Estate Planner Nov-Dec 2001
Today’s financial market may have you worried about the future. Although you can make fast money by investing in the unsteady stock market, you can lose it just as quickly. You may also wish to share a portion of your earnings with a favorite charity, museum, school or religious organization but are concerned about minimizing the tax impact. So how can you maintain a consistent income flow and still protect capital gains from the IRS? One of the most accessible and least complicated ways is through a charitable gift annuity.
A charitable gift annuity allows you to reinvest your appreciated property, avoid a current capital gains tax and do a good deed all at once. Here’s a closer look at how a charitable gift annuity can benefit your cash flow and your community.
Benefits of a Charitable Gift Annuity
Jon’s stock in CouponSaver.com has skyrocketed and he will face a large capital gains tax if he sells the stock. With dot-coms as unstable as they have been, he’s afraid to continue investing in the same company, yet doesn’t like the idea of selling his stock and handing over 20% of his gain to the IRS.
At the same time, Jon wants to prepare for his future. He has $500,000 worth of the stock that he wants to reinvest to provide additional cash flow. Jon’s advisor suggests creating a charitable gift annuity. Jon decides to support his local nature society. The
society and Jon agree on the terms and payout provisions of the charitable gift annuity agreement.
How a Charitable Gift Annuity Works
Jon’s charitable gift annuity agreement provides that, in exchange for the stock worth $500,000, the society will pay him an annuity of $33,000 a year for the remainder of his life. By purchasing an annuity, Jon is able to defer the capital gains when the society sells the stock and recognize a portion of the gain, but only as he receives annual payments. Jon reports his capital gain over his life expectancy. Also, a charitable gift annuity defines a portion of each payment Jon receives as a tax-free return of principal.
In addition, the tax law allows Jon to claim an income tax charitable deduction in the year he sets up the charitable gift annuity. Jon’s current tax deduction is based on the present value of the portion of the gift that will pass to the charity and is limited to 30% of his adjusted gross income. Jon can carry forward any excess deduction for five years.
Several factors determine the actual amount of the annuity Jon receives from the society:
- Jon’s age at the time of the gift,
- The rate of return the charity believes it will earn,
- The gift amount, and
- Whether the payments will begin immediately or be deferred to a later time.
Jon may want to consider how the gift annuity may affect what he leaves to his wife after his death. But there is an easy way to handle this: Jon may name his wife – or a child or another person – as the successor beneficiary. The number and age of any additional beneficiaries will be taken into account when calculating the annuity payout and the gift’s value. Jon could also increase his life insurance or set up the annuity so that a portion of the payout pays his life insurance premiums, ensuring the welfare
of his beneficiaries.
A Win-Win Situation
A charitable gift annuity carries many advantages. Financially, it spares you harsh taxation from immediate capital gains while ensuring retirement funds. Unlike many retirement savings plans – such as 401(k)s and IRAs – there are no limits on how much you can contribute to a gift annuity.
The plans are relatively easy to set up and allow for tremendous flexibility. And, philanthropically, a gift annuity benefits your community. Whether it is a charity or an educational or religious institution, charitable gift annuities protect the investor while ultimately giving to those in need.