Washington and Lee University 50th Reunion Gift Planning Guide

Dear Class of 1971 Classmates: I hope this letter finds you and yours very well.

Our 50th Reunion Committee asked me to summarize some of the best ideas I see out there for tax-efficient charitable donations. The group hopes this information might help educate you on some financial planning techniques that could be valuable to you as you consider your reunion gift to W&L and prepare your own family estate and financial plans. For the past 46 years, I have noted to clients that there are four basic ways to allocate their assets: community causes, taxes, consumption needs and/or family requirements.

Many clients are willing to give back to the community with their charitable giving as long as their giving does not risk their consumption needs, or those of their families. In other words, if the assets they allocate to the community, as they define it, come out of the “tax bucket,” they will make that reallocation. The view of many clients, including me, is that they can allocate their resources to their community much better than governmental authorities can.

Enclosed with this letter is a pamphlet that presents 10 examples of charitable giving strategies that I believe to be tax-efficient. Many of these ideas have a minimal effect on a donor’s consumption needs and family. Based upon facts assumed in the examples, some of these techniques actually increase the resources available for a donor’s lifestyle and/or family.

Several of our committee members are using, or have used, some of the techniques discussed in the attached examples. For instance, Buddy Le Tourneau, Marc Bromley, Bob Woodward and this writer will take advantage of the idea to direct qualified charitable distributions from their IRAs to make annual fund and capital gifts to W&L. In addition, Rob Minor created a charitable remainder trust to diversify his investment portfolio while making a future gift to W&L, and Matt Cole, Bob and several others have used donor-advised funds and appreciated securities to make their gifts. You are obviously free to give to your community causes in any way you desire. We will introduce our proposed 50th reunion class gift to W&L in the coming weeks, and we hope some of these gift techniques might make it easier for you to participate with us at a level that satisfies your philanthropic and financial objectives.

In addition to the materials that are attached and the advice of your tax advisors, you may wish to use W&L resources in designing your gift. W&L enjoys an informative website (see: plannedgiving.wlu.edu) and dedicated staff to help you. Jamie Killorin, director of Gift Planning, is available to help you tailor your giving techniques to fit your specific situation.

W&L gave us, and continues to give to its students, a significant educational opportunity by providing small classes that are taught by highly qualified professors. That educational opportunity, then and now, has been fostered in a unique environment that cultivates mutual respect, self-reliance, independence and integrity.

W&L could afford to provide us that unique educational opportunity in part because of one of our many traditions: significant class reunion gifts. I hope you will join me in continuing that tradition.

Very best,

S. Stacy Eastland

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Best Ideas to Maximize the Tax Benefits for Reunion Giving to W&L As a result of tax reform under the Tax Cuts and Jobs Act (“TCJA”), which affects taxpayers in tax years 2018-2025, many itemized deductions previously claimed by individual taxpayers are either limited or outrightly repealed. In addition, the standard deduction has nearly doubled.

Consequently, certain expenses are less likely to provide a tax benefit going forward and the number of taxpayers who will simply use the standard deduction rather than itemize is expected to increase. However, for taxpayers who have the ability to control the timing of charitable donations, there may still be a way to maximize their tax benefit by using either a “bunching” technique or by contributing to a donor-advised fund. For taxpayers who are age 70½, the benefits of a different technique, a qualified charitable distribution will be the most taxadvantaged strategy for charitable giving.

Deductions Generally Taxpayers are able to reduce their taxable income through the use of either the standard deduction or by itemizing deductions. The standard deduction is a flat amount based on filing status, and this amount has increased dramatically under the TCJA. Alternatively, taxpayers can choose to itemize their individual expenses if it results in a larger deduction.

Standard Deduction The standard deduction for a married couple filing jointly is $24,800 in 2020. There is an additional standard deduction of $1,300 in 2020 for taxpayers age 65 and older. The standard deduction is indexed for inflation annually.

For simplicity, the illustrations below assume a 2% annual inflation adjustment. The five year period mirrors the typical pledge period for 50th reunion and campaign giving at W&L.

Changes to Itemized Deductions under the TCJA Some of the more common types of itemized deductions include state income (or sales) tax, property taxes, mortgage interest and charitable contributions. For tax years 2020-2025, however, the treatment of many of these expenses has changed. For example, unless otherwise grandfathered under the old tax law, the mortgage debt for which an interest deduction is allowed has been reduced from $1,000,000 to $750,000. Additionally, home equity interest is no longer deductible. Further, the deduction for state income (or sales) and property taxes is limited to $10,000 combined. As a result, for some taxpayers the tax benefit of certain previously deductible expenses may no longer exist.

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Example 1: Assume a married couple both over the age of 65 with the following expenses: • • • •

Mortgage has been paid off, so no mortgage interest $50,000 in state income taxes $20,000 in property taxes $20,000 donated to various charities (including W&L)

In 2017, the couple would have itemized their deductions for a total of $90,000 instead of the $12,700 standard deduction. In 2021, however, the couple will only be able to take $30,000 in itemized deductions. That is because their state income and property tax deduction is limited to just $10,000. As a result, if this couple’s charitable goals are influenced by tax benefits, then they may decide to stop their charitable donations since it no longer produces a significant tax benefit for them.

Although the tax benefit of certain itemized deductions has been reduced or eliminated under the new tax law, taxpayers can maximize the tax benefit of charitable donations by implementing timing strategies.

Best Ideas to Maximize Your Itemized Deductions – #1 Timing Strategies Bunching Under the bunching technique, a taxpayer delays a year’s worth of charitable giving from one year to the next, but then gives double the amount to charity in that second year. While the total amount of giving stays the same, the total tax deduction claimed over multiple years is increased.

Using the same couple as from the previous example, they are limited to $10,000 in state income and property tax deductions due to the TCJA. Further, they don’t have any mortgage interest to deduct. Their decision to make annual charitable donations or else to employ the bunching technique will impact their deduction as follows: Example 1A: $20,000 Charitable Donations Made Annually Deductible 2021 2022 2023 Expenses Mortgage $0 $0 $0 Interest State Income & $10,000 $10,000 $10,000 Property Tax Charitable $20,000 $20,000 $20,000 Donations TOTAL $30,000 $30,000 $30,000 DEDUCTION Itemized Itemized Itemized TOTAL DEDUCTION OVER FIVE YEARS $150,000

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2024

2025

$0

$0

$10,000

$10,000

$20,000

$20,000

$30,000 Itemized

$30,000 Itemized

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Example 1B: $33,333 Bunching Strategy Every Other Year Deductible 2021 2022 2023 Expenses Mortgage $0 $0 $0 Interest State Income & $10,000 $10,000 $10,000 Property Tax Charitable $33,333 0 $33,333 Donations TOTAL $43,333 $28,400 $43,333 DEDUCTION Itemized Standard Itemized TOTAL DEDUCTION OVER FIVE YEARS $187,900

2024

2025

$0

$0

$10,000

$10,000

0

$33,334

$29,500 Standard

$43,334 Itemized

As the examples above illustrate, if the couple donates $20,000 annually, they will deduct $150,000 over a five-year period. Alternatively, if they increase their charitable donation amount in odd years beginning with 2021, but give nothing in even years, then their total deduction over the same five-year period will be $187,900. By implementing the bunching strategy, the couple will be able to deduct an additional $37,900 over five years, even though their total charitable donation amount ($100,000) remains the same. Assuming a 37% tax bracket, this is an additional tax savings of $14,023.

Donor-Advised Funds One problem with the bunching strategy is that it leaves charities short on funding in the offyears. A solution to this problem (as well as a potential for even greater tax savings) is to contribute to a donor-advised fund (“DAF”).

A DAF is a charitable entity that allows donors to make tax-deductible contributions to the fund in the year of the gift, but then keep the funds in the account until the donor decides to make distributions to a particular charity. As a result, the donor can realize an upfront tax deduction, although they have the option to spread their grant-making over several years. A potential benefit to keeping funds in the DAF is that they can be invested to grow over time, providing even more funds to transfer to charity in the future. Additionally, taxpayers can make donations of long term appreciated securities to the DAF, resulting in an additional tax savings by avoiding any capital gains tax that would have been paid if the security was otherwise sold.

While taxpayers can certainly gift long term appreciated securities to individual charities and receive the same tax advantages, a gift of these securities to a DAF typically involves just one security transfer, not multiple transfers, generally making the process much easier. Income and capital gains in the DAF are tax-exempt and the value of the DAF is not included in the taxpayer’s estate. Generally, donor-advised funds should not be used to pay charitable pledges.

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Using the same couple as from the original example, if they make a $100,000 donation to a DAF in 2021, their total deduction during the 2021-2025 period will be as follows: Example 1C: $100,000 Donation to a DAF in 2021 Deductible 2021 2022 2023 Expenses Mortgage $0 $0 $0 Interest State Income & $10,000 $10,000 $10,000 Property Tax Charitable $100,000 $0 $0 Donations TOTAL $110,000 $28,400 $28,900 DEDUCTION Itemized Standard Standard TOTAL DEDUCTION OVER FIVE YEARS $226,900

2024

2025

$0

$0

$10,000

$10,000

$0

$0

$29,500 Standard

$30,100 Standard

By using a DAF, the couple will be able to deduct a total of $226,900 during this five-year period, compared to $150,000 with annual donations and $187,900 with the bunching strategy.

Assuming a 37% tax bracket, that is an additional tax savings of $28,453 as compared to annual gifting, and $14,430 as compared to the bunching strategy. The couple’s total giving remains the same at $100,000, and they can direct the DAF to make $20,000 distributions each year (and potentially more if the funds in the account have grown in value).

Donor-Advised Funds The benefits of a DAF should be weighed against expenses related to the fund as well as any rules for making donations. Donors should discuss the potential benefit of this strategy with their tax advisor.

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# 2 Strategy for Taxpayers Age 70½ or Older Who Have an IRA For taxpayers age 70½, the most tax-advantaged way to make charitable gifts is a Qualified Charitable Distribution (“QCD”). This strategy allows up to $100,000 per year per taxpayer to be transferred directly from an IRA to a qualifying charity on a tax-free basis. Contributions to a private foundation or a DAF will not qualify. For a married couple filing a joint return, up to $200,000 may be utilized provided each spouse qualifies and no more than $100,000 is taken from each spouse’s IRA. The benefit to this strategy is that the IRA owner can exclude otherwise taxable IRA distributions from income. Although no corresponding charitable itemized deduction is allowed for such excluded income, this tax-free treatment equates to a 100% above-the-AGI-line deduction. Additionally, if the IRA owner has not taken their Required Minimum Distribution (“RMD”) for the year, the QCD can satisfy all or part of that requirement. QCDs may be used to pay charitable pledges.

Example 2: Assume the same married couple as from Example 1, but with these additional facts: • •

They are both over age 70½ They have annual RMD requirements

Because this couple is at least age 70½, they can each choose to implement the QCD strategy. As a result, they can transfer $20,000 directly from their IRAs to a qualified charity (e.g., W&L) in partial satisfaction of their RMD requirements. By implementing the QCD strategy, their tax benefit would be as follows: $20,000 QCD Annually; No Corresponding Charitable Itemized Deduction Deductible Expenses QCD from IRA Reduces AGI Mortgage Interest State Income & Property Tax Charitable Donations Standard Deduction TOTAL DEDUCTION & EXCLUSION

2021 $20,000

2022 $20,000

2023 $20,000

2024 $20,000

2025 $20,000

$0

$0

$0

$0

$0

$10,000

$10,000

$10,000

$10,000

$10,000

$0 $27,900

$0 $28,400

$0 $28,900

$0 $29,500

$0 $30,100

$47,900

$48,400

$48,900

$49,500

$50,100

TOTAL OVER FIVE YEARS $ 244,800

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By using the QCD technique, the couple will be able to exclude $20,000 each year from adjusted gross income while taking the standard deduction. Effectively deducting a total of $244,800 during this five-year period, compared to $150,000 with annual donations, $187,900 with the bunching strategy, and $226,900 with the DAF strategy. Assuming a 37% bracket, that is a tax savings of $90,576 over five years.

# 3 Charitable Contributions of Non-IRA Assets and Gift to Family: Creation of a Charitable Lead Annuity Trust (or “CLAT”) A couple would like to give $60,000 annually for a defined period of time (around 16 years) to their favorite charities (including W&L), which simulates a 100% Above-the-AGI-LineDeduction for the full amount in a manner that does not affect their ability to use the increased standard deduction. The couple would also like to give their children a $1,000,000 (or more, if returns exceed 6% over the next 16 years) in 16 years without that gift being considered a taxable gift for gift tax purposes. Given the above goals the taxpayer decides to create a CLAT with a $1,000,000. CLATs are tax-favored by the current low interest rate environment: What is a CLAT? •

A CLAT is a trust that has been allowed by the Internal Revenue Code since 1969. The IRS has given taxpayers and their advisors forms for creating a CLAT.

•

A CLAT is a trust in which the current (lead) interest is payable to a charity and is in the form of an annuity amount for a period of years.

•

In the CLAT, the annual payment is not based on the income of the trust. Since the annuity amount is not based on the income of the trust, that amount must be paid to the charity even if the trust has no income. If the trust’s current income is insufficient to make the required annual payment, the short fall must be made up out of the invasion of the trust principal. If the realized and unrealized gains exceed the required annual payment, it does not have to be paid over to the charity; however, that excess income and/or gains would then be accumulated and added to the trust corpus.

•

The lead interest in a CLAT can be for a fixed term of years. The lead interest can also be measured by the life of an existing individual or the joint lives of existing individuals.

•

CLATs are not subject to the minimum payout requirements associated with charitable remainder trusts. Thus, there is no 5% minimum pay out for CLATs.

•

The CLAT is a taxable entity. A grantor CLAT is taxable to the deemed income tax owner who is often the creator of the trust. If the CLAT is a non-grantor trust, the realized net taxable income in the trust will be subject to income taxes. The non-grantor CLAT will receive a charitable income tax deduction when it makes the annual distributions to the charity. If the CLAT is a grantor trust, the grantor will receive an

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income tax deduction upon creation of the CLAT and no future income tax deductions for the distributions to charities. •

CLATs are characterized as private foundations for purposes of certain restrictions placed on such organizations. If the specified prohibited transactions occur onerous significant excess taxes could accrue. CLATs may not pay charitable pledges.

•

Unlike the QCD strategy in Example 2, the charitable annuity CLAT distributions can be paid to any charity, including a donor advised fund or a private foundation.

Please see the calculator and discussion on the W&L website: https://plannedgiving.wlu.edu/giving-options/charitable-lead-trust

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Always a General

By Amanda Minix

R

what they deemed an “impresob Minor ’71 may sive and unparalleled” 2020 have graduated Mock Convention. Rob Minor from Washington also attended the Institute for and Lee nearly 50 years Honor Symposium in early ago, but his move to LexFebruary. ington with his wife, Su, in October 2019 proves Before relocating from that W&L ties run deep.

Nashville, Minor served for Minor is serving on his 15 years as the vice president 50th reunion committee, for development with the and he and Su have already Behavioral Health Division established a charitable of Universal Health Services, remainder trust to honor where he facilitated mergers the milestone. “It’s hard to and acquisitions totaling more believe this anniversary of than $6 billion, as well as the 50 years since graduating is development of new hospitals. coming up, but I definitely Currently, he is a consultant think it’s worth celebrating serving in the health care “As W&L navigates the issues of the and reflecting on what has field. He also holds a law degree past and the complex social concerns changed over time and what from Cumberland Law School. of today, I believe the university and its Minor looks forward to has remained constant,” he said. his 50th reunion celebration students are stronger for a myriad of

The Minors have been in spring 2021 and has many reasons, such as integrity and civility loyal donors to W&L over fond memories of his time at for one another in all areas of university the years, generously supW&L, from the close relationporting the Annual Fund ships with professors and fellow life, the almost equal number of men and Mock Convention, students to the Honor System and women learning together, and the among other priorities. After and Speaking Tradition. For generous financial assistance programs, him, these core aspects live on their move to Lexington, the couple decided to make this and have combined with more including Johnson Scholars.” next step in their philanrecent advantages.

— Rob Minor ’71 “As W&L navigates the isthropic journey using stock options from Minor’s presues of the past and the complex vious employment. They will enjoy significant tax benefits social concerns of today, I believe the university and its and receive annual income, all while supporting an instistudents are stronger for a myriad of reasons, such as intution they love. “We decided that a charitable remainder tegrity and civility for one another in all areas of university trust under the stewardship of the university would be an life, the almost equal number of men and women learning ideal way for us to support the students, faculty and staff together, and the generous financial assistance programs, now and in the future,” Minor said. including Johnson Scholars,” he said.

After living in Nashville, Tennessee, for a number of

Nostalgia is an important part of the human experiyears, the couple is relishing small-town living in close ence, but for the Minors, giving back is not about the past; proximity to Minor’s alma mater. “We love the relaxed it’s about building a better future. “Over the years, through atmosphere as well as the welcoming and diverse commucontinued friendships and new ones with other alumni, nity, surrounded by the beautiful Shenandoah Valley,” Su I’ve valued not only the education I received but the closeMinor said. “There are many educational and cultural opknit W&L community that has had lifelong benefits,” he portunities and absolutely no traffic congestion.” They dove reflected. “Su and I wanted to provide the opportunity for right into university life, and before the COVID-19 panother students to experience W&L and the positive impact demic closed the W&L campus, they attended Founders it offers for their lives.”

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Best Ideas for Charitable Gifts That Occur at Death # 4 Bequest under the will of the surviving spouse Assume a married couple, Mr. and Mrs. Smith, both 72 years of age would like to make a bequest under the survivor’s will of $200,000 to their favorite charities (including W&L):

#5 Name W&L as Beneficiary of Life Insurance Policy The facts are the same as Example 4. The couple owns a paid up life insurance policy which will pay $200,000 on the death of the surviving spouse. The couple continues to own the policy, but decides to name their favorite charity (W&L) as the beneficiary of the policy.

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# 6 Current Gift of Paid Life Insurance Policy The facts are the same as Example 5, except the couple gives their paid up life insurance policy to W&L. An income tax deduction is available for the appraised value of the policy.

#7A Create a Charitable Remainder Unitrust Assume the same goal of Example 4. A married couple both 72 years of age would like to make a bequest, at the time of the survivor’s death, of $200,000 to their favorite charities (including W&L). They own numerous low basis securities. They are willing to make an irrevocable pledge for that gift as long as they can change their mind as to which charities receive that gift. Congress, since 1969, gives that couple a very advantageous income tool to make that pledge. The tool is a Charitable Remainder Trust (“CRT”). The IRS has also published a form of a CRT document that it will honor.

What is a CRT and what are some of the key provisions and benefits?

1.

The donor contributes assets to the trustee of a CRT that annually pays to the donor a fixed dollar amount (a charitable remainder annuity trust or “CRAT”) or a fixed percentage of the then value of the trust (a charitable remainder uni-trust or “CRUT”). The donor could also be trustee of the trust. The payments can be for the donor’s lifetime.

2.

The donor is only taxed on the annual payments. Generally, the donor will be taxed on those payments: first on the ordinary income and dividend income earned by the trust until it is all paid out; secondly, on the new capital gains income earned by the trust until it is all paid out; thirdly, on the old capital gains income inherent in the original contributed assets that are sold; and finally on the tax free income earned by the trust.

3.

The contributed assets to the CRT, including low basis assets, can be sold without any immediate capital gains consequences. The sale proceeds can be reinvested in a diversified portfolio.

4.

The donor will also receive a current income tax deduction for the actuarial present value of the assets projected to be paid to the donor’s favorite charities upon the donor’s death, which must be at least 10% of the value of the assets contributed to the CRT.

5.

When the CRT terminates the remaining trust assets will pass to the donor’s then favorite charities without any estate tax being paid.

Learn more at: go.wlu.edu/charitable-remainder-trust.

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The couple in this Example 7A has $1,369,291 in near zero basis securities. The couple would like to diversify out of that portfolio and apply the proceeds to a more diversified portfolio. With that goal, the couple would also like to compare the creation of a CRUT to the simplicity of selling the securities and reinvesting the proceeds in a diversified portfolio and making a bequest in the survivor’s will of $200,000 to charity. With that diversification goal, the couple would also like to compare the CRUT technique to selling the low basis assets without making any gifts to charity. The terms of the CRUT provide that the annual payout from the CRUT will equal 15.334% of the then value of the CRUT. It is assumed that the surviving donor will live 20 years. Please see the table below and attached Schedule 1.

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Table 1 Smith Beneficiaries

IRS Income Tax

(1) Charity

(2) Smith Family

(3) Direct Cost

(4) Investment Opportunity Cost

No Further Planning Except for Sale of Stock in Year 1 and No Charitable Bequest at Death

$0

$1,712,505

$690,941

$985,303

No Further Planning Except for Sale of Stock in Year 1 and a Charitable Bequest at Death of $200,000

$200,000

Contribute$1.4mm $1.4M in Lifetime CRUT, CRUT, Contribute in Stock Stock to a Lifetime Sell Stock, Remainder to a Charity

$200,000

(5) Estate Tax @ 40%

(6) Total

$1,141,670

$4,530,419

$1,061,670

$4,530,419

$1,205,680

$4,530,419

$696,728

$2,764,783

$647,906

$2,764,783

$735,791

$2,764,783

Post Death Scenarios: 20-Year Future Values

$1,712,505 $1,592,505

$1,792,505 $1,808,520

$2,008,520

$1,676,244 $690,941

$985,303

$1,676,244 $697,132

$619,088

$1,316,220

Post Death Scenarios: Present Values (Discounted at 2.5%) No Further Planning Except for Sale of Stock in Year 1 and No Charitable Bequest at Death

$0

$1,045,092

No Further Planning Except for Sale of Stock in Year 1 and a Charitable Bequest at Death of $200,000

$122,054

Contribute in Stock Stock to a Lifetime Contribute$1.4mm $1.4M in Lifetime CRUT, CRUT, Sell Stock, Remainder to a Charity

$122,054

$1,045,092 $971,859

$1,093,914 $1,103,687

$1,225,741

$421,661

$601,302

$1,022,963 $421,661

$601,302

$1,022,963 $425,439

$377,811 $803,251

What are some of the key takeaways from the above calculations with respect to the assumed facts of this Example 7A? 1.

The donor’s charities and the donor’s family benefits the most under the CRUT technique alternative.

2.

The chief reason for that beneficial result of the CRUT technique is the delay in taxation of the donor’s low basis assets as represented by Column 4. The power of delaying the capital gains tax and the future earnings of the diversified portfolio is significant. When a tax is paid to the IRS the donor cannot invest that cash. The donor can keep investing the earnings of the portfolio that is not paid to the IRS.

#8 Life-Income Gift with a Charitable Gift Annuity Example 8: The facts are essentially the same as Example 4. The couple is 72 years of age and are targeting around $200,000 to pass to their favorite charity on the death of the survivor. The couple would like to explore purchasing a charitable gift annuity from their favorite charity (e.g., W&L) in a manner that targets $200,000 on the death of the survivor. Similar to Example 4, the couple would like to retain an annuity stream during their lifetime from their gift to their favorite charity. At the time of the purchase of the annuity the IRC Section 7520 rate is 2.2%. The couple explores transferring $155,078 of a

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#7B — Name a Charitable Remainder Unitrust as the Beneficiary of your IRA for your Children In addition to being a very tax efficient technique for a donor who has low basis assets, a form of the CRUT technique may save significant income taxes and future estate taxes on IRA distributions to a donor’s descendants.

The Secure Act became effective on January 1, 2020. One of the changes brought about by the Secure Act was it eliminated the ability of a non-spouse beneficiary to “stretch” inherited IRA payments over his or her lifetime. The payments of an inherited IRA to a non-spouse beneficiary (e.g., a child or a grandchild of the donor) must be made over a 10-year period. This change eliminated the ability to have long periods of pre-tax compounding for a child or grandchild as a beneficiary of an inherited IRA. As noted above, a CRUT can be designed to last for the lifetime benefit of an individual, or for a term of years (which cannot exceed 20 years), before it terminates in favor of a charity. A CRUT could be designated to be the beneficiary of an IRA after the death of the IRA owner and his or her spouse. If a CRUT is designed to last for the life of an individual, before it terminates in favor of the remainder charity, the CRUT may last longer or shorter than 20 years depending on the individual beneficiary’s date of death. However, if an individual is the lifetime beneficiary of the CRUT and if the CRUT distributions that are not spent by the individual, those accumulated distributions are subject to future creditors (including a divorced spouse of the beneficiary) and future estate taxes.

In order to eliminate those disadvantages, including the disadvantage of an amount of IRA proceeds accruing to charity that is inconsistent with the owner of the IRA stewardship goals, because of the timing of the death of the individual beneficiary, it may be advantageous for a trust for the benefit of the owner’s descendants be named as the CRUT term beneficiary. If a trust is named as the term beneficiary, the term may not be based on the lifetime of an individual, it must be for a designated term of years. The term of years cannot be longer than 20 years. It should be noted that income accumulated in a trust may be taxed at a higher marginal rate than the individual’s marginal rate unless the trust is designed to be a special trust that taxes the trust income to the beneficiary, instead of to the trust.1 As a consequence, a form of the CRUT technique may substantially mitigate the income tax considerations of the new Secure Act 10-year rule and may provide the descendant beneficiary with greater estate tax savings and creditor protection than the pre-Secure Act stretch IRA payable to an individual would have provided. After the child’s death, the trust could be designed to continue for the

1 If the trust gives the owner’s child the right to vest the income of the subject trust to himself, or herself, the trust will not be taxable on the taxable income of the trust. Instead that child will be taxable on that taxable income because of operation of IRC Section 678(a)(1). This vesting occurs by giving the child the right to annually withdraw the taxable income of the trust (accounting income and capital gains income) from all portions of the trust and that withdrawal right can be satisfied out of accounting income, sale proceeds and/or corpus of the trust. These trusts are called Beneficiary Deemed Owner Trusts (or “BDOTs”) by some commentators. The child does not have to withdraw all of the taxable income. If the child does not withdraw all of the taxable income, the annual withdrawal right lapses as to the amount that is not withdrawn and stays in the trust. The child is not considered as having made a taxable gift if the lapsed withdrawal right does not exceed 5% of the then value of the BDOT corpus. The beneficiary may also wish to sell his or her other assets in a non-taxable sale to the BDOT for a low interest note in order to achieve additional estate tax savings and creditor protection.

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(1) Charity

(2) Smith Family

(3) Direct Cost

(4) Investment Opportunity Cost

(5) Estate Tax @ 40%

(6) Total

Postowner’s Death Scenarios: 20-Year Future or Values IRA grandchildren any other person the child appoints by his or her will. The trust beneficiary $0 $690,941 $985,303 No Further Planning Except for Sale in could also be designed inofaStock manner in which it is$1,712,505 neither subject to the child’s estate taxes nor the child’s $1,141,670 $4,530,419 Year 1 and No Charitable Bequest at Death $1,712,505 $1,676,244 creditors.

No Further Planning Except for Sale of Stock in $200,000 $1,592,505 Year 1 and a Charitable Bequest at Death of $1,792,505 A$200,000 diagram of the technique follows: Contribute $1.4mm in Stock to a Lifetime CRUT, Sell Stock, Remainder to a Charity

$200,000

$1,808,520

$2,008,520

$690,941

$985,303

$1,676,244 $697,132

$619,088

$1,316,220

$1,061,670

$4,530,419

$1,205,680

$4,530,419

$696,728

$2,764,783

$647,906

$2,764,783

$735,791

$2,764,783

Post Death Scenarios: Present Values (Discounted at 2.5%) No Further Planning Except for Sale of Stock in Year 1 and No Charitable Bequest at Death

$0

$1,045,092

No Further Planning Except for Sale of Stock in Year 1 and a Charitable Bequest at Death of $200,000

$122,054

Contribute $1.4mm in Stock to a Lifetime CRUT, Sell Stock, Remainder to a Charity

$122,054

$1,045,092

$421,661

$601,302

$1,022,963

$971,859

$1,093,914

$421,661

$601,302

$1,022,963

$1,103,687

$1,225,741

$425,439

$377,811 $803,251

What are some of the key takeaways from the above calculations with respect to the assumed facts of this Example 7A? 1.

The donor’s charities and the donor’s family benefits the most under the CRUT technique alternative.

2.

The chief reason for that beneficial result of the CRUT technique is the delay in taxation of the donor’s low basis assets as represented by Column 4. The power of delaying the capital gains tax and the future earnings of the diversified portfolio is significant. When a tax is paid to the IRS the donor cannot invest that cash. The donor can keep investing the earnings of the portfolio that is not paid to the IRS.

#8 Life-Income Gift with a Charitable Gift Annuity Example 8: The facts are essentially the same as Example 4. The couple is 72 years of age and are targeting around $200,000 to pass to their favorite charity on the death of the survivor. The couple would like to explore purchasing a charitable gift annuity from their favorite charity (e.g., W&L) in a manner that targets $200,000 on the death of the survivor. Similar to Example 4, the couple would like to retain an annuity stream during their lifetime from their gift to their favorite charity. At the time of the purchase of the annuity the IRC Section 7520 rate is 2.2%. The couple explores transferring $155,078 of a

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low basis stock to their favorite charity in exchange for an annual annuity of $8,064 until the death of the survivor using the charitable gift annuity technique.

A charitable gift annuity is a contract between a donor(s) who transfers assets to a charity in exchange for the charity’s promise to pay an annuity to the donor(s) or another. The annuity is a fixed sum payable annually or more frequent installments. The transaction is treated in part as the purchase of an annuity and in part as a gift to the charity.

The annuity represents a general obligation of the charity. Annuity rates are generally very conservative (set at 50% of the fair market of the asset that is transferred) and set by the American Council on Gift Annuities in order to ensure that the charity receives a significant benefit.

A charitable gift annuity give rise to the following tax issues: (i) the amount of the charitable contribution deduction allowable to the donor; (ii) if low basis property is contributed to the charity, the amount of gain that is annually allocated to the donor; and (iii) the tax treatment of the annuity payments to the donor.

With a charitable gift annuity, the adjusted basis of the property is allocated between the gift portion and sale portion is ratably reported over the donor’s life expectancy. A portion of each annuity payment is excluded from gross income as a return of consideration paid. The gift portion of the charitable gift annuity is eligible for an income tax deduction in year one. In order to get the favorable income tax treatment, the annuity must be either only the donor and a designated survivor annuitant.

A diagram of the technique is below:

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Results of Example 8: The donors contribute $155,078 of a stock that has a basis of $0 in consideration for a joint lifetime annuity of $8,064. For the first 19 years of the annuity, $6,121 of the annuity is taxed at capital gains rates and $1,943 is taxed at ordinary income tax rates. After the first 19 years of the annuity, the entire $8,064 of the annual payment is taxed at ordinary income tax rates. The donor’s will receive a charitable deduction of $43,427 in year one. On the death of the surviving spouse in 20 years the charity receives $200,000.

Assuming the death of the survivor occurs in 20 years, and the charity annually earns 6.5% of the assets contributed by the couple, the charity will receive $200,000.

The couple will receive total payments of $161,281 which grows to $245,356 after income taxes over the assumed 20-year period (assuming no other spending). See the table below and attached Schedule 2 for detailed calculations.

Table 2 Smith Beneficiaries

IRS Income Tax

(1) Charity

(2) Smith Family

(3) Direct Cost

(4) Investment Opportunity Cost

No Further Planning Except for Sale of Stock in Year 1 and No Charitable Bequest at Death

$0

$193,948

$78,252

$111,590

No Further Planning Except for Sale of Stock in Year 1 and a Charitable Bequest at Death of $200,000

$200,000

Contribute $155K $153k in Stock to a Lifetime Charitable Gift Annuity, Sell Stock, Remainder to a Charity

$200,000

(5) Estate Tax @ 40%

(6) Total

$129,299

$513,089

$49,299

$513,089

$98,142

$513,089

$78,907

$313,123

$30,086

$313,123

$59,893

$313,123

Post Death Scenarios: 20-Year Future Values

$193,948

$189,842 $73,948

$78,252

$273,948

$111,590 $189,842

$147,213

$51,859

$347,213

$15,875 $67,734

Post Death Scenarios: Present Values (Discounted at 2.5%) No Further Planning Except for Sale of Stock in Year 1 and No Charitable Bequest at Death

$0

No Further Planning Except for Sale of Stock in Year 1 and a Charitable Bequest at Death of $200,000

$122,054

Contribute $155K $153k in Stock to a Lifetime Charitable Gift Annuity, Sell Stock, Remainder to a Charity

$122,054

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$118,361

$47,755

$118,361

$115,855 $45,129

$47,755

$167,183

$68,100 $115,855

$89,840 $211,894

$68,100

$31,648

$9,688 $41,336

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#9 Give a Remainder Interest in a Residence, Farm or Ranch The facts are the same as Example 4. A couple aged 72 targets a $200,000 gift to their favorite charity (W&L) to take place on the death of the surviving spouse. The donors wish to give an undivided remainder interest in one of their residences, farm or ranch (https://plannedgiving.wlu.edu/givingoptions/retained-life-estates) which they believe will equal $200,000 at the time of their death to satisfy their donative intent. •

The gift cannot be in trust.

•

Depreciation (computed on a straight-line method) and depletion must be taken into account to determine the value of the remainder interest and those values are discounted at an interest rate that depends on the federal rate in effect in the month of the transfer or either of two prior months.

•

While not a statutory requirement, most charities will require a detailed agreement detailing the responsibilities of the life estate owner and the remainderman charity. The agreement will generally detail not only the responsibilities during the lifetime owner, but also what happens on the death of the lifetime owner.

A diagram of the gift is shown below:

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#10 Combine Techniques to Increase Cash Flow The facts are the same as Examples 8 and 9, except the donors wish to combine the two techniques in order to significantly increase the cash flow accruing to them during their lifetime. The donors, use a combination of QCDs (see Example 2), cash gifts, marketable securities and a remainder gift in either their personal residence, vacation home, farm or ranch in exchange for a charitable gift annuity. The donors wish to receive lifetime annuity payments equal to 45% of the fair market value of the assets contributed to the charity which is equal to 90% of the cash and marketable securities contributed to the charity. Consider the following diagram:

For instance, the donors could contribute cash, QCDs and/or marketable securities equal to $200,000 to their favorite charity. The donors could also contribute an undivided remainder interest in either their personal residence, vacation home, farm or ranch, which has a value of $200,000. The charity pays the donors a monthly annuity that has a present value of $180,000. The donors also receive a charitable deduction equal to $220,000.

The authors of this document do not provide legal, tax, or accounting advice to its readers and all readers are strongly urged to consult with their own advisors regarding any potential strategy or investment. Tax results may differ depending on a reader’s individual positions, elections or other circumstances. This material is intended for educational purposes only. While it is based on information believed to be reliable, no representation or warranty is given as to its accuracy or completeness and it should not be relied upon as such.

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Contribute $1.4M in Stock to a Lifetime CRUT, Sell Stock, Remainder to a Charity

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Contribute $1.4M in Stock to a Lifetime CRUT, Sell Stock, Remainder to a Charity

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Contribute $1.4M in Stock to a Lifetime CRUT, Sell Stock, Remainder to a Charity

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Contribute $155K in Stock to a Lifetime Charitable Gift Annuity, Sell Stock, Remainder to a Charity

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$155K

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$155K

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View from law school parking lot

50th Reunion Gifts

A

t Washington and Lee, the 50th reunion is one of the most significant celebrations hosted on campus.

Members of the honored class come together to commemorate shared experiences — a distinguished education, inspiring mentors and lifelong friendships. While reunions are often associated with looking back, the 50th milestone enables the class to look forward. Inspired by W&L’s motto Non Incautus Futuri, each class leaves a legacy that will

benefit the university for years to come.

Classmates join forces to conduct a 50th reunion fundraising campaign that is personally meaningful and supports W&L’s mission. It is an energetic, collaborative effort to which every member of the class has an opportunity to contribute. Nothing embodies the spirit of W&L nor demonstrates alumni loyalty more than the 50th reunion giving campaign.

The 50th reunion class gift total includes:

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Annual Fund

Class Project

Other Capital and Endowment Priorities

➤ Gifts or five-year

➤ Gifts or five-year pledges

➤ Gifts or five-year pledges

pledges made during reunion year

➤ Planned gift commitments

➤ Payments to any university fund (counting from July 1

(counting from July 1 after 45th reunion through June 30 of 50th reunion year)

after 45th reunion for 10-year period) ➤ Planned gift commitments (counting from July 1 after 45th reunion through June 30 of 50th reunion year)

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Ways to Make a Gift that Counts Cash, credit card or check payable to Washington and Lee University _____________________________________________________________________________ IRA Qualified Charitable Distribution (QCD) _____________________________________________________________________________ Recommend a grant from your donor advised fund _____________________________________________________________________________ Stocks, bonds and mutual funds _____________________________________________________________________________ Planned gifts* _____________________________________________________________________________ • Bequests _____________________________________________________________________________ • IRA and retirement plan beneficiary designations _____________________________________________________________________________ • Charitable Remainder Trusts _____________________________________________________________________________ • Charitable Gift Annuities _____________________________________________________________________________ • Life insurance _____________________________________________________________________________ Closely held business interests _____________________________________________________________________________ Real estate

*All planned gifts must be documented. To be included in reunion giving and campaign totals, W&L must be a primary beneficiary of your gift commitment. If you have a question about a planned gift, please contact Jamie Killorin at 540-458-8429.

Nothing embodies the spirit of W&L nor demonstrates alumni loyalty more than the 50th reunion giving campaign.

Recent 50th Reunion Class Giving Results

These tremendous gifts demonstrate the significant impact classes have on W&L.

Class

Class Project

Class Project Total

Annual Fund

Planned Gifts to Other Priorities

Other Capital and Endowed Gifts and Pledges

Overall Class Giving Total

1969

Class of 1969 Lyburn Honor Scholarship and the Restoration of Historic Doremus Gymnasium

$5,140,778

$870,620

$3,142,000

$4,126,810

$13,280,208

1968

Class of 1968 Scholarship

$2,816,250

$655,813

$6,367,700

$1,275,664

$11,115,427

1967

Class of 1967 Scholarship

$1,236,454

$507,118

$6,070,000

$2,080,380

$9,893,952

1966

Class of 1966 W&L History Fund • Support for new W&L history book • Support for Special Collections

$1,076,668

$211,083

$1,524,000

$176,809

$2,988,560

1965

Class of 1965 Endowment for Excellence in Teaching

$1,279,269

$271,115

$210,000

$948,027

$2,708,411

To make a gift or for questions regarding 50th reunion giving, please contact Erin Stringer at 202-631-5038 or estringer@wlu.edu

Office of University Development • support.wlu.edu • (540) 458-8410

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TO

IV

IN

G

ER

• WA S H

SIT Y •

Y

DO

ET

MUS SOCI RE

UN N A N D LEE

Washington and Lee University Bequest Recognition Form (Confidential)

______________________________________________ Name(s)

___________________ Class Year

____________________ Date

In appreciation of Washington and Lee University and with the desire to contribute to its continued strength and success, I/we have executed and intend to keep in effect a provision in my/our estate plan for the university.

A conservative estimate of the current value of my/our provision is $ _________________________________________

Attached is a copy of the relevant document naming Washington and Lee as primary beneficiary For example, the page of your will or trust mentioning Washington and Lee, the beneficiary form from your life insurance or retirement plan.

My/our provision is made through the following planned gift: BEQUEST ❑ Bequest in a will

TRUST ❑ Bequest in a living trust ❑ Charitable remainder trust ❑ Charitable lead trust

OTHER ❑ Retirement plan assets [e.g., IRA, 401(k), 403(b)] ❑ Life Insurance ❑ Other _______________________________________ Continued on back All bequest documentation will be kept confidential in accordance with the university’s policies, procedures, and practices.

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On occasion, names of donors who have documented bequests may be listed in university reports or shared with class leadership. No bequest dollar amount will be directly associated with a donor’s name. Documented bequest dollar amounts will be aggregated and included in overall class totals at reunions.

Please state your preference: ❑ I/we give Washington and Lee permission to publish my/our name(s) in university reports and share with class leadership as having documented a bequest intention for the university and have our bequest intention figure included in aggregate totals. ❑ I/we prefer for this gift to be anonymous in that my/our name(s) will never be published in any university reports or shared with class leadership as having documented a bequest intention for the university— however, I/we wish that my/our bequest intention figure be added to aggregate totals.

If my intentions change, I/we will inform the university. _________________________________________________________ Signature

____________________________ Date

_________________________________________________________ Signature

____________________________ Date

Please return this form and relevant documents to: Jamie M. Killorin Director of Gift Planning Washington and Lee University 204 W. Washington Street Lexington, VA 24450

August, 2019

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50th Reunion Staff Contact Information Reunion Weekend Events and Logistics Mary Webster Associate Director for Alumni Engagement 540-458-8886 mwebster@wlu.edu Reunion Class Giving Erin Stringer Director of Reunion Giving 540-458-8424 estringer@wlu.edu Planned Giving Opportunities Jamie Killorin Director of Gift Planning 540-458-8429 jkillorin@wlu.edu