This is an educational illustration and does not represent legal or tax advice. The value and cost numbers have purposely been selected as round numbers to allow for personal interpretation. The value used is not a minimum, maximum or suggested amount. Please consult your legal and tax advisors about your specific situation.
Alan and Connie Richards, 74 and 76 years old, have watched interest rates fluctuate for years.
They have not been satisfied with their money market fund currently earning 1.5%. They have looked at ways they could get back to the 5-6% rate of return they were used to. However, they do not want to increase their market risk by investing in securities that would fluctuate in value.
For a number of years they have been actively involved with several local charities. In addition to supporting them financially, Connie and Alan have enjoyed volunteering their time and getting to really know the staff and having a deeper understanding of their mission and how they change lives. One day while helping out at her favorite charity, Connie had an opportunity to drop in on the Development Officer and asked her if there was anything that they could do that could help the charity and provide Alan and Connie with some additional income. Connie excitedly brought back a brochure on Charitable Gift Annuities to show Alan.
The Development Officer explained that a Charitable Gift Annuity is a contract between the Richards and the charity. The charity will promise to pay Connie and Alan a fixed rate of return for both of their lives. In this case, the Richards were thinking of a $100,000 annuity. Based on the market conditions and other factors, such as their age, the rate* suggested by the American Council on Gift Annuities (ACGA) is 5.0%. This means that the charity promises and guarantees to pay them $5,000 a year, regardless of changes in interest rates, for the rest of their lives. Because they are not using appreciated assets to fund the gift annuity, part of their payment will be considered tax-free return of principal for the Richards.
Charitable Gift Annuity
Equivalent Rate of Return:
Current year Tax Savings:
Based on current calculations*, $3,855.00 of the $5,000 annual income will be free from income tax for 16.4 years. Also, part of their $100,000 is a charitable gift and therefore the Richards get a charitable tax deduction in the current year of $36,814.00. That deduction could save Connie and Alan $12,885 this year (based on their 35% federal tax bracket). These numbers do not consider any state taxes that may be applicable. The tax deduction and tax-free income mean the Richards' effective annuity rate (what they would have to earn to equal it with fully taxable income) is 8.14%.
Connie and Alan are happy with the increased income and the tax savings, and they are really excited about what their gift will mean to their charity.
Example assumes a
2.0 percent applicable federal rate (AFR) and a federal income tax bracket
of 35%. State tax liability is not considered. The IRS allows the AFR
from the current or one of the two previous months to be used. For a gift
annuity, the lower the AFR, the higher the tax free portion of the annuity
payments. A higher AFR increases the charitable tax deduction.
* Based on the current ACGA suggested rates effective 1/1/12 unchanged as of April 24, 2017.
** Adjusted upward because the tax-free portion of $3,885 makes the $5,000 annuity equivalent to $7,091.92 of taxable income for a beneficiary in the 35% income tax bracket and the $36,814 charitable tax deduction reduces the cost of the gift by $12,885.