Charitable Gift Annuities Offer Win-Win Solutions
By: By Michael T. Palermo, JD, CFP Source: Date Posted:
Tom (seventy-five) and Edna (seventy-two) Bolton are enjoying a comfortable retirement and want a financial plan to ensure they can do so for many more years.
The Boltons' financial adviser is concerned that a large portion of their savings is invested in the stock of a single company. The stock price has risen steadily since they bought it, but that is no guarantee of the future. Tom and Edna know they should diversify their investments but have been putting it off, reluctant to take a capital gains tax hit on the appreciated value of any shares they sell. Yet they realize that, like it or not, in about a year they’ll need to start drawing upon the stock to provide income.
Their adviser happens to recall the Boltons' lifelong love of animals and suggests a plan that appeals to them: the Boltons transfer a portion of their stock to a foundation that protects wildlife, and which is qualified under section 501(c)(3) of the tax code. In return, they receive a charitable gift annuity that will make quarterly payments at a 6.2 percent annual rate until the second of them dies.
When both of them are gone, the charity will benefit from their financial wisdom and generosity—plus, the transferred stock will not be included in the Bolton’s federal taxable estates. Meanwhile, the capital gains tax on the appreciated value of their shares at the time of the donation will be spread over the life of the annuity, greatly reducing its impact. A portion of each annuity payment will be tax free—a return of their original investment. The Boltons can also take a substantial income tax deduction this year if they itemize deductions. (Note that while this example is believed to be realistic, the actual figures for any individuals will depend on their ages and the annuity rates in effect at the time of the property transfer.)
From “AARP Crash Course in Estate Planning: The Essential Guide to Wills, Trusts and Your Personal Legacy,” by Michael T. Palermo, JD, CFP, 2005, pp. 191-192.
The Boltons' financial adviser is concerned that a large portion of their savings is invested in the stock of a single company. The stock price has risen steadily since they bought it, but that is no guarantee of the future. Tom and Edna know they should diversify their investments but have been putting it off, reluctant to take a capital gains tax hit on the appreciated value of any shares they sell. Yet they realize that, like it or not, in about a year they’ll need to start drawing upon the stock to provide income.
Their adviser happens to recall the Boltons' lifelong love of animals and suggests a plan that appeals to them: the Boltons transfer a portion of their stock to a foundation that protects wildlife, and which is qualified under section 501(c)(3) of the tax code. In return, they receive a charitable gift annuity that will make quarterly payments at a 6.2 percent annual rate until the second of them dies.
When both of them are gone, the charity will benefit from their financial wisdom and generosity—plus, the transferred stock will not be included in the Bolton’s federal taxable estates. Meanwhile, the capital gains tax on the appreciated value of their shares at the time of the donation will be spread over the life of the annuity, greatly reducing its impact. A portion of each annuity payment will be tax free—a return of their original investment. The Boltons can also take a substantial income tax deduction this year if they itemize deductions. (Note that while this example is believed to be realistic, the actual figures for any individuals will depend on their ages and the annuity rates in effect at the time of the property transfer.)
From “AARP Crash Course in Estate Planning: The Essential Guide to Wills, Trusts and Your Personal Legacy,” by Michael T. Palermo, JD, CFP, 2005, pp. 191-192.
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