Charitable Remainder Trusts by Central New York Community Foundation

Charitable Remainder Trusts: October 23, 2018

Central New York Community Foundation 315-422-9538 www.cnycf.org

Thank you to our sponsors for making this program possible! gold sponsors Michael Miller, CFA, Managing Director 750 Third Avenue, 20th Floor New York, NY 10017 212-218-4900 ∙ www.colonialconsulting.com Mary Ann Pierce, CLU 6319 Fly Rd, East Syracuse, NY 13057 315-446-5797 ∙ www.marathonadv.com Kenneth J. Entenmann, CFA, Chief Investment Officer 120 Madison Street, Syracuse, NY 315-475-5891 ∙ kentenmann@nbtbank.com

Estate Planning Council of Central New York

Charlotte G. Crandall, Council Executive 606 State Tower Building, 109 S. Warren St Syracuse, NY 13202 315-474-6775 ∙ cgcrandall@peoplepc.com Gail M. Kinsella, CPA, CGMA, Partner 432 North Franklin St, Syracuse, NY 13204 315-214-2725 ∙ gkinsella@bonadio.com

continuing education sponsors Mary Anne Cody, Esq. 440 South Warren St, Ste 400, Syracuse, NY 13202 315-474-7571 ∙ www.mackenziehughes.com Joe Lazzaro, CFP, CLU, President 315-760-3662 ∙ jlazzaro@centerbridgepg.com Madelyn Hornstein, CPA, CEO 443 North Franklin St, Ste 100, Syracuse, NY 13204 315-471-9171 ∙ www.dbbllc.com Lee M. Gatta, CLU, CLTC, AEP, ChFC Brett VanAntwerp, Managing Director 5786 Widewaters Pkwy, Dewitt, NY 13214 315-350-2460 ∙ lee.gatta@prudential.com Charlotte G. Crandall, Chapter Executive 315-474-6775 ∙ cgcrandall@peoplepc.com

Central New York Community Foundation 315-422-9538 www.cnycf.org

October 23, 2018

Dear Advisor, Charitable planning is a broad topic that can have significant benefits for your charitable clients. Identifying the clients that could benefit, discerning their intentions, and creating a plan that maximizes the advantage for their financial and estate plans are all part of the process. Our presenter, Philip L. Burke, uses his experience as partner and chair of his firm's Family Wealth and Estate Planning Department to share some guidance on a specific type of charitable gift- the charitable remainder trust. Using case studies, he will share when this would be a useful planning tool for clients and why it may be of more interest now that interest rates seem to be increasing. We hope his examples and insights make you think of some of your own clients and ways the charitable remainder trust could help them. The Community Foundation’s staff is available to be a part of your team whenever charitable planning is on the list of topics for your clients. This is true even in situations where we are not going to be a part of the solution. Of course, we are proud of the fact that our mission and purpose offers the flexibility to accomplish a wide spectrum of charitable goals. Whether we are helping a client to structure a planned gift for the benefit of our community, or simplifying their current giving through a donor-advised fund, we will partner with you to leave your clients feeling happy with the outcome of their planning process. The best way to find out if the Community Foundation can support you in accomplishing your clients’ goals is to ask. We are available when needed to help find the right giving option for your client’s particular situation – be it legal, financial or other. We hope that you will come to think of us as your ‘charitable back office’, freeing you to focus on your area of core competency. We have a wealth of written materials that you can use when working with clients. Additionally, we are also available to meet face-to-face with you individually or including your client. Please contact Tom Griffith, Vice President, Development at 315-883-5544 or tgriffith@cnycf.org with questions or to schedule a meeting. Thank you for joining us this morning. I hope we have an opportunity to work together in the future. Sincerely,

Peter A. Dunn President & CEO Central New York Community Foundation 315-422-9538 www.cnycf.org

Agenda

7:30 am:

Registration

8:00 am:

Welcome and Introductions

8:10 am:

Presentation by Phillip L. Burke, Esq.

9:50 am:

Questions & Answers

Central New York Community Foundation 315-422-9538 www.cnycf.org

Phillip L. Burke, Esq Partner and Chair of Woods Oviatt Gilman Family Wealth and Estate Planning Department Philip L. Burke concentrates his practice in estate planning, charitable giving, estate administration, probate, estate tax law and long term care planning. He works closely with clients and their advisors to develop appropriate estate plans for them and their families, including drafting of Last Wills and Testaments, Revocable and Irrevocable Trusts, Family Limited Partnerships and Limited Liability Companies, Business Succession Documents, Powers of Attorney, Living Wills and Health Care Proxies and other related documents. Mr. Burke is also a firm liaison to Meritas, an international association of law firms, and a member of its board of directors. Mr. Burke received his J.D. degree from Albany Law School and his B.A. degree with Distinction from Boston University. He is a Fellow of the American College of Trust and Estate Counsel and also a Fellow of the New York State Bar Foundation, and a PastChair of the Trusts and Estates Section of the New York State Bar Association.

Central New York Community Foundation 315-422-9538 www.cnycf.org

Central New York Community Foundation 315-422-9538 Âª www.cnycf.org

Professional Advisors The Community Foundation recognizes the key role that you, as your clients’ professional advisor and confidant, play in structuring a plan to address the needs and desires of clients with charitable interest. We work hard to make the charitable giving process easy and rewarding for all involved. To do that, we have dedicated ourselves to meeting your needs, ensuring that you have the technical information and tools at your fingertips to help your clients achieve their charitable goals. What can the Community Foundation do for you? 1)

The Community Foundation provides an extremely flexible, accountable, dynamic charitable platform for long-term giving. Donors can create funds for multiple charitable beneficiaries or allow the Foundation to direct the funds to charitable organizations that can most effectively achieve the donor’s goals. Also, the Community Foundation will steward the donor’s intent and act as a hedge against nonprofit uncertainty.

The Community Foundation can create funds around a specific area of interest – for example, education, arts, or the environment. This fund can serve as a catalyst to bring other donors in the community to the table with similar interests, leveraging your client’s contributions.

The Community Foundation can work with you and your client to identify the most effective type of life income gift to meet their needs and to maximize the benefits of those gifts through the use of the most effective assets and distribution rate.

The Community Foundation can serve as trustee of split interest vehicles like charitable remainder trusts or can arrange for third party trust administration if the donor prefers to self-trustee.

The Community Foundation can prepare charitable deduction calculations for your clients.

The Community Foundation accepts donations of complex, non-cash assets including real estate, closely held stock, art, collections and life insurance.

The Community Foundation can work with your clients who want to create a platform for family philanthropy.

Central New York Community Foundation 315-422-9538 www.cnycf.org

Professional Advisors (cont.) Most of your clients may not know how to achieve their charitable goals or what they can accomplish through effective charitable planning. Some may not even know to raise the issue unless their advisor first presents the topic for conversation. Discussing philanthropy with your clients can be good for your clients and good for your business. What can you do to support the Community Foundation? 1)

Ask your clients about their charitable goals in the financial and estate planning process. This will increase charitable giving across the community. Begin with these three questions: – Do you have charities that you support on an annual basis? – Do you want to include any of these charities in your financial or estate plans? – If I could show you how to shift tax dollars to charitable dollars in your planning, would you be interested in exploring that?

Involve us during the planning process if you are creating a perpetual charitable gift through the Community Foundation. We will be happy to brainstorm with you about how that gift might be structured to best achieve your client’s charitable goals.

Help educate your clients and the community about the unique role of the Community Foundation in building a permanent pool of resources for the community.

Serve as our ambassadors and advocates in the community. Encourage your friends, colleagues, or clients to call us or visit our website at www.cnycf.org if they have questions, concerns, or see opportunities.

If you have questions or would like to discuss a specific situation for a particular client, please feel free to contact Tom Griffith, Vice President, Development at 315-883-5544 or tgriffith@ cnycf.org.

Central New York Community Foundation 315-422-9538 www.cnycf.org

Ten Reasons To Partner with the Community Foundation ONE

We enable you to broaden your practice by building on our philanthropic expertise.

TWO

We provide highly personalized service tailored to each individual's charitable and financial interests.

THREE

We are a local organization with deep roots in the community.

FOUR

Our professional program staff's knowledge on community issues and needs is available to donors on request.

FIVE

Our donor-advised funds help people invest in the charities they already care about, and learn about new causes to invest in.

SIX

We accept a wide variety of assets, and can facilitate even the most complex forms of giving.

SEVEN

We offer maximum tax advantage under state and federal law.

EIGHT

We multiply the impact of gift dollars by pooling them with other gifts and grants.

NINE

We offer permanence to donors, through endowment funds and multigenerational involvement.

TEN

We are community leaders, convening agencies and coordinating resources to create positive change.

Central New York Community Foundation 315-422-9538 www.cnycf.org

[Divider Page] Tab: “Presentation”

Charitable Remainder Trusts

Interest Rate Variables

• Interest rate used to value charitable trust interests is 120% of the "applicable federal mid‐term rate" (AFR), rounded to the nearest two‐ tenths of 1% (IRC §7520). • Prior to 1984, a fixed interest rate of 6% was used for valuation. The IRS then imposed a fixed 10% rate until 4/30/89. • §7520 became effective on 5/01/89. • Example: ‐ Prime rate on 6/26/84 was 13% ‐ Prime rate of 4/21/86 was 8.5% (approximately 35% decrease). • The value of the charitable deduction available with a Charitable Remainder Trust (CRT) increases with increased interest rates; i.e., a charity will receive more value at the end of the CRT term if the rate of return is increased. (See Example A) • AFRs are issued monthly (See Exhibit B)

II. Basics of CRTs (IRC §664) • CRTs take advantage of the ability to value the "split interests" set up in a trust – the retained "unitrust" or annuity interest (defined below) vs. the remainder interest passing to a designated charity (or charities) at the end of the trust term. Types of CRTs: A. Charitable Remainder Unitrusts (CRUTs) • Pays a "unitrust" interest to the current beneficiary. The unitrust is a percentage of the value of the trust assets revalued each year. • Unitrust percentage cannot be less than 5% nor more than 50%. – Additional contributions may be made.

II. Basics of CRTs (IRC §664) A. Charitable Remainder Unitrusts (CRUTs) ‐ Continued – Also, the value of the remainder interest must be at least 10% of the value of the initial contribution to the trust (the "10% remainder test"). – Remainder is paid to charity (or charities) at the end of the term. Term can be for the life of the current beneficiary or for a term of years, not to exceed 20 years. Can have "joint" beneficiaries, or successor beneficiaries. (Ltr. Rul. 9143030) – The fluctuation of values with a CRUT are less interest rate sensitive since a unitrust interest is more a function of the annual value than the initial contribution. – (See Exhibit A)

II. Basics of CRTs (IRC §664) B. Charitable Remainder Unitrusts (CRUTs) – Continued – Pays a fixed annuity amount to the current beneficiary each year, based on a percentage of the value of the initial contribution to the trust. No annual re‐valuations as with a CRUT. – No additional contributions are allowed. – Annuity must be at least 5% and cannot exceed 50%. – The 10% remainder test applies. – Annuity term can be for life or a term of years not to exceed 20 years.

II. Basics of CRTs (IRC §664) B. Charitable Remainder Unitrusts (CRUTs) – Continued – Additional consideration: a CRAT is subject to the "5% exhaustion" rule. A CRAT will not qualify for beneficial tax treatment if there is more than a 5% probability that the distributions to the annuitant will exhaust the trust (Rev. Rul. 77‐374, 1977‐2 CB 329). – The valuation of the annuity and remainder interests in a CRAT are subject to more fluctuation as a result of changing interest rates. As rates increase, the present value of the annuity interest decreases and the value of the charitable remainder increases. (See Exhibit A)

II. Basics of CRTs (IRC §664) C. Variations on the CRUT theme – NI‐CRUT – pays only trust income (e.g. interest and dividends) to beneficiary (if less than stated percentage amount) for the term of the trust (NI – "net income"). – NIM‐CRUT – pays only trust income to beneficiary (if less than stated percentage amount) but deficiencies can be made up in later years if income exceeds the stated percentage (NIM – "net income with makeup provision"). – FLIP‐CRUT – starts out as a NI‐CRUT or NIM‐CRUT but converts ("flips") to a standard CRUT upon the happening of a triggering event (63 Fed Reg. 68188 (December 10, 1998)).

II. Basics of CRTs (IRC §664) C. Variations on the CRUT theme – Continued – Triggering event must be "outside the control of the trustees or any other persons." (See Regulations above). Regulations give examples of permissible triggering events: marriage, divorce, birth, death, sale of an "unmarketable" asset such as real estate. Impermissible triggering events include sale of "marketable" assets or request/instruction to trustee to sell. – A CRUT must remain a CRUT, and a CRAT must remain a CRAT when flipped.

II. Basics of CRTs (IRC §664) D. General Considerations – Trust must be irrevocable, although the Grantor can retain the right to revise/amend named charities. – Trust term, again, for life of the beneficiary or a term of years (not to exceed 20). – Trust must be either a CRUT or a CRAT (can't merge features). – CRAT must provide that no additional contributions may be made to the trust (Rev. Rul. 2008‐41). Additional contributions may be made to a CRUT.

II. Basics of CRTs (IRC §664) D. General Considerations– Continued – Distribution of unitrust or annuity interest must be made at least annually, but can be made monthly, quarter–annually or semi‐annually. Payment requirements will affect calculation of the value of respective interests. – Restrictions against "self‐dealing" (IRC §4947(a)(2)) apply to CRTs.

II. Basics of CRTs (IRC §664) E. General Permissible Charitable Beneficiaries – Remainder must be transferred to or for the use of an organization described in IRC §170(c). (IRC §664(d)) – Income tax deduction will differ based on remainder passing to a public charity vs. private non‐operating foundation (See IV below).

III. Which CRT To Use (if at all)? • Donor's intent – primary. • Donor's need for income (vs. outright gift to charity) or increased income. • A "high income" donor may decide to use a FLIP‐CRUT during his/her career and convert to standard CRUT upon retirement to replace lost income. • Age and health of beneficiary (usually the Donor). • Need/desire for "fixed" annuity income or variable unitrust income. • Type of property to be contributed – real estate, marketable securities, closely‐held stock, tangible personal property. • Donor's current income/tax bracket (need for a charitable deduction?) • Estate tax considerations (less of an issue now with $11.2M federal exemption and New York exemption of $5.25M).

IV. Income Gift and Estate Taxes • A CRT is a tax exempt entity (unless it has "unrelated business taxable income "(UBTI) IRC §512). • CRTs are not subject to "grantor trust" rules (IRC §§671‐678). • Gain or loss on sale of contributed property calculated in grantor's "carryover" basis. • For lifetime CRT, donor entitled to income tax charitable deduction for value of remainder interest (IRC §170(f)(2)). • Note percentage limitations and adjusted gross income parameters. (IRC §1706(b); See Exhibit C). • Unused deduction can be carried forward for 5 years.

IV. Income Gift and Estate Taxes •

For testamentary CRT, estate tax deduction available for value of charitable interest (IRC §2055); if surviving spouse is sole beneficiary of unitrust or annuity trust interest marital deduction will apply (IRS §2056, PLR 87 30004). If non‐ spouse is beneficiary of unitrust or annuity interest, that interest is "taxable" but would be offset by the available lifetime exemption.

•

For gift tax purposes, if donor retains unitrust or annuity interest, no gift tax consequences, but gift tax return required to obtain gift tax charitable deduction (IRC §6019). If spouse is beneficiary, gift tax marital deduction applies (IRC §2523). However, if non‐spouse is the beneficiary, value of current interest is a gift (qualifies for annual exclusion treatment (IRC §2503(a)) but balance taxable and may be offset by available lifetime exemption.

IV. Income Gift and Estate Taxes • For trust income tax purposes, unitrust and annuity trust payments are taxable in accordance with four separate tiers (IRC IRC §664). – First – ordinary income – Second – current and prior realized capital gains – Note: under First and Second Tiers the income or gain subject to the highest tax are deemed to be distributed first. – Third – tax exempt income (current and undistributed from prior years) – Fourth – return principal (tax free)

IV. Income Gift and Estate Taxes Capital gains are not realized on lifetime contribution to CRT, nor realized upon sale by CRT; may be taxed to beneficiary upon subsequent payment through Tier distributions above. Rev. Rul. 55‐275, 1955‐1 CB 295; Rev. Rul. 60‐370, 1960‐2 CB 203. – Non‐recognition of capital gains upon distribution or sale by CRT (subject to Tier distribution provisions, above) make CRTs good vehicles for tax‐free transfer of highly appreciated property with potentially minimal adverse income tax problems. –

Marginal tax rates run from 10% for income up to approximately $19,050.00 (depending on filing status) to 37% for high income earnings. (See Chart attached Exhibit D). Contrast with capital gains tax rates which max out at 20%; proposed to be indexed for inflation starting in 2019.

IV. Income Gift and Estate Taxes • If a large charitable deduction is desired for current income tax purpose (due to, for example, a large current influx of taxable income) a CRT may not be the best answer except for short term CRT (See Exhibit E); or consider outright gift or charitable "lead" trust.

V. Valuation Considerations • Fair market value on date of contribution – (See IRS Publication 561). • For closely held stock or other assets that are difficult to value, if deduction claimed is more than $5,000 (or for artwork for which a deduction of $20,000 or more is claimed) a "qualified appraisal" is required.

VI. Selection of Trustee • Grantor may act as Trustee. However, for hard to value assets ("unmarketable") a valuation by an independent Trustee or a qualified appraisal is required (63 Fed. Reg. 68188 (December 10, 1998)). • Corporate Trustee allowed. • Charitable entity may serve as Trustee in New York (NYS Attorney General Opinion.

VII. Special Situations Use of IRAs/Retirement Accounts: a lifetime transfer of a retirement account to a CRT will trigger recognition of income to the Grantor, offset only by the value of the charitable remainder deduction. A testamentary transfer may or may not be beneficial: – Since a CRT is not a taxable entity, the trust does not recognize the contribution as income. – Since the trust is not a "designated beneficiary" required minimum distribution may be accelerated (Ltr. Ruling 9820021). – Individual beneficiary does not get the benefit of the estate tax deduction attributable to the value of the retirement account included in the donor's taxable estate (Ltr. Rul. 199901023). – Charitable estate tax deduction will apply.

VII. Special Situations Life Insurance: Often used as a "wealth replacement" vehicle to provide the family funds that replace the assets contributed to the CRT. – It is permissible for a CRUT to purchase and maintain life insurance on the life of the grantor. (Ltr. Rul. 199915045). – Make sure to check state law "insurable interest" rules. – The "wealth replacement" use of a life insurance policy often involves the transfer of the policy to an irrevocable life insurance trust.

VII. Special Situations • Beneficiary designations: assets like life insurance, retirement accounts/IRAs and annuities, etc., pass to named beneficiaries on the death of the owner. Planner needs to make sure named beneficiaries confirm to the client's plan.

VIII. Examples/Case Studies 1. Grantor wishes to fund CRT for lifetime, balance to charity on death. – Gets current income tax deduction for value of charitable remainder. – No gift for retained interest but must file gift tax return to report charitable gift (future interest) and to claim gift tax charitable deduction (IRC §6019). – Trust included in Grantor's estate on death but gets offsetting estate tax charitable deduction (IRC §2036 and §2055).

VIII. Examples/Case Studies 2. Grantor creates CRT for life of third party, then to charity on death. – Two gifts to report – gift of life interest (qualifies for annual exclusion purposes) and gift of charitable remainder – gift tax return required (See Example 1, above). – If third party is Grantor's spouse, life interest qualifies for marital deduction (IRC §2523(g)). – Not applicable to non‐citizen spouse as beneficiary, but current gift to tax annual exclusion for gift to non‐citizen spouse (2018 ‐ $152,000) applies.

VIII. Examples/Case Studies 3. Calculations involving 10% remainder test. – Grantor, age 50, sets up $1.0M lifetime CRUT, paying unitrust interest of 10% on a quarterly basis: Present value of the charitable remainder is $97,490 (using 9/18 AFR of 3.40%). Fails the 10% remainder test. – However, if Grantor is 55, or unitrust reduced to 8%, 10% remainder test is met ($133,820 or $139,940 respectively).

VIII. Examples/Case Studies 4. Calculations involving 5% "exhaustion" test. – Grantor, age 65, sets up a CRAT of $1.0M paying 5% annuity (quarterly) using 9/18 AFR of 3.40%. Charitable deduction is $369,098 (meets 10% test) and probability of exhaustion is 3.6% (meets 5% test). – If annuity interest increased to 6% (a 1% increase) probability of exhaustion jumps to 22.4% (fails 5% test). – If Grantor is 60, a 5% annuity trust meets the 10% test ($276,096) but probability of exhaustion is 12.3% (fails 5% test). – Illustrates how sensitive CRAT calculations are.

VIII. Examples/Case Studies 5. H&W, both in their 70's, no children, combined estates of approximately 7.0M. – – – –

Assets represent inherited family wealth. Wife has one sister (unmarried, no children). Federal estate tax not a concern, but New York estate tax could apply. Plan: H&W create QTIP marital deduction trusts for each other, to be followed by a CRUT for the benefit of the sister. – First spouses' estate will get marital deduction for QTIP trust (no federal or NY estate tax). Marital deduction election will cause QTIP assets to be included in the estate of the surviving spouse. – However, surviving spouse estate will get charitable deduction for value of remainder interest. – If surviving sister is 80 years old on the death of the survivor, 5% CRUT for $7.0M will provide a charitable deduction of approximately $4.7M thereby offsetting any potential estate taxes (taxable estate reduced to about $2.3M).

VIII. Examples/Case Studies 6. Grantor has vacant real estate valued at $500,000, with basis of $100,000. Property expenses (taxes, insurance, maintenance) are a drain on Grantor's other assets. Grantor decides to sell, but doesn't want to pay tax on $400,000 of capital gain. – Grantor contributes the property to a CRT. Gets charitable deduction for FMV, subject to 30% AGI deduction limit. – CRT sells the property. Capital gain not recognized by trust on sale. – Proceeds invested to produce unitrust or annuity payments. – Distributions to Grantor will be taxed under the tier categories (Section IV, above). – Asset that cost the Grantor money is now "income" producing. 5% trust will provide $50,000 in first year and charitable deduction will reduce income tax consequences. – Trust should invest assets to minimize "ordinary" income production (first tier distribution) and try to generate "income" taxed at lower brackets ("qualified dividends," etc.). – Trust is subject to "prudent investor" standard. NY EPTL §11‐2.3. (See Estate of Rodney Jaynes, 90 N.Y.2d 41 et al.).

Exhibit A

Exhibit B

Exhibit C

Exhibit D

Exhibit E