June 2, 2015 Catholic Charities and the Archdiocese of Chicago - PowerPoint Presentation

June 2, 2015 Catholic Charities and the Archdiocese of Chicago 11th Annual Tax and Estate PlanningSeminar for Professionals “The Good Giver: An Exploration of Tax-Wise Charitable Giving” Suzanne Shier Wealth Planning Practice Executive and Chief Tax Strategist/Tax Counsel sls14@ntrs.com 312-557-8396 Rev. 6-1-15 (v13)

The Good Giver“To give away money is an easy matter and in any man’s power. But to decide whom to give it and how large and when and for what purpose and how, is neither in every man’s power nor an easy matter.” Aristotle

The Good GiverGiving TodayGiving TomorrowGiving Choices – Donees and DonationsGiving Choices – National and International Giving Choices - Giving VehiclesGiving Choices – Transmitting Value(s)

The Good Givers’ Giving Source: Giving USA 2014, The Annual Report on Philanthropy for the Year 2013 Giving by individuals is the greatest source of giving

The Good Givers’ Recipients Source: Giving USA 2014, The Annual Report on Philanthropy for the Year 2013 The majority of giving recipients are religion, education and human services

The Good Givers’ Level of Giving Giving levels are once again increasing Source: Giving USA 2013: The annual Report on Philanthropy for the Year 2012 (Chicago: Giving USA Foundation, 2013), p. 26

The Good Givers’ Generosity Giving among income groups is greatest at the highest and lowest income levels Source: IRS 2011 Statistics of Income (SOI)

United in GivingSocial Value: Charities provide essential services, often more effectively than government ever could. National Character: As a people, Americans are uniquely benevolent; the charitable deduction simply reflects this element of the American character. Limited Government: Government will do what charities cannot; in the absence of a well-funded nonprofit sector, government will expand its social, political and economic ambit.Fairness: Charitable deductions are consistent with the core principle of tax fairness, since taxpaying capacity is directly affected by the amount of charitable giving done by a taxpayer. There are multiple rationales for the charitable deductionSee: J. Thorndike, Making the World Safe for Philanthropy (Urban Institute, April 2013), pp. 5-6

The Good Givers’ Heritage of Giving1917 – War Revenue Act of 1917Enacted the individual charitable deduction1944 – Revenue Act of 1944 1981 – Economic Recovery Act of 1981Expanded the charitable deduction to non-itemizer individuals1986 – Tax Reform Act of 1986Charitable deduction escaped the 2% floor 2006 – Pension Reform Act of 2006Temporary direct contribution from IRAThe charitable deduction has a long standing history in the tax code

What the Good Giver GivesNon-cash contributions$49 billion in non-cash contributions (22.2 million returns) in 2012One-third of the returns (7.6 million) report $42.9 billion in contributions Taxpayers age 65+ gave the most (cash and non-cash) AssetValueShare Corporate stock$16.8 billion39.1%Mutual funds $1.7 billion 2.8% Clothing $9.3 billion 21.8% Household items $3.7 billion 8.7 % Art and collectibles $1.2 billion 2.8% Non-cash contributions remain popular for donations Source: IRS Statistics of Income, Spring 2015

What the Good Giver GivesArt and collectibles“Making Charitable Gifts of Art – A Primer for Donors” Capital gain or ordinary income propertyUse for a related purpose Art for a medical school or for liberal arts college? An income tax deduction consideration, but not a gift or estate tax issueArt Advisory Panel344 items reviewed with recommended adjustments for 56%Giving of art and collectibles is of particular interest

What the Good Giver GivesIndividual Retirement AccountsOptimal testamentary giving vehiclePension Protection Act of 2006 direct IRA gift provisionTemporary Age 70-1/2 or olderOwner’s or inherited IRAOnly IRAs, not 40(k)s$100,000 maximum per taxpayer per year Direct to qualified charityPublic charity (but not donor advised funds or supporting organizations)Private operating foundationsIncreased income tax rates makes giving from retirement assets even more attractive

What the Good Giver GivesSplit-interest charitable trusts and pooled income funds in 2012113,688 split-interest trust returns$11.7 billion in gross income $4.3 billion in charitable distributions93% charitable remainder trusts80% CRUTs (majority 5-6%)14% CRATS 6% charitable lead trusts1% pooled income fundsMany donors continue to favor giving in trustSource: Rosenthal, Lisa, Split-Interest Trust, Filing Year 2012, Statistics of Income Bulletin 51 (Winder 2014)

The Global Good GiverIncome tax charitable contribution deductionLimited to donees organized within the USQualificationsUS charitable donee may use funds abroad for charitable purpose US charity may make donations to a foreign charity“Friends” are permitted“Conduits” are notGiving globally is an increasing priority, but it has limitations

The Global Good GiverGift and estate tax charitable deduction There is no (US) place of organization requirementBut, there is a Section 501(c)(3) status notice requirement Exception if foreign organization receives less than 15% of its support from US sourcesThe estate and gift tax rules for global giving are broader

Reforming the Good GiverRecapTotal gifts in US $335.17 billion in 2013$240.60 billion from living individuals $196.21 billion (81.6%) from taxpayers who itemize deductionsDeductions are regressive, credits are notFor example The “cost” to the government (the “subsidy” to the taxpayer) of a $100 itemized charitable deduction for a taxpayer in the 35% tax bracket is $35The “cost” and “subsidy” of a $100 gift by a non-itemizer is $0A credit of $xx is of equal cost and subsidy to all taxpayersTax reform proposals affecting the charitable deduction have various rationales

Reforming the Good GiverProposals AdministrationCap the value of all itemized deductions at 28% Camp proposed Tax Reform Act of 2014Increase standard deduction2% floor on itemized charitable deductionSimplify the rules on deduction limitations Various reform proposals have been suggested

Reforming the Good GiverProposed limit of the deduction for the appreciated value of propertyLimit the deduction to the adjusted basis of property Similar to the current limit for contributions to private foundationsRecommended by the Joint Committee on Taxation in 2005Part of the proposed Tax Reform Act of 2014 (with exceptions) Limiting the deduction on appreciated assets has garnered interest

Reforming the Good GiverRecent headlines ask “Who will watch the charities?”David, Callahan, New York Times, Sunday, May 31, 2015 The transparency and accountability of charitable organizations (private foundations in particular) is under public scrutinyProposed focus of reformsTransparency of charitable donations Narrower definition of charitable philanthropy focusing on public benefitEmphasis on the timely use of tax-exempt dollarsExample – Payout of donor advised fundsBetter accounting of effectiveness of philanthropic dollarsFederal oversight akin to British national Charity Commission Some have questioned the degree of transparency and accountability of charitable organizations

Reforming the Good GiverDoes the income tax deduction for charitable giving impact giving?The lower the price of giving, the more that is givenThe “wealthier” the environment, the more that is given The exact relationship (elasticity) of giving and deductions is undeterminedDoes the estate tax and the charitable deduction impact giving? In 2010 (the year of estate tax repeal) for estate worth more than $10 million30% of value ($3.5 billion) to charityWhat impact any changes will have on giving is unclear

The Good Giver’s Tax-Wise ChoicesThe choice of charity and the gift are important

The Good Giver’s Tax-Wise Choices

The Good Giver’s Tax-Wise Choices Planning for gifts makes a difference

Direct Donation to Charity Donor Advised Fund Supporting Organization Private Foundation Charitable Remainder Trust Charitable Lead Trust Least Complex Most Complex The Good Giver’s Giving Options There are many ways to give, with varying degrees of complexity

Donor Advised Fund A Simple and Flexible Way to Promote Family Giving N O R T H E R N T R U S T

At a Glance: Donor Advised Fund A donor advised fund (DAF) provides an attractive alternative to establishing a private foundation. A DAF is a charitable giving vehicle that allows you to maintain discretion over your charitable giving without the administrative and financial burdens associated with a private foundation. You can transfer assets to a DAF account during life or at death, and you will receive an immediate charitable tax deduction . You may also appoint family members and friends as "advisors" to the account, thereby promoting family philanthropy and/or charitable giving circles. Uses:DAFs are less expensive to administer than a private foundation, and offer a higher income tax charitable deduction Grants may be made in the name of the DAF account or anonymously How does it work? Accounts and assets (cash, securities, etc.) are held by a sponsoring charity, often a community foundation In year 1, you transfer assets to the DAF You may be entitled to a charitable income tax deduction in year 1, even though the property may or may not be distributed to charitable organizations in that year You may make recommendations to the sponsoring charity to make distributions to select charitable organizations What are the complications? Loss of access to assets for personal needs Distribution only for the benefit of public charities While rare, a situation could occur whereby the sponsoring charity may deny a request to direct a charitable gift** For illustrative purposes only. Not legal or tax advice. **All DAFs are legally prevented from making certain grants. For more information regarding prohibited grants, please consult a Northern Trust advisor. DAF Year 1* Year 2 and beyond: Distributions to Charity CHARITIES *Current income tax deduction, subject to deduction limitations Contribution Donor Advised Fund Strategy YOU

Example: Donor Advised Fund For illustrative purposes only. Not legal or tax advice. Sample Profile: You have a high income year and are not subject to the alternative minimum tax You are charitably inclined, but currently unsure of the charitable organizations you want to support Anticipated Results: You receive an income tax charitable deduction of up to 50% of adjusted gross income You can deduct the entire $250,000 from your itemized tax return, subject to applicable IRS deduction limitations Assumptions: $250,000 cash contribution to initially fund the donor advised fund Donor’s adjusted gross income is $1,000,000 DAF Year 1* Year 2 And Beyond: Donor Advises on Distribution to Charities CHARITIES *Current income tax deduction, subject to deduction limitations Contribution YOU $250,000

Charitable Remainder Trust – "CRT" Fulfill your philanthropic intent while retaining cash flow and deferring capital gains tax N O R T H E R N T R U S T

At a Glance: Charitable Remainder Trust A charitable remainder trust (CRT) is an irrevocable trust established to provide annual payments to current beneficiaries with the remainder balance distributed to charity. A CRT is typically funded with appreciated assets. You, the grantor, are eligible for an income tax deduction and perhaps a gift or estate tax deduction for the present value of the remainder interest, which will pass to charity. Payments from the trust may be made to an individual or individuals over time, either for life or for a defined term not to exceed 20 years. Your designated charity (or charities) receives the remaining principal (remainder interest) at the end of the trust term. Uses:Appropriate for charitably-inclined persons with highly appreciated assets who desire a defined stream of cash flows for themselves or their beneficiariesAlso provides a method of diversifying appreciated assets while deferring the income taxation, potentially increasing the yield from the assets while gaining a current income tax deduction How does it work? A CRT is created in the form of a unitrust (fixed percentage of the trust assets determined and distributed annually) or an annuity trust (fixed dollar amount distributed annually) Your choice of the term and payout percentage determines both the income tax and gift or estate tax deduction You and/or your beneficiary(ies) take annual distributions based on the annuity or unitrust amounts These payments are subject to income tax based upon the character of income earned by the CRT What are the complications? Underperforming assets may deplete the trust Loss of control over the contributed assets Growth on assets exceeding annuity or unitrust passes irrevocably to charity If you irrevocably name a beneficiary other than you or your spouse, the present value of that beneficiary’s interest will be considered a gift for gift tax purposes Consider generation-skipping transfer tax issues before naming a grandchild or other "skip" person as a beneficiary For illustrative purposes only. Not legal or tax advice. CRT CHARITY Remainder to charity CRT Strategy YOU Contribution ANNUITY OR UNITRUST PAYMENTS BENEFICIARY

Choosing the Charitable Remainder Trust Charitable remainder trust design presents a number of options

Charitable Lead Trust – "CLT" A Deferred Gift to Minimize Transfer Taxes While Optimizing Annual Charitable Gifts N O R T H E R N T R U S T

At a Glance: Charitable Lead Trust A Charitable Lead Trust (CLT) makes annual payments to a charity or charities for a term of years, or for a lifetime, before the remaining principal is made available to trust beneficiaries such as children. A CLT can either be testamentary (created by your will or trust upon your death) or inter vivos (created during your lifetime). Uses: CLTs typically make sense if you want to minimize gift and estate tax by delaying the transfer of wealth to children or grandchildren, and if you are already making or would like to make annual gifts to charity How does it work? A CLT is an irrevocable trust with specific annual payments to charity. Remainder interests pass to or are held for the benefit of non-charitable beneficiaries (typically children) A CLT is created in the form of a unitrust (fixed percentage of the trust assets determined and distributed annually) or an annuity trust (fixed dollar amount distributed annually) If structured as a grantor trust, you will be entitled to a current income tax deduction for the present value of the current interest going to charity You will be taxed on the taxable income during the charitable term Alternatively, a non-grantor CLT will not tax the grantor on the trust’s income, resulting in the grantor foregoing a current income tax deduction The CLT, however, will be entitled to a charitable income tax deduction for the amounts passing to charity annually What are the complications? Loss of control over gifted assets Loss of access to assets if you or your family have a future need prior to the expiration of the trust’s lead term Under-performing investments could exhaust the CLT such that the charity may not get its full series of payments and then there will be nothing to pass to the remainder beneficiaries For illustrative purposes only. Not legal or tax advice. Charitable Lead Trust Strategy CLT TRUST BENEFICIARIES CHARITY Annuity Payments to Charity Term of Years Remainder End of Term YOU Contribution

Choosing the Charitable Lead Trust Choice of the type of charitable lead trust determines the tax benefits

Private Family Foundation Maintain Control of Your Charitable Giving While Promoting Family Philanthropy N O R T H E R N T R U S T

At a Glance: Private Family Foundation A private family foundation is a tax-exempt charitable vehicle that may be organized as a corporation or a trust. Private family foundations are usually grant-making foundations that make grants to public charities chosen by the foundation’s trustees or directors. A private foundation allows the donor the maximum amount of control and flexibility over a donor’s tax-deductible charitable giving during life and after death. Multiple generations of family members may be involved in the charitable giving process. Contributions to private foundations are generally deductible for income tax purposes, subject to some limitations. Uses:A private foundation is effective when you want to maintain the maximum amount of control over your charitable giving while teaching younger generations about the importance of charitable giving and promoting a family giving legacy How does it work? A non-profit corporation or a wholly charitable trust is created Contributions are made to the foundation for future distributions to charitable causes Private family foundations are generally exempt from income tax, but must pay an excise tax of 2% on net investment income Private family foundations must distribute at least 5% of the value of its net assets annually The donor can maintain control over grant making and investment decisions What are the complications? Assets must be used for charitable purposes Loss of personal access to assets after transfer to private foundation Administratively complex Potential loss of privacy due to tax returns being publicly recorded Subject to complex Internal Revenue Code rules and close scrutiny by the IRS, particularly as it relates to prohibited transactions For illustrative purposes only. Not legal or tax advice. Private Family Foundation Strategy CHARITIES Annual Grants YOU Contribution PRIVATE FOUNDATION

Example: Private Family FoundationFor illustrative purposes only. Not legal or tax advice. Sample Profile: Your family would like to contribute $5,000,000 to a charitable giving vehicle to consolidate your charitable giving activities and encourage younger family members (children) to participate in philanthropic activities Results: You create a family charitable legacy through the creation and management of the private foundation You and your spouse/partner and adult children can serve as directors for a corporation or as distribution committee members for a trust and be actively involved in the grant-making process From a tax perspective, a $5,000,000 income tax charitable deduction is available in the year the contribution is made, subject to the applicable adjusted gross income limitation of 30% for gifts of cash and 20% for gifts of long-term appreciated securities Assets of the foundation will be subject to the 2% annual excise tax on the net investment income Assumptions: Total family assets of $20,000,000 Family is charitably inclined Family is willing to commit up to $5,000,000 in cash to fund the foundation CHARITIES Grants YOU Contribution FAMILY PRIVATE FOUNDATION $5,000,000 At Least 5% Annually

Choosing Between a Private Foundation and Donor Advised Fund Aligning the type of vehicle with the donor’s goals is essential to planning

Supporting Organizations N O R T H E R N T R U S T

At a Glance: Supporting OrganizationsHow does it work? A supporting organization is established as either a nonprofit corporation or a trust One or more donors make contributions to the supporting organization, making them eligible to take an income tax charitable deductionThe supporting organization makes financial contributions to, or supports the programmatic work of, one or more specified domestic public charities The donor may continue to have a limited role in the oversight of the supporting organization, including governance and investments Special Considerations: The rules that govern supporting organizations are complex The donor(s) and certain related parties (known as "disqualified persons") may not maintain control over the supporting organization The supporting organization’s public charity status depends on the involvement of the public charities that are benefitted by the supporting organization. Thus, based on their governance structure, certain supporting organizations are subject to extensive administrative requirements, including minimum required distributions and additional reporting. For illustrative purposes only. Not legal or tax advice. Supporting Organization Structure SPECIFIED CHARITY Financial or programmatic support DONOR(S) Contribution SUPPORTING ORGANIZATION SPECIFIED CHARITY A supporting organization is a tax-exempt, wholly charitable entity established by one or more donors which provides support to specified public charities. Based on its special relationship to the public charities it supports, the supporting organization is classified as a public charity (rather than as a private foundation).

Comparison: Supporting Organizations vs. Private Foundations Advantages of Supporting Organization Status over Private Foundation status Tax-free investment income: Because they are classified as public charities, supporting organizations do not pay tax on investment income, whereas private foundations pay a 1-2% excise tax on investment income. Increased income tax charitable deductions: Contributors to a supporting organization are entitled to greater income tax charitable deductions for such gifts than they would be for identical gifts to a private foundation. Decreased IRS oversight: Supporting organizations are not subject to the private foundation laws of the Internal Revenue Code, which impose strict rules covering self-dealing, timing of distributions, and types of investments. Failure to fully comply with these rules subjects a private foundation (and, in some cases, its donors or managers) to large excise taxes. For illustrative purposes only. Not legal or tax advice.

Comparison: Supporting Organizations vs. Private Foundations Disadvantages of Supporting Organization status relative to Private Foundation statusLoss of donor control: The donor of a supporting organization cannot retain control over the entity and may only appoint a minority of the trustees or board of directors. Loss of grant-making flexibility: A supporting organization is limited to supporting specific public charities that are identified by name or class under the governing instrument, and which cannot be changed at the will of either the donor or the trustee of the supporting organization. By contrast, a private foundation may be established with broad charitable purposes, permitting the trustees to change its grant recipients every year No compensation to donors or related parties: Disqualified persons related to the donor of a supporting organization may not receive any grant , loan, payment of compensation or similar payments, whereas a private foundation may provide reasonable compensation to such disqualified persons. For illustrative purposes only. Not legal or tax advice.

Comparison of Giving Vehicles Tax Implications Lifetime gift: Immediate income tax deduction Cash: up to 50% of AGI Securities: up to 30% of AGI No capital gains tax on properly structured gifts of appreciated securities Bequest: Estate tax deduction for full market value of donation at death Lifetime gift: Immediate income tax deduction Cash: up to 50% of AGI Securities: up to 30% of AGI No capital gains tax on properly structured gifts of appreciated securities Bequest: Estate tax deduction for full market value of donation at death Investment income is not subject to tax Lifetime gift: Immediate income tax deduction Cash: up to 30% of AGI Securities: up to 20% of AGI No capital gains tax on properly structured gifts of appreciated securities Bequest: Estate tax deduction for full market value of donation at death Disadvantages Gift acceptance policies vary among charities and may restrict type of donated property One-time gift vs.continuous grants Sponsoring charity has final say on grant recommendations and investment of fund assets Subject to annual excise tax, quarterly estimated excise tax payments Annual tax returns Substantial set-up and ongoing expenses Complex self-dealing and other private foundation excise tax rules Outright Donation to Charity Donor Advised Fund Private Foundation Advantages Immediate benefit to charity No front-end costs or expenses Keep assets until you donate, investing them as you choose Contributions deductible in current year Ability to recommend investments and grants over time Flexible, convenient giving Minimum cost to establish Involvement of family members and friends Anonymity, if desired Contributions deductible in current year Ability to make grants over time Full control over charitable distributions Involvement of family members and friends Anonymity, if desired

The Good Giver’s Legacy$400 billion in taxable gifts were made in 2012Compared to $25 billion per year from 2002 to 2009Generational wealth transfer over the next 20 years will be unprecedented Giving the gift of giving has never been more importantPositioning asAn heir – to wisdom as well as wealth A steward – responsible for passing the value of generosity on to the next generationA participant – modeling generosity, as those who follow are more likely to do as we do than to do as we sayThe Good Giver’s greatest gift is transmitting the value of giving

The Good-Giver’s Tax-Wise LegacyConsider a married couple living in Florida with $10 million in assets and two successful children who intend to make a $1 million charitable gift Alternatives Testamentary charitable gift of $1million and $4.5 million to each child or$5 million to each child and children make gifts of $500,000 eachAssume the children each have $500,000 ordinary income in 2015 and 2016Estate tax parents$0 under both alternatives Income savings children$0 under testamentary gift alternativeIn excess of $150,000 for each child over two years Giving with increased estate tax exclusion, portability and higher income tax rates

A Closing Thought for the Good Giver (and their Counsel) The desire of power in excess caused the angels to fall; the desire of knowledge in excess caused man to fall;b ut in charity there is no excess;neither can angel nor man come in danger by it. Sir Francis Bacon

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