Northern Trust - Catholic Charities of the Archdiocese of Chicago

NORTHERN TRUST Catholic Charities and the Archdiocese of Chicago 11th Annual Tax and Estate Planning Seminar for Professionals June 2, 2015 The Good Giver: An Exploration of Tax-Wise Charitable Giving Suzanne Shier Wealth Planning Practice Executive and Chief Tax Strategist/Tax Counsel [email protected] 312-557-8396 Rev. 6-1-15 (v13) 2015 Northern Trust Corporation The Good Giver To give away money is an easy matter and in any mans power. But to decide whom to give it and how large and when and for what purpose and how, is neither in every mans power nor an easy matter. Aristotle 2

The Good Giver Giving Today Giving Tomorrow Giving Choices Donees and Donations Giving Choices National and International Giving Choices - Giving Vehicles Giving Choices Transmitting Value(s) 3 The Good Givers Giving Giving by individuals is the greatest source of giving Source: Giving USA 2014, The Annual Report on Philanthropy for the Year 2013 4 The Good Givers Recipients The majority of giving recipients are religion, education and human services Source: Giving USA 2014, The Annual Report on Philanthropy for the Year 2013 5 The Good Givers Level of Giving Giving levels are once again increasing

Source: Giving USA 2013: The annual Report on Philanthropy for the Year 2012 (Chicago: Giving USA Foundation, 2013), p. 26 6 The Good Givers Generosity Giving among income groups is greatest at the highest and lowest income levels Source: IRS 2011 Statistics of Income (SOI) 7 United in Giving There are multiple rationales for the charitable deduction Social Value: Charities provide essential services, often more effectively than government ever could. National Character: As a people, Americans are uniquely benevolent; the charitable deduction simply reflects this element of the American character. Limited Government: Government will do what charities cannot; in the absence of a well-funded nonprofit sector, government will expand its social, political and economic ambit. Fairness: Charitable deductions are consistent with the core principle of tax fairness, since taxpaying capacity is directly affected by the amount of charitable giving done by a taxpayer.

See: J. Thorndike, Making the World Safe for Philanthropy (Urban Institute, April 2013), pp. 5-6 8 The Good Givers Heritage of Giving The charitable deduction has a long standing history in the tax code 1917 War Revenue Act of 1917 Enacted the individual charitable deduction 1944 Revenue Act of 1944 1981 Economic Recovery Act of 1981 Expanded 1986 Tax Reform Act of 1986 Charitable 2006

deduction escaped the 2% floor Pension Reform Act of 2006 Temporary 9 the charitable deduction to non-itemizer individuals direct contribution from IRA What the Good Giver Gives Non-cash contributions remain popular for donations Non-cash $49 contributions billion in non-cash contributions (22.2 million returns) in 2012 One-third of the returns (7.6 million) report $42.9 billion in contributions Taxpayers

age 65+ gave the most (cash and non-cash) Asset Value Share Corporate stock $16.8 billion 39.1% Mutual funds $1.7 billion 2.8% Clothing $9.3 billion 21.8% Household items $3.7 billion

8.7 % Art and collectibles $1.2 billion 2.8% Source: IRS Statistics of Income, Spring 2015 10 What the Good Giver Gives Giving of art and collectibles is of particular interest Art and collectibles Making Charitable Gifts of Art A Primer for Donors Capital gain or ordinary income property Use for a related purpose Art for a medical school or for liberal arts college? An income tax deduction consideration, but not a gift or estate tax issue Art Advisory Panel 344 items reviewed with recommended adjustments for

56% 11 What the Good Giver Gives Increased income tax rates makes giving from retirement assets even more attractive Individual Retirement Accounts Optimal testamentary giving vehicle Pension Protection Act of 2006 direct IRA gift provision Temporary Age 70-1/2 or older Owners or inherited IRA Only IRAs, not 40(k)s $100,000 maximum per taxpayer per year Direct to qualified charity Public charity (but not donor advised funds or supporting organizations) Private operating foundations

12 What the Good Giver Gives Many donors continue to favor giving in trust Split-interest charitable trusts and pooled income funds in 2012 113,688 split-interest trust returns $11.7 billion in gross income $4.3 billion in charitable distributions 93% charitable remainder trusts 80% CRUTs (majority 5-6%) 14% CRATS 6% charitable lead trusts 1% pooled income funds Source: Rosenthal, Lisa, Split-Interest Trust, Filing Year 2012, Statistics of Income Bulletin 51 (Winder 2014) 13 The Global Good Giver Giving globally is an increasing priority, but it has limitations

Income tax charitable contribution deduction Limited to donees organized within the US Qualifications US charitable donee may use funds abroad for charitable purpose US charity may make donations to a foreign charity Friends are permitted Conduits are not 14 The Global Good Giver The estate and gift tax rules for global giving are broader Gift and estate tax charitable deduction There But, is no (US) place of organization requirement there is a Section 501(c)(3) status notice requirement

Exception if foreign organization receives less than 15% of its support from US sources 15 Reforming the Good Giver Tax reform proposals affecting the charitable deduction have various rationales Recap Total gifts in US $335.17 billion in 2013 $240.60 billion from living individuals $196.21 billion (81.6%) from taxpayers who itemize deductions Deductions are regressive, credits are not For example The cost to the government (the subsidy to the taxpayer) of a $100 itemized charitable deduction for a taxpayer in the 35% tax bracket is $35 The cost and subsidy of a $100 gift by a non-itemizer is $0

A credit of $xx is of equal cost and subsidy to all taxpayers 16 Reforming the Good Giver Various reform proposals have been suggested Proposals Administration Cap the value of all itemized deductions at 28% Camp proposed Tax Reform Act of 2014 Increase standard deduction 2% floor on itemized charitable deduction Simplify the rules on deduction limitations 17 Reforming the Good Giver Limiting the deduction on appreciated assets has garnered interest Proposed limit of the deduction for the appreciated value of

property Limit the deduction to the adjusted basis of property Similar to the current limit for contributions to private foundations Recommended by the Joint Committee on Taxation in 2005 Part of the proposed Tax Reform Act of 2014 (with exceptions) 18 Reforming the Good Giver Some have questioned the degree of transparency and accountability of charitable organizations Recent headlines ask Who will watch the charities? David, Callahan, New York Times, Sunday, May 31, 2015 The transparency and accountability of charitable organizations (private foundations in particular) is under public scrutiny Proposed focus of reforms

Transparency of charitable donations Narrower definition of charitable philanthropy focusing on public benefit Emphasis on the timely use of tax-exempt dollars Example Payout of donor advised funds Better accounting of effectiveness of philanthropic dollars Federal oversight akin to British national Charity Commission 19 Reforming the Good Giver What impact any changes will have on giving is unclear Does the income tax deduction for charitable giving impact giving? The lower the price of giving, the more that is given The wealthier the environment, the more that is given The exact relationship (elasticity) of giving and deductions is undetermined Does the estate tax and the charitable deduction impact giving? In 2010 (the year of estate tax repeal) for estate worth more than $10 million 30% of value ($3.5 billion) to charity

20 The Good Givers Tax-Wise Choices The choice of charity and the gift are important 21 The Good Givers Tax-Wise Choices 22 The Good Givers Tax-Wise Choices Planning for gifts makes a difference 23 The Good Givers Giving Options There are many ways to give, with varying degrees of complexity Direct Donation to Charity Least Complex 24 Donor Advised Fund

Charitable Remainder Trust Supporting Organization Charitable Lead Trust Private Foundation Most Complex NORTHERN TRUST Donor Advised Fund A Simple and Flexible Way to Promote Family Giving Revised April, 2015 At a Glance: Donor Advised Fund A donor advised fund (DAF) provides an attractive alternative to establishing a private foundation. A DAF is a charitable giving vehicle that allows you to maintain discretion over your charitable giving without the administrative and financial burdens associated with a private foundation. You can transfer assets to a DAF account during life or at death, and you will receive an immediate charitable tax deduction . You may also appoint family members and friends as "advisors" to the account, thereby promoting family philanthropy and/or charitable giving

circles. Uses: How does it work? DAFs are less expensive to administer than a private foundation, and offer a higher income tax charitable deduction Grants may be made in the name of the DAF account or anonymously Donor Advised Fund Strategy Year 1* YOU YOU Contribution Accounts and assets (cash, securities, etc.) are held by a sponsoring charity, often a community foundation

In year 1, you transfer assets to the DAF You may be entitled to a charitable income tax deduction in year 1, even though the property may or may not be distributed to charitable organizations in that year You may make recommendations to the sponsoring charity to make distributions to select charitable organizations DAF DAF What are the complications? Year 2 and beyond: Distributions to Charity CHARITIES CHARITIES *Current income tax deduction, subject to deduction limitations

Loss of access to assets for personal needs Distribution only for the benefit of public charities While rare, a situation could occur whereby the sponsoring charity may deny a request to direct a charitable gift** **All DAFs are legally prevented from making certain grants. For more information regarding prohibited grants, please consult a Northern Trust advisor. For illustrative purposes only. Not legal or tax advice. 26 Example: Donor Advised Fund Sample Profile: You have a high income year and are not subject to the alternative minimum tax

You are charitably inclined, but currently unsure of the charitable organizations you want to support Assumptions: Anticipated Results: $250,000 cash contribution to initially fund the donor advised fund You receive an income tax charitable deduction of up to 50% of adjusted gross income Donors adjusted gross income is $1,000,000 You can deduct the entire $250,000 from your itemized tax return, subject to applicable IRS deduction limitations

Year 1* YOU YOU Contribution $250,000 Year 2 And Beyond: Donor Advises on Distribution to Charities DAF DAF CHARITIES CHARITIES *Current income tax deduction, subject to deduction limitations For illustrative purposes only. Not legal or tax advice. 27 NORTHERN TRUST Charitable Remainder Trust "CRT" Fulfill your philanthropic intent while retaining cash flow and deferring capital gains tax

Revised April, 2015 At a Glance: Charitable Remainder Trust A charitable remainder trust (CRT) is an irrevocable trust established to provide annual payments to current beneficiaries with the remainder balance distributed to charity. A CRT is typically funded with appreciated assets. You, the grantor, are eligible for an income tax deduction and perhaps a gift or estate tax deduction for the present value of the remainder interest, which will pass to charity. Payments from the trust may be made to an individual or individuals over time, either for life or for a defined term not to exceed 20 years. Your designated charity (or charities) receives the remaining principal (remainder interest) at the end of the trust term. How does it work? Uses: Appropriate for charitably-inclined persons with highly appreciated assets who desire a defined stream of cash flows for themselves or their beneficiaries Also provides a method of diversifying appreciated assets while deferring the income taxation, potentially increasing the yield from the assets while gaining a current income tax deduction CRT Strategy YOU YOU Contribution CRT

CRT A CRT is created in the form of a unitrust (fixed percentage of the trust assets determined and distributed annually) or an annuity trust (fixed dollar amount distributed annually) Your choice of the term and payout percentage determines both the income tax and gift or estate tax deduction You and/or your beneficiary(ies) take annual distributions based on the annuity or unitrust amounts These payments are subject to income tax based upon the character of income earned by the CRT What are the complications? BENEFICIARY BENEFICIARY ANNUITY ANNUITYOR OR UNITRUST UNITRUST PAYMENTS PAYMENTS Underperforming assets may deplete the trust Loss of control over the contributed assets Growth on assets exceeding annuity or unitrust

passes irrevocably to charity If you irrevocably name a beneficiary other than you Remainder to charity CHARITY CHARITY For illustrative purposes only. Not legal or tax advice. 29 or your spouse, the present value of that beneficiarys interest will be considered a gift for gift tax purposes Consider generation-skipping transfer tax issues before naming a grandchild or other "skip" person as a beneficiary Choosing the Charitable Remainder Trust Charitable remainder trust design presents a number of options 30 NORTHERN TRUST Charitable Lead Trust "CLT" A Deferred Gift to Minimize Transfer Taxes While Optimizing Annual Charitable Gifts Revised April, 2015 At a Glance:

Charitable Lead Trust A Charitable Lead Trust (CLT) makes annual payments to a charity or charities for a term of years, or for a lifetime, before the remaining principal is made available to trust beneficiaries such as children. A CLT can either be testamentary (created by your will or trust upon your death) or inter vivos (created during your lifetime). Uses: How does it work? CLTs typically make sense if you want to minimize gift and estate tax by delaying the transfer of wealth to children or grandchildren, and if you are already making or would like to make annual gifts to charity Charitable Lead Trust Strategy YOU YOU Contribution A CLT is an irrevocable trust with specific annual payments to charity. Remainder interests pass to or are held for the benefit of non-charitable beneficiaries (typically children)

A CLT is created in the form of a unitrust (fixed percentage of the trust assets determined and distributed annually) or an annuity trust (fixed dollar amount distributed annually) If structured as a grantor trust, you will be entitled to a current income tax deduction for the present value of the current interest going to charity CLT CLT Annuity Payments to Charity Term of Years CHARITY CHARITY Remainder

End of Term TRUST TRUST BENEFICIARIES BENEFICIARIES For illustrative purposes only. Not legal or tax advice. 32 You will be taxed on the taxable income during the charitable term Alternatively, a non-grantor CLT will not tax the grantor on the trusts income, resulting in the grantor foregoing a current income tax deduction The CLT, however, will be entitled to a charitable income tax deduction for the amounts passing to charity annually What are the complications? Loss of control over gifted assets

Loss of access to assets if you or your family have a future need prior to the expiration of the trusts lead term Under-performing investments could exhaust the CLT such that the charity may not get its full series of payments and then there will be nothing to pass to the remainder beneficiaries Choosing the Charitable Lead Trust Choice of the type of charitable lead trust determines the tax benefits 33 NORTHERN TRUST Private Family Foundation Maintain Control of Your Charitable Giving While Promoting Family Philanthropy Revised April, 2015 At a Glance: Private Family Foundation A private family foundation is a tax-exempt charitable vehicle that may be organized as a corporation or a

trust. Private family foundations are usually grant-making foundations that make grants to public charities chosen by the foundations trustees or directors. A private foundation allows the donor the maximum amount of control and flexibility over a donors tax-deductible charitable giving during life and after death. Multiple generations of family members may be involved in the charitable giving process. Contributions to private foundations are generally deductible for income tax purposes, subject to some limitations. Uses: How does it work? A private foundation is effective when you want to maintain the maximum amount of control over your charitable giving while teaching younger generations about the importance of charitable giving and promoting a family giving legacy A non-profit corporation or a wholly charitable trust is created Contributions are made to the foundation for future distributions to charitable causes

Private family foundations are generally exempt from income tax, but must pay an excise tax of 2% on net investment income Private family foundations must distribute at least 5% of the value of its net assets annually The donor can maintain control over grant making and investment decisions Private Family Foundation Strategy Contribution PRIVATE PRIVATE FOUNDATION FOUNDATION YOU YOU Annual Grants CHARITIES

CHARITIES For illustrative purposes only. Not legal or tax advice. 35 What are the complications? Assets must be used for charitable purposes Loss of personal access to assets after transfer to private foundation Administratively complex Potential loss of privacy due to tax returns being publicly recorded Subject to complex Internal Revenue Code rules and close scrutiny by the IRS, particularly as it relates to

prohibited transactions Example: Private Family Foundation Sample Profile: Your family would like to contribute $5,000,000 to a charitable giving vehicle to consolidate your charitable giving activities and encourage younger family members (children) to participate in philanthropic activities Assumptions: Results: Total family assets of $20,000,000 Family is charitably inclined Family is willing to commit up to $5,000,000 in cash to fund the foundation Contribution

YOU YOU $5,000,000 FAMILY FAMILY PRIVATE PRIVATE FOUNDATION FOUNDATION Grants 36 You create a family charitable legacy through the creation and management of the private foundation You and your spouse/partner and adult children can serve as directors for a corporation or as distribution committee members for a trust and be actively involved in the grant-making process From a tax perspective, a $5,000,000 income tax charitable deduction is available in the year the

contribution is made, subject to the applicable adjusted gross income limitation of 30% for gifts of cash and 20% for gifts of long-term appreciated securities Assets of the foundation will be subject to the 2% annual excise tax on the net investment income At Least 5% Annually CHARITIES CHARITIES For illustrative purposes only. Not legal or tax advice. Choosing Between a Private Foundation and Donor Advised Fund Aligning the type of vehicle with the donors goals is essential to planning 37 NORTHERN TRUST Supporting Organizations

Revised April, 2015 At a Glance: Supporting Organizations A supporting organization is a tax-exempt, wholly charitable entity established by one or more donors which provides support to specified public charities. Based on its special relationship to the public charities it supports, the supporting organization is classified as a public charity (rather than as a private foundation). How does it work? A supporting organization is established as either a nonprofit corporation or a trust Supporting Organization Structure One DONOR(S) DONOR(S) The or more donors make contributions to the supporting organization, making them eligible to take an income tax charitable deduction

supporting organization makes financial contributions to, or supports the programmatic work of, one or more specified domestic public charities Contribution The donor may continue to have a limited role in the oversight of the supporting organization, including governance and investments SUPPORTING SUPPORTING ORGANIZATION ORGANIZATION Special Considerations: SPECIFIED SPECIFIED CHARITY CHARITY Financial or programmatic support The

SPECIFIED SPECIFIED CHARITY CHARITY rules that govern supporting organizations are complex The donor(s) and certain related parties (known as "disqualified persons") may not maintain control over the supporting organization The supporting organizations public charity status depends on the involvement of the public charities that are benefitted by the supporting organization. Thus, based on their governance structure, certain supporting organizations are subject to extensive administrative requirements, including minimum required distributions and additional reporting. For illustrative purposes only. Not legal or tax advice. 39 Comparison:

Supporting Organizations vs. Private Foundations Advantages of Supporting Organization Status over Private Foundation status Tax-free investment income: Because they are classified as public charities, supporting organizations do not pay tax on investment income, whereas private foundations pay a 1-2% excise tax on investment income. Increased income tax charitable deductions: Contributors to a supporting organization are entitled to greater income tax charitable deductions for such gifts than they would be for identical gifts to a private foundation. Decreased IRS oversight: Supporting organizations are not subject to the private foundation laws of the Internal Revenue Code, which impose strict rules covering self-dealing, timing of distributions, and types of investments. Failure to fully comply with these rules subjects a private foundation (and, in some cases, its donors or managers) to large excise taxes. For illustrative purposes only. Not legal or tax advice. 40 Comparison: Supporting Organizations vs. Private Foundations Disadvantages of Supporting Organization status relative to Private Foundation status Loss of donor control: The donor of a supporting organization cannot retain control over the entity and may only appoint a minority of the trustees or board of directors.

Loss of grant-making flexibility: A supporting organization is limited to supporting specific public charities that are identified by name or class under the governing instrument, and which cannot be changed at the will of either the donor or the trustee of the supporting organization. By contrast, a private foundation may be established with broad charitable purposes, permitting the trustees to change its grant recipients every year No compensation to donors or related parties: Disqualified persons related to the donor of a supporting organization may not receive any grant, loan, payment of compensation or similar payments, whereas a private foundation may provide reasonable compensation to such disqualified persons. For illustrative purposes only. Not legal or tax advice. 41 Comparison of Giving Vehicles Outright Donation to Charity Tax Implications Lifetime gift: Immediate income tax deduction Cash: up to 50% of AGI Securities: up to 30% of AGI No capital gains tax on properly structured gifts of appreciated securities

Bequest: Estate tax deduction for full market value of donation at death Donor Advised Fund Advantages Disadvantages 42 Immediate benefit to charity No front-end costs or expenses Keep assets until you donate, investing them as you choose Gift acceptance policies vary among

charities and may restrict type of donated property One-time gift vs.continuous grants Lifetime gift: Immediate income tax deduction Cash: up to 50% of AGI Securities: up to 30% of AGI No capital gains tax on properly structured gifts of appreciated securities Bequest: Estate tax deduction for full market value of donation at death Investment income is not subject to tax Contributions deductible in current year Ability to recommend investments and grants over time Flexible, convenient giving Minimum cost to establish Involvement of family members and friends Anonymity, if desired Private Foundation

Sponsoring charity has final say on grant recommendations and investment of fund assets Contributions deductible in current year Ability to make grants over time Full control over charitable distributions Involvement of family members and friends Anonymity, if desired Lifetime gift: Immediate income tax deduction Cash: up to 30% of AGI Securities: up to 20% of AGI No capital gains tax on

properly structured gifts of appreciated securities Bequest: Estate tax deduction for full market value of donation at death Subject to annual excise tax, quarterly estimated excise tax payments Annual tax returns Substantial set-up and ongoing expenses Complex self-dealing and other private foundation excise tax rules The Good Givers Legacy The Good Givers greatest gift is transmitting the value of giving $400 billion in taxable gifts were made in 2012 Compared to $25 billion per year from 2002 to 2009 Generational wealth transfer over the next 20 years will be unprecedented

Giving the gift of giving has never been more important Positioning as An heir to wisdom as well as wealth A steward responsible for passing the value of generosity on to the next generation A participant modeling generosity, as those who follow are more likely to do as we do than to do as we say 43 The Good-Givers Tax-Wise Legacy Giving with increased estate tax exclusion, portability and higher income tax rates 44 Consider a married couple living in Florida with $10 million in assets and two successful children who intend to make a $1 million charitable gift Alternatives

Testamentary charitable gift of $1million and $4.5 million to each child or $5 million to each child and children make gifts of $500,000 each Assume the children each have $500,000 ordinary income in 2015 and 2016 Estate tax parents $0 under both alternatives Income savings children $0 under testamentary gift alternative In excess of $150,000 for each child over two years A Closing Thought for the Good Giver (and their Counsel) The desire of power in excess caused the angels to fall; the desire of knowledge in excess caused man to fall; but in charity there is no excess; neither can angel nor man come in danger by it. Sir Francis Bacon 45 Insights From Northern Trust Experts Market Updates Helping clients stay abreast of the latest market challenges and opportunities MarketScape Video (Weekly) Perspective Publication (Monthly)

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Passport Mobile Download app for iPad at northerntrust.com/ wealthpath Disclosures LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. This presentation is for your private information and is intended for one-on-one use with current or prospective clients of Northern Trust. The information does not constitute investment advice or a recommendation to buy or sell any security, may not be suitable for all investors and is subject to change without notice. Securities products and brokerage services are sold by registered representatives of Northern Trust Securities, Inc. (member NASD, SIPC), a wholly owned subsidiary of Northern Trust Corporation. Not FDIC Insured | No Bank Guarantee | May Lose Value 47 47

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