP Trust


Starts as a net income trust
Upon triggering event, changes to standard CRT





Sale of asset
Death
Divorce
Forfeit any makeup upon “flip”
Ideal for unmarketable assets
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NotOnly.
For
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Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Case Study: Mike and Carol Brady







Ages 72 and 68 establish a CRUT
$1,000,000 of stock, $200,000 cost basis
5 % and 7% payouts
7% return
7520 rate of 2.6%
Federal income tax rate of 28%
Federal capital gains tax rate of 15%
For Producer or Broker/Dealer
Only. Use
NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Case Study: Mike and Carol Brady




5% Payout
Deduction $410,070
Total Income
$1,345,287
Remainder
$1,502,801
1st year income
$50k




7% Payout
Deduction
$293,070
Total Income
$1,510,648
Remainder
$960,345
1st year income
$70k
This hypothetical example is for illustration purposes only and actual results may vary.
For Producer or Broker/Dealer
Only. Use
NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Case Study: Sale or CRT?




Sale:
Invested: $880,000
Initial After Tax
Income: $38,106
Heirs: $1,541,697
Charity: $0





5% CRT:
Invested: $1,000,000
Income Tax
Deduction: $ 410,070
Initial After Tax
Income: $36,000
Heirs: $509,947
Charity: $ 1,502,801
This hypothetical example is for illustration
purposes only and actual results may vary.
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For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Tax Diversification Plan

Contribute stock to CRT



Creates income tax deductions
Sell enough stock so that taxable gain is offset by
CRT tax deduction
Provides both income stream and cash
For Producer or Broker/Dealer
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Client Objection
“Implementing a CRT
Disinherits Our Heirs!”
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For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Possible Solution: Wealth Replacement Trust



Value of asset transferred to CRT may be replaced
for heirs with the purchase of life insurance
Premiums may be paid from CRT income stream
Life insurance purchased inside wealth replacement
trust may avoid estate inclusion
For Producer or Broker/Dealer
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For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Why Use a Wealth Replacement Trust

Trust document controls destiny of policy




protects policy from surrender by children
determines when proceeds will be paid to children
Outside donor’s estate
May provide protection from child’s creditors *
* Creditor protection laws vary dependant upon governing federal and state law. The applicability of such
laws also depend on the terms of the trust. One should be sure to confer with their independent tax and
legal advisors prior to establishing a trust for this purpose.
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For
For Producer orUse
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For PublicDistribution.
Distribution
Designing the Wealth Replacement Trust



Trust is owner and beneficiary of policy
Insured(s) cannot be trustee
Insured(s) cannot have any incidents of ownership
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How Much Coverage to Purchase

Full replacement


Equal replacement


Amount equal to contributions to CRT
Net replacement


Amount equal to CRT remainder value
Amount equal to remainder net of estate tax
Realistic replacement

Amount donor(s) can afford to gift
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For PublicDistribution.
Distribution
Example




Donor, age 70, gifts
$1,000,000 to CRT
At life expectancy,
CRT remainder
value is $1,184,304
Payout is 6% & tax
rate is 33%
Estate tax bracket is
50%

Replacement value:


Equal value:


$1,000,000
Net value:


$1,184,304
$592,152
Realistic value:

Whatever the net payout of
$40,200 will buy
This hypothetical example is for illustration purposes only and actual results may vary.
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For
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For PublicDistribution.
Distribution
Questions?
For Producer or Broker/Dealer
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NotOnly.
For
For Producer orUse
Broker/Dealer
NotPublic
For PublicDistribution.
Distribution
Important Information
Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in
this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports
the promotion and marketing of insurance products. You should seek advice based on your particular
circumstances from an independent tax advisor.
MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this
document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is
subject to interpretation and change. Tax results and the appropriateness of any product for any specific taxpayer may vary
depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors
regarding your particular set of facts and circumstances.
MetLife life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in
force. There is no guarantee that any of the variable investment options in this product will meet its stated goals or
objectives. The cash value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its
original value. Guarantees are subject to the claims paying ability and financial strength of the issuing insurance company.
Life insurance products are issued by MetLife Investors USA Insurance Company, Irvine, CA, Metropolitan Life Insurance
Company, New York, NY, and in New York only by First MetLife Investors Insurance Company, New York, NY. All guarantees
are subject to the claims-paying ability and financial strength of the issuing insurance company. Variable products are
distributed by MetLife Investors Distribution Company, Irvine, CA. All are MetLife companies. July 2012
Insurance Products are:
· Not A Deposit · Not FDIC-Insured · Not Insured By Any Federal Government Agency ·Not
Guaranteed By Any Bank Or Credit Union · May Go Down in Value
L0912280754 (exp11/13)
PEANUTS © 2012 Peanut Worldwide
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For
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For PublicDistribution.
Distribution