Key Private Bank Philanthropic Advisory Services Toledo, OH December 5, 2014 Toledo Area Partnership for Philanthropic Planning Conference, December 5,

Key Private Bank

P h i l a n t h r o p i c A d v i s o r y S e r v i c e s

Toledo, OHDecember 5, 2014

Toledo Area Partnership for Philanthropic Planning Conference, December 5, 2014

Agenda – Trust Planning Considering IRS, Family and Charities

• Update on Qualified Charitable Distribution (charitable IRA rollover) and other tax “extenders” after the election, proposed “Kill the Stretch IRA” bill, new IRS qualified retirement plan after-tax rollover rules

• The charitable planning disconnect between advisors and clients in planning and how to better engage the client in philanthropic planning

• Building a better trust – options for better ongoing income tax

• Other miscellaneous methods to legitimately shift income tax, above the line, to charity or kids – QCDs, IC-DISCs, gifts of agricultural goods

• Personal income tax inversions in response to corporate tax inversions – how we can use CRTs, DDTs and combinations thereof to defer federal income tax and/or avoid Ohio income tax

Updates on various new income tax developments

• Qualified Charitable Distribution (charitable IRA rollover) still pending (we’ve heard this story before, right?). Remember the basic rules: over 70 ½ at time of donation, only from IRA, not 401k, 403b, directly to public charity (not CRT, PF, or even DAF). What’s the harm in making payment anyway if Congress does not renew? Perhaps none if cash would otherwise be given, but if LTCG securities would otherwise be used, there is some opportunity loss. Answer: wait as long as possible to put off QCD v. LTCG security decision.

• Other tax “extenders” pending as well – many for business owners, such as S corp rules, 179 expensing increase $25,000 ->$500,000

• “Kill the Stretch IRA” bill – would be a huge boon to using testamentary CRTs for $14 trillion in retirement plan money!!! If ever passed, only spouses get IRA rollover, all others 5 years (ex. disabled).

• New IRS qualified retirement plan after-tax rollover rules. E.g. I have $300,000 in pre-tax 401k, $50,000 in after-tax. Now clear on I can roll $300,000 to IRA, $50,000 to Roth IRA (if otherwise able).

Charitable Planning: Strategic Objectives & Tools

• There is no shortage of ideas / strategies / giving vehicles to discuss

• Bigger challenge is to connect the right strategies and tools with each person’s unique circumstances and needs

• Research has shown a huge disconnect between donors’ actual intentions and their advisors’ interpretation of their intentions

Reasons for Donors’ Reluctance to Give

Donors’ Responses

Advisors’ Responses

* The U.S. Trust Study of the Philanthropic Conversation, 2013

Would not have enough money to leave heirs

Would not be left with enough money for themselves

Client does not consider themselves wealthy enough to

give

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%41%

34%

22%

My gift will not be used wisely Lack of knowledge/connection to charity

Fear of increased donation requests from others

0%

5%

10%

15%

20%

25%

30%

35%

30%

24%

17%


What’s the answer?

Asking the right questions….

Philanthropy Questionnaire


2. How do you feel about your charitable giving thus far?Mark with an “x” the statement that most closely reflects your view.

I am satisfied with my charitable giving in terms of both the causes and the organizations I support. My giving into too many directions without a focused annual plan for giving. My giving has been determined primarily by personal and/or emotional connections; I would prefer to

be more strategic and objective.x


Income Tax Minimization

Strategic Philanthropy

Charitable Remainder Trust

Estate Tax Minimization

Socially Responsible Investing

Grant-Making Evaluation

Donor Advised Funds

Retirement Income Maximization

Asset-Based GivingSocial

Entrepreneurship Family Legacy

Charitable Lead Trust

Private Foundation Impact InvestingPre-Liquidity Event

PlanningPooled Income

Funds

Charitable Gift Annuities

Mission StatementEngaging the Next

Generation Outright Gifts


Reactive & Spontaneous


• Facilitate family discussions/education

• Develop family gifting philosophy/mission

(1)Vision & Mission

• Define charitable goals• Set clear expectations of

desired impact• Seek family consensus

and collaboration

(2) Values & Goals

• Identify cause(s) that will be supported

• Determine how broad the focus will be

• Define level of involvement (i.e., financial only or volunteering/ partnering as well)

(3) Strategy

• Evaluate potential recipients of grants

• Management of investments & grant-making requests

• Maximize tax benefits through appropriate charitable gifting vehicles

(4)Implementation


3. What best represents your family’s views about philanthropy?Mark with an “x” the answer that best describes your view.

Model: We want to model philanthropic giving, and support younger generations as they, in turn, get involved with their own causes and interests.

Mentor: We want to mentor younger generations by having them be part of our family foundation and/or charitable causes and interests.

Mobilize: We want to mobilize all of the generations, channeling the family’s resources of time, knowledge, and money into one area of passion.

x


4. Based on what you know about your family, do you think it is possible to arrive at consensus around gifting?

Check the statement that most closely reflects your view.

No, and I would prefer to not involved the family in philanthropy at this time. No, but resources should still be made available for each individual member to give as he/she wishes. Yes, and we would like to find a way to be more collaborative in our approach to charitable giving. Yes, and we are already collaborating on a number of social causes that we collectively support. Not sure, but would like to evaluate and discuss further. Not sure, but would prefer to not involved the family in philanthropy at this time.

x








Donor Advised Funds







Funds


Mission StatementEngaging the

Next Generation Outright Gifts

NonProfit Evaluation

1) Organization History – Provide a brief history of the organization, its mission, and activities. Why is it the logical organization to carry out this project?

2) Beneficiary Demographics – Provide demographic information to describe the population served by this program.

3) Intent – Why is the purpose of this project or request? What significant will this project have to recipients and the community?

4) Timeline – How will this project be implemented? Where will it take place? Who is responsible for its implementation? What is the timetable for completing it?

5) Budget – What is the proposed budget of this project?

6) Sources of Support – What organizations or corporations have committed funding for this project, and in what amounts? What additional organizations or corporations will be approached for funding of project?

7) Sustainability – How will this project be sustained once support is completed?

8) Management – What review and evaluation procedures will determine the success of this project?


5. Some families establish private foundations in order to engage in philanthropy. Check the statement and any applicable subcategory that most closely reflects your view.

I am attracted to the idea of a private family foundation. I am interested in a foundation, but would prefer a less complicated alternative. I have already established a private foundation and,

so far, have been disappointed. have been satisfied, but feel there is room for improvement. have found the process compelling and rewarding.

I am not interested in establishing a private family foundation.

x








Donor Advised Funds





Private Foundation

Impact InvestingPre-Liquidity Event


Funds




Private Foundation

Advantages:

1) Flexibility in giving

2) Control of process

3) Timing of gifting

4) Family involvement

Private Foundation

Disadvantages:

1) Expenses, excise taxes

2) Detailed administration

3) Income tax deductibility limitations, including basis v. FMV

4) Prohibited transaction/self dealing rules

5) Disclaimer-funding rules


10. How would you like your giving to be recognized? Check any statement(s) that reflect your view.

I would like the ability to gift anonymously. I would like to receive public recognition for larger gifts. I would like to make gifts through typical channels – make donees aware of gift but without special

recognition.

x








Donor Advised Funds







Funds




Donor Advised Funds

Donor A Donor-Advised Fund (DAF)

Opens an account with the DAF and makes

irrevocable contribution of assets.

Contributions are generally tax deductible

by the donor in year they are paid to DAF.

DAF creates a separate account to hold assets contributed by Donor A. The DAF owns the assets and has ultimate control over distributions.

While the DAF will generally follow a donor's recommendations, it is not bound by them. The DAF has control over which charities receive

contributions and when contributions are made.

Offers DAF nonbinding advice about how grants to Charities should be made.

Advice

Assets

Donor A’s

Account

Donor X’s

Account

Donor Y’s

Account

Donor Z’s

Account

Recipient Charity

One

Recipient Charity

Two

Recipient Charity Three

Donor Advised Funds

5 Questions to Ask:

1) What types of grants recommended by donors will the Donor Advised Fund (DAF) sponsoring organization approve?

2) What types of assets can the DAF accept besides personal checks?

3) Can the assets in a DAF account be transferred to another DAF sponsor?

4) Are there restrictions on the amount that can be granted from a DAF?

5) What are the specific account details for this DAF?


7. A variety of charitable purposes could benefit from your contributions. Choose up to 3 that are of greatest interest to you.

Poverty Microfinance / Small Business Development Water & Sanitation Education Health and Wellness Disaster Response Arts, Culture and Humanities Environment and Wildlife Affordable Housing & Community Development Religion or Spiritual Endeavors Advocacy & Human Rights Other (please specify): __________________________________________________

x

x






Socially Responsible

Investing


Donor Advised Funds







Funds




Socially Responsible & Impact Investing


12. Have you established a mission statement and/or strategic goal for your philanthropy?

Check the answer that most closely reflects your view.

No, and I am not interested in it. No, but I would like help in developing that. Yes, and I feel that it is sufficient. Yes, but I would like to revisit what is in place currently to see if it can be improved or updated.

x








Donor Advised Funds







Funds


Mission Statement

Engaging the Next Generation

Outright Gifts

Family Mission Statement

The Optimal Basis Increase Trust – Better Income Tax

Results for Trusts

Presented by: Edwin P Morrow III, JD, LL.M., CFP®

Senior Wealth Specialist, Key Private Bank

[email protected]

[email protected] 12/5/2014 Toledo Area Partnership for Philanthropic Planning

White paper at http://ssrn.com/abstract=2436964

Information provided is not intended to be individual tax advice.

Copyright 2013-2014 Edwin Morrow, KeyBank, NA

mailto:[email protected]

mailto:[email protected]

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Agenda

• Tax law changes and the lure of portability• Adapting disclaimer-based plans• Reducing ONGOING income tax of higher rates• Shifting tax to lower brackets through trusts• Exploiting the 642(c) charitable deduction

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What’s New in Estate Tax Planning?• “Permanent” $5 million estate/gift/GST,

adjusted for inflation ($250,000 added in just two years with LOW inflation, up to $5.34 million in 2014), with spousal “portability”

• Ohio estate tax eliminated• 2014 “Greenbook” proposals propose again to

make $3.5 million estate/gst excl., $1 million gift excl, 45% top rate – unlikely to pass, but Congress may pass “loophole closers” (GRATs, IGTs, entity valuation).

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What’s New in Income Tax Planning?

• For 2013, new tax law (ATRA and ACA):• New ordinary income rate of 39.6% and 20% LTCG/QD

on taxable income (not AGI) over:$400,000 (single) (in 2014, $406,750)$450,000 (married) (in 2014, $457,600)$11,950 (trusts/estates) (in 2014, $12,150)

Medicare Surtax of 3.8% (net investment income) or 0.9% (wages)

• Hits taxpayers with AGI over $200k/$250k• Trusts/estates AGI over only $11,950 ($12,150 in 2014)• Together, investments top at 43.4%/23.8%

(w/ Pease limitations effect (not trust), 44.6%/25%)(if Ohio income tax counted, add another 5.41%*!)

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The Challenge for Sub $10.68 Million Estates

• The popular financial press, even sophisticated CFPs, CPAs, and yes, even attorneys are questioning bypass trusts or even the need for trusts at all for the “99%”

• The most common “solutions” cited are to ditch the trust altogether, use disclaimer funding, or use an “all marital” approach – all of these have significant flaws and issues.

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• Traditional Asset Protection/Family Bloodline

• Management/ Avoid Probate

• Quirks of Portability, DSUE, simultaneous death, remarriage

• Income Tax Benefit? - state, spray, etc

See page 4-8 of longer CLE outline

Why not ditch the trust?

1. Lack of second basis “step up” (or “step down”) that a simple “I love you will” or even intestacy would probably provide the family

2. Potentially higher trust income tax rates

3. Unique assets may get worse tax treatment

Goal – eliminate concerns and even turn these income tax negatives of trusts into POSITIVES!

See infographic p. 132

Three Key Income Tax Problems Post-ATRA

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• Powers of Appointment (POA) have TREMENDOUS income tax planning potential for both stepping up basis (at death) and spraying income (lifetime).

• GPOA (general power of appointment) – power to appoint to yourself, your estate, or creditors of either – can be lifetime, or testamentary (only effective at death) – triggers gift tax/estate inclusion

• LPOA (limited powers of appointment) – power to appoint that excludes power to appoint to self, estate, or creditors or either – usually does NOT trigger gift tax or estate inclusion, except special circumstance

Understanding Powers of Appointment

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• You have all been taught that spouses using any disclaimer funding have to disclaim any powers of appointment in trusts receiving disclaimed assets.

• This is wrong, or at least, overbroad

• A POA that can only trigger estate/gift tax, or that is limited by ascertainable standard, CAN BE retained. OBIT clauses meet this requirement

See page 52-54 of CLE outline, sample clauses

Busting Spousal Disclaimer Myths

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Mary cannot be trustee w/discretionary spray power, has no lifetime or testamentary power of appointment (or disclaims it)

Traditional AB Trust – Disclaimer Plan/Effect

John Doe Trust(could be joint trust)

To Mary OutrightJohn Doe Bypass Trust fbo Mary (& children?) < $5.34 million. No LPOA,

no power to “rewrite” via testamentary

POA to adapt trust.

John Doe Marital Trust Fbo Mary

Planning Steps At John’s Death Alternate Method Usual Method

After Mary’s Disclaimer

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Mary has fiduciary POA limited by HEMS, “taxable” LPOAs to shift income (life), testamentary GPOA power to increase basis (at death)

“OBIT” Trust – Disclaimer Plan/Effect

John Doe Trust(could be joint trust)

To Mary Outright or Marital Trust

John Doe Bypass Trust fbo Mary (& children) < $5.34 million (AEA). Keeps HEMS spray, gift-taxable

spray and estate-taxable testamentary POA “rewrite” power

Planning Steps

At John’s Death Usual Disclaimer Plan

At Mary’s Disclaimer

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• The biggest issue is that capital gains are defaulted under §643 in most cases to be trapped in trust and not carried out onto the beneficiaries’ Form K-1, even if substantial distributions equal to or more than taxable income are made. See comparison chart.

• Example: Jane is a widow otherwise in 15%-25% tax bracket, beneficiary of her husband’s trust, which generates $100,000 of capital gains and $40,000 of interest, dividends or rents. She takes $140,000 to live on from the trust – the trust issues a K-1 for $40,000, taxed to her. The remaining $100,000 is taxed, after $12,150, at 23.8% to trust (43.4% if short term capital gains!). That’s 59% higher LTCG tax, 189% higher STCG tax

If Jane makes > $406,750 taxable income anyway, there is no “tax negative” to the trust, but this brings up other better options!

Better Ongoing Income Tax Planning

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Ordinary “A/B” Trust – Ongoing Tax Effect

Above rates refer to trust income above $12,150 in 2014 (top rates), ignoring state income tax, AMT, or special rates for collectibles, depreciation recapture

At John’s Death

Tax Effect to Spouse and Doe Family, during spouse’s lifetime

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Income Tax Efficient Trust– Ongoing Tax Effect

At John’s Death

Income Tax effect to spouse and Doe Family during spouse’s life

This may change trust’s income above $12,150 from 43.4%/23.8% top rates to 15%, 25%, 28%, 33%, 35%, or 15% LTCG/QD, or even less to beneficiaries.

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• There are many investment solutions to manage trust income taxation (individual stock/bond portfolio can best manage tax loss harvesting and realization, some tax-efficient ETFs and mutual funds are more tax efficient than more managed funds, etc, and of course using tax free muni bonds may play a role).

• This outline will primarily discuss methods of distributing the taxation or shifting whatever income is generated by the trust assets between the trust and the beneficiaries, using §678(a), §643 Regulations, in kind distributions, powers to adjust, partnerships and powers of appointment.

• Outline assumes situation where the settlor’s goal is not to create a restrictive distribution ceiling (e.g., income-only QTIP)

Ongoing Income Tax Planning

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• You can make a trust an IRC §678(a) “beneficiary-defective” “Mallinckrodt” trust – giving the beneficiary the unfettered right to withdraw income (a General Power of Appointment) not only over net accounting income, but even capital gains – could also apply via formula – this puts income directly onto the beneficiary’s Form 1040, not the Trust’s Form 1041/K-1

• Does NOT have to be over 100% of principal, despite common wisdom

• Can be over only certain assets

• Beneficiary must have sole, unfettered right (e.g., not with permission of trustee, trust protector, or HEMS limitations)

• Unlike traditional trust K-1 accounting, a beneficiary does not have to actually receive the income for it to be taxable to him/her.

Ongoing Income Tax Planning – §678(a)

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• This might be appropriate for a couple with special assets in trust, such as a personal residence, or a couple wanting to simplify tax reporting in spite of slightly less asset protection.

• Query whether §121 would allow $250,000/$500,000 capital gains tax exclusion for a trust drafted in this manner. See revenue rulings in citations which should allow it. Also consider application to many other tax provisions where grantor trust status would be highly advantageous (S Corp, §179 expensing)

Not practical for some estate situations, but a flexible §678(a) trust might have more tax flexibility. Unlike certain provisions re capital gains in §643, can be changed year to year. This is probably not a good option for second marriage situations where corpus preservation is paramount, but appropriate for someone otherwise considering outright, or a more liberal trust.


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• Can a QTIP Trust come under 678(a)? YES.

• QTIPs do not have to require all net income be paid, they can also qualify if the surviving spouse has the unrestricted ability to withdrawal such income at least annually. Hence, it is possible to have a 678(a) trust as to not only accounting income, but any greater amount if the settlor would permit, such as the greater of all accounting income or all taxable income.


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• Other exception to make capital gains taxed to beneficiary – Treas. Reg §1.643(a)-3(b) – the MOST IMPORTANT REGULATION YOU SHOULD READ THIS YEAR, even more than Section 1411 Regs, contains three paragraphs outlining when capital gains can be part of DNI and hence taxed to the beneficiary (if sufficient distributions made): “(b) Capital gains included in distributable net income. Gains from the sale or exchange of capital assets are included in distributable net income…”. Let’s discuss paragraphs (1),(2) and (3)

Ongoing Income Tax Planning (§643 Regs)

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Treas. Reg. §1.643(a)-3(b)(2): • Easiest to do (in theory) – “(2) Allocated to corpus

but treated consistently by the fiduciary on the trust's books, records, and tax returns as part of a distribution to a beneficiary;”

• Not possible if contrary Forms 1041 already filed. Could decanting or amendment start a new clock as to an arguably new trust, cleaning the slate? Doubtful. Perhaps worth a try.

• Unlike 678(a), requires distribution to beneficiary

Ongoing Income Tax Planning(§643 Regs)

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Treas. Reg. §1.643(a)-3(b)(1): “Allocated to income…”

• Or, trustee may allocate pursuant to trust and state law, net capital gains to income, which makes it part of DNI, hence distributions can be deducted by trust, passed out as income to beneficiary on K-1.

• Unlike 678(a), requires an actual distribution, but remember the 65 day rule may allow late distributions if properly elected.

Ongoing Income Tax Planning (643 Regs)

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Treas. Reg. §1.643(a)-3(b)(3): “Allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary.”

• Two alternate tests here – first seems to require tracing- second is also awkward and unclear – how does a trustee prove how they determine this, and does there have to be trust language justifying the practice? Few trusts would specify. Some attorneys more optimistic than I about this, but I have suggested language in material.

Ongoing Income Tax Planning (643 Regs)

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• IRC §643(e) in kind distributions – unless trustee affirmatively elects, a trust distribution in kind would not trigger capital gain. E.g. trustee distributes P&G stock, Blackacre, etc – beneficiary generally receives carry over basis (unless “loss” property), then sells and incurs LTCG at their tax rate.

• Qualified Subchapter S Trust (QSST) Election – ongoing K-1s from S corp report directly onto the beneficiaries’ 1040, even if some income passing through is capital gains (not same if stock sold).

• Partnership (LLC taxed as partnership): Distributions from partnership usually accounting income (DNI), even if K-1 from LLC shows capital gains. No help for “phantom income”.

Other Techniques that Shift Capital Gains

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Ordinarily, we have very little power to shift income tax burden without transferring the underlying assets under the assignment of income doctrine (fruit/tree). We can’t just give a paycheck to kids/charity and expect our W-2 to change. Want to shift $30,000 of annual P&G dividend income? – give away $1,000,000 of P&G stock!

Exceptions:• Gifts of agricultural products (case, Rev. Rul.)• IC-DISCs (statute favoring export income)• Partnerships (complicated allocation, gift tax rules)• Non-grantor Trusts! (specific rules in

Subchapter J)

Tax Shifting to Other Beneficiaries

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Planning Steps & Strategies

1) Farmers/Ranchers are unique in the ability to get around this “assignment of income”. If any agricultural product produced by the farmer is given away (e.g. to an account in a charity’s (DAF) name at a grain elevator), when the product is sold it does NOT trigger any tax to donor. This may often be much better than gifting cash. Unlike gifting appreciated securities, which might get around some LTCG tax, gifting “grain” can get around ordinary income AND employment tax AND state and local income tax. Similar tax-wise, but perhaps even better, than a Qualified Charitable IRA Distribution.

2) The IRS fought this for years, lost a few court cases, and finally acquiesced. The IRS does force farmers to back out their deductions/costs associated therewith (e.g. if they gifted 10% of their crop, and spent $100,000 on fertilizer, they could only deduct $90,000 for fertilizer expenses).

3) Ditto – the same concept applies to gifts to children, who would pay either long but probably short term capital gains

Gifts of Agricultural Products

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1) IC-DISCs (interest charge domestic international sales corporation) also allow tax shifting for qualified export income

2) Vastly overlooked, but must be US made goods going abroad (incl. agriculture, parts, can include via distributor but probably not through secondary US mfr)

3) Can include software, engineering/agricultural4) Allows shifting of tax to IC-DISC owners at qualified

dividend rates. Charity would have to pay UBTI, but it still allows above the line shifting.

5) Ditto – the same concept applies to children, who may easily be in a 0% LTCG/QD bracket

6) Email me if you’d like a separate 30 minute presentation on IC-DISCs and various income, estate and charitable planning strategies

Tax Shifting for exporting business owners

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• There is a tremendous tax planning power to have spray provisions to allow distributions to other beneficiaries, potentially including charities.

• However, from a practical administrative perspective, spray powers are “messy” at best – trustees often hate them - accounting, reporting, more conflicts.

• Beneficiaries may be in low bracket, even 0% LTCG/QD bracket (if MFJ beneficiary makes under $72,500 TI, which might be about $90,000 AGI after deductions etc), or even live in no-tax state of residence – should all bypass trusts have this capability – if properly limited/circumscribed?

• Personal powers of appointment, however, are non-fiduciary, with no attendant duties whatsoever on the powerholder. Power can be “collateral” – held by a non-beneficiary, similar to “distribution trustee”.

See page 116-120 of CLE outline

Tax Shifting to Other Beneficiaries - Spray

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QTIPs are necessary for large estates, but terrible for a basic foundation and with portability may be overused. It’s not because they force a step down in basis unnecessarily, have §2519 issues, Rev. Proc 2001-38 uncertainty, more chance for decreased basis via discounting, and less flexibility via decanting or amendment, but because they prevent tax shifting

• §2056(b)(7) appears to disallow any power to distribute anything to other than spouse, or any POA

• Surprisingly, you can make a good argument that a QTIP might be able to shift income with a 5/5 GPOA power, following regulation and PLR, but I would not count on it.

Tax Shifting – Drawbacks to QTIP Trusts

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Example: Bypass Trust has $40,000 interest, dividends, $100,000 capital gains. What if the surviving spouse doesn’t need the $140,000 and the spouse would prefer the income go to children, grandchildren etc and be taxed at their rates? (or parents’ via kiddie tax, but remember, it doesn’t affect 3.8% surtax!)

• A trustee spray power (fiduciary) can do this.• A non-fiduciary lifetime limited power of appointment

held by a non-beneficiary (collateral power) can do this.• A lifetime power of appointment held by the spouse can

do this. It may trigger a gift, using lifetime gift tax exclusion if over annual exclusion amounts. When? If the spouse is entitled to all income (Regester case), or perhaps even a nominal gift if not (PLR), or if GPOA. Distributions from trusts that are taxable gifts are NOT tax-free to beneficiary pursuant to IRC 102(b).

Tax Shifting – Powers of Appointment

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• Many middle class clients make charitable donations – taxes are not primary motivation usually, but people always want the maximum tax benefit possible

• What if you made it discretionary with independent (or even family) trustee? Accounting/reporting? Most people do not trust independent trustees to do what they want, perhaps for good reason, and don’t want fiduciary duties as trustee to their charities, even if wholly discretionary to a Donor Advised Fund.

• Instead, why not allow charity to be permissive appointee under a lifetime power of appointment? Use a private foundation or donor advised fund? Families prefer this route. 642(c) should still apply, see citations.

See pages 102-105 of CLE outline

Efficient Tax Shifting to Charity – §642(c)

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• Unlike IRC §170, §642(c) can benefit foreign charity, it is not subject to the 20%/30%/50% of AGI rules, and it is not subject to the Pease limitations that affect individual taxpayers! Because Ohio bases its trust income tax on the taxable income on the Form 1041 after the 642(c) deduction, this indirectly allows Ohio income tax deduction (unlike personal). Moreover, you don’t have a 65 day rule, you get a full 1 year rule!

• However, it probably must be traced to gross income (taxable income, incl. CG, not accounting income, so not muni) from current or immediately prior year, but a professional trustee is good at tracing that. Abbin’s treatise argues tracing should not be necessary, but best practice would be to assume it does for planning.

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• Trust might even limit charities to a % of gross income only (not prior principal), even excluding non-taxable income (muni) and/or preferential tax rate income (LTCG/QD)

• A trust or trustee cannot just allocate higher rate income to charity, unless the trust limitation on the charity’s potential income has “economic effect” per the Regs. For example, if the trust document limits the charity’s potential distribution to short-term capital gains, non-qualified dividends, interest (43.4% potential rate income), non-business income (watch out IRC §681), this should have the economic effect of curtailing their potential income.



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• Remember, powers of appointment may be an elixir for trust income tax planning, but they can be POISON for stretch IRA “see through trust” planning

• For a “conduit trust”, you want to ensure that no IRA distributions can be distributed to anyone older, or any entity, while the “designated beneficiary” is living. Any lifetime distribution to younger beneficiary kills spouse “sole beneficiary” advantages (delayed RBD, recalc LE)

• For an “accumulation trust”, POAs should limit to younger individuals, but even after death of current beneficiary. All good reasons for separate or standalone trusts for IRA/QRP.

See separate CLE material, articles on see through trusts with a pre, post-mortem checklist on trust/IRA issues.

Issues for “Stretch” IRA - QRP planning

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• A DING (OING) allows “above the line” deductions from trust income, so that K-1 income can go to children in lower tax brackets. Any distribution to non-settlor makes the gift complete as to those assets, but gift eligible for annual exclusion $14/$28,000, plus, people may want to shift income with taxable gift)

• More importantly, as discussed above, lifetime limited powers of appointment can be used to spray income to a donor advised fund getting an “above the line” deduction, undaunted by the Pease limitations or 20/30/50% limitations, achieving state income tax deduction, and it’s flexible and discretionary!


Efficient Income Tax Shifting with “DINGs”

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• A DING (OING) can also be structured to avoid Ohio income tax on non “source income” (which is Ohio based business, real estate, tangible property, Ohio lottery winnings, etc)

• When is such complexity going to be worth the trouble? Generally, large sales of out of state property, publically traded securities, etc – consider the recent KMP, AbbVie, etc transactions recently in the news!

See page 124-125 of CLE outline, Probate Law Journal of Ohio article

Efficient Ohio Income Tax Avoidance with “Deferred Distribution Power Trusts”

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• When people think of deferring tax, we think of Charitable Remainder Trusts – life or 20 yr term

• Just because there is an announcement/intention to undergo an inversion does not mean it is a “done deal” and too late for CRT planning!!! You don’t have to read the Palmer case and IRS rulings to know these deals are hardly complete! Read the news!

• Consider the Deferred Distribution Power Trust to avoid Ohio income tax on the deals as well – perhaps portions of stock are contributed to each type of trust

• Consider – the non-charitable beneficiary of a CRT does not have to be an individual – it can be a non-grantor incomplete gift trust, enabling both the deferral of federal income tax, and perhaps further avoidance of Ohio, and even income tax shifting to boot.

“Personal tax inversions” for client owns stock undergoing corporate tax inversions

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• Optimal basis increase trusts (OBITs) have all the upside of a traditional bypass trust, but negate the two principal downsides, even turning them into positives (optimizing basis, better income tax by spraying income and/or 678a)

• Avoids all the negatives of outright bequests or marital trusts (step down in basis, fractional discounting, trapping income with no spray/gifting ability, 2519 risk);

• QTIPs/portability may still be needed or desired for various narrow situations (e.g. QRP/IRA rollover, $9-$10 million estate w/kids from same marriage), but suffer from weaker ongoing gifting/shifting options – see comparison chart

• Negative? – No “off the shelf”, NOLO press online trust form, these require a real attorney, new drafting!

Conclusions – Optimizing Basis and Income Tax Efficiency

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• Updated material and clauses will be periodically added to white paper at http://ssrn.com/abstract=2436964

New Articles: • The Art of Avoiding Ohio Income Tax Using Trusts, Ohio

Probate Law Journal, May/June 2014 issue• Ed Morrow & Steve Oshins on Ferri v. Powell-Ferri: Asset

Protection Lessons, Perils and Opportunities with Decanting, LISI Asset Protection Newsletter #240

• The Upstream Crummey Optimal Basis Increase Trust – CCH Estate Planning Review, May 2014 issue

• Clark v. Rameker: Supreme Court Holds that IRAs are Not Protected in Bankruptcy - Are Inherited Spousal IRAs and Even Rollover IRAs Threatened? LISI Asset Protection Newsletter #248 (June 16, 2014). 50 State IRA Creditor Exemption Chart with Commentary. LISI Asset Protection Newsletter #256 (August 7, 2014).

Conclusions – Sample Forms

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• Email [email protected] or

[email protected]

• I always welcome constructive criticism and discussion on tax and trust issues related to this outline, and I am well aware that many good attorneys find some of them to be completely unheard of, crazy, novel or all of the above! However, I do aim to be practical, hence the 30 pages or more of sample clauses. Take them with a grain of salt, I have not been in private practice for 8 years! But hopefully they will give you a start for your own forms, or ideas for better drafting. Let me know how you improve on them!

Thanks!

Questions?

Documents

Key Private Bank Philanthropic Advisory Services Toledo, OH December 5, 2014 Toledo Area Partnership for Philanthropic Planning Conference, December 5,