Case Study: Utilizing Gift Annuities to Help Older Donors Provide for Future Needs
It was Will Rogers who once said, “I’m not as interested in return on my principal as I
am return of my principal. In this case study, Mr. Braun, an 82-year-old widower who is
worried about market volatility, learns how he can transfer appreciated stock from his
portfolio to a charity in exchange for a charitable gift annuity that will provide him with
a substantial income tax deduction and fixed annual payments that will provide for his
future health care and other needs for the balance of his life. In addition, Mr. Braun will
make a meaningful contribution to his community.
Mr. Braun is a widower age 82. He was an early investor in a very successful company.
His stock has been worth as much as $700,000 and is now worth $500,000. It pays very
low dividends, currently less than 1%. He vividly remembers a number of past market
downturns and is concerned that current market conditions may result in further losses over time that he is not prepared to sustain. He does not believe his current position will fare well in a market correction and would like to sell the stock and put the proceeds in cash and debt instruments. He would like more income as he anticipates very heavy cash outlays for health care as he grows older.
Mr. Braun was born in 1932, and he remembers hard economic times when he was
growing up during the Depression. Even though he knows he might be able to earn
more through more aggressive investments, he does not believe the markets will
continue to perform in the same manner as they have over the past twenty years, and he
is not comfortable with what he considers to be a relatively high level of risk.
Mr. Braun’s basis in the stock is just $150,000. If sold, he would owe $52,500 in capital
gains taxes on a sale of the stock, leaving him just $447,500 to reinvest for income in
the range of 4% per year. He is in a combined 35% state and local tax bracket, so he
would pay some $6,265 in income taxes on income of $17,900 and be left with $11,635
in spendable income. He does not like this scenario.
Mr. Braun receives information from one of his favorite charities who points out that
for a gift of $500,000 he would receive payments of 7.2%, or $36,000 per year from a
charitable gift annuity.
Mr. Braun is intrigued to learn that he would be entitled to an income tax deduction
of some $263,678 in the year of his gift. His accountant tells him that he could not
fully utilize this benefit immediately due to the 30% limitation of AGI rule for gifts of
appreciated property, but that he may carryover the deduction for an additional five
years. Mr. Braun is still very pleased because he knows that in addition to an increased
life income, he has made a significant charitable gift.
He and his accountant are much more interested in the way in which his gift annuity
payments would be taxed. Gift annuity payments where gift annuities are funded with
appreciated property are taxed very favorably. A portion of each payment is taxed as
ordinary income. Over the period of time equal to the life expectancy of the payment
recipient in the case of a single donor, the portion of the payment that is considered
return of the donor’s “investment in the contract” is partially taxed as capital gain income
and the remainder is received free of tax. The capital gain attributed to the gift portion of
the annuity is never taxed.
Mr. Braun learned that during this time of low interest rates and equity market volatility,
a higher income stream and lower capital gains taxes combine to make gift annuities
highly attractive to certain donors. Perhaps charitable gift annuities may also be of
interest to you. Feel free to contact me at 614-338-2365 for more information.
Jackie Jacobs is the Chief Executive Officer of the Columbus Jewish Foundation, the Central Ohio
Jackie Jacobs is the Chief Executive Officer of the Columbus Jewish Foundation, the Central Ohio Jewish community’s planned giving and endowment headquarters.