As estate planners, we often have conversations with clients who want to make a substantial monetary contribution to charity yet they are reluctant to do so. They have the motivation to give, they believe in the good works of the charitable program, and they may already be donating their time and talent. Yet they hesitate because a substantial charitable gift might have an adverse impact on their current income or their future income stream. That is an important justification and it can be overcome. One technique that can help you make a significant charitable charitable gift without giving up the income you or a loved one needs is the charitable gift annuity.
The charitable gift annuity is essentially a bargain sale to a qualified charity in return for a fixed annuity payment to be made to one or more individuals for life. You can fund it now by transferring cash, appreciated securities or other assets. You can decide who gets the annuity income stream. You can set it up to start now or be postponed to a future starting date. In these ways, the charitable gift annuity acts just like a commercially available immediate annuity or deferred annuity.
The big difference is that when you fund your charitable gift annuity, you get to claim a deduction for a gift to charity. The charity doesn't necessarily have to wait until you pass away to access the funds. Charitable gift annuities are usually less generous than commercial annuities. They pay interest at a lower rate. This key difference is what creates the income tax charitable tax deduction. Your charitable income tax deduction is based on the difference between the value of the charitable annuity and the value of the asset you contributed to the qualified charity.
Occasionally someone will donate cash, start an immediate income stream for himself and that's the end of the story. Frequently, the income stream is shared with another individual and possible gift tax consequences need to be considered. More frequently, the charitable gift annuity is funded with substantially appreciated assets, such as a low income stocks (think no- or low-dividend paying stocks) or raw land, and long-term capital gain taxes will be triggered. Fortunately, because the annuity payments are spread out over time, the tax on the gain will also be spread out over time and because each annuity payment is part return of capital and part income, only a portion of the payment is subject to income or long-term capital gain tax. So, you can see that while the concept of the charitable gift annuity is simple and easy to understand, the tax planning aspect can be a little more challenging.
Before you implement this or any other charitable giving technique, reach out to your attorney, financial planner or tax advisor for personalized advice about the technique and alternative techniques, and their advantages and disadvantages, including tax benefits and other tax considerations, in view of your personal situation.
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