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Column 24

Boulder Daily Camera

Enid Ablowitz

Making Money Matter

Planned Giving: Charitable Gift Annuities

Have you noticed the proliferation of seminars about planned giving? Many organizations are sponsoring informational programs to help teach potential donors about tax-wise ways of giving. That’s great, but I have a confession to make.

I have a strong bias against marketing charitable gifts as a tax technique, unless it is clearly in the context of charitable intent. As donors, we should most certainly be tax-wise in our giving, but the purposes for which we give reveal who we are as people. The fact that the IRS provides an incentive by leveraging our gifts makes it possible for us to be even more generous.

Having said that, the seminars often talk about gifts that provide a life income. This can be a very attractive way to make a gift. The asset is transferred to the non-profit, but the donor retains the income. Variations on this technique include naming others as income recipients either directly or as secondary beneficiaries.

A very popular life-income instrument is the charitable gift annuity. (Another is the charitable remainder trust, the subject of another column.) While I believe it is critically important forur you to begin with y philanthropic agenda, you may be able to free-up unproductive assets that could create a win-win for you and for the organization you want to support. The concept is simple, although the details can be technical.

Suppose you have a stock in your portfolio that you’ve owned for years, that has a very low cost basis, and that is paying you a 1% or 2% dividend. You’ve thought about cashing in the stock to get a higher yield, but then you’d have to pay the capital gain tax. You have been making annual gifts to a favorite organization and have even considered naming the organization in your will.

If you were to enter into a contract with the organization for a charitable gift annuity (CGA), you could transfer the stock, probably significantly increase your income from that asset and make your gift now, knowing that the organization will ultimately get the benefit of appreciation over time. You might even be able to make a larger annual gift with your increased income.

Here’s an example (with lots of assumptions) for purposes of demonstration. Suppose you are age 70. You have 1000 shares of XYZ stock with a cost basis of $2000 that now has a market value of $20,000. It generates a dividend income of $200 year. If you were to sell it, you might pay a capital gains tax of $4000. Investing the $16,000 in a CD you might be able to get 3% per year or $480.

Now suppose that instead of selling and reinvesting, you were to gift the stock in return for an annuity. The charity promises to pay you a return of, say, 6.5% (based on actuarial tables tied to your age and the recommendations of the American Council on Gift Annuities rate schedule.) The annuity percentage is applied to the full market value of the gift ($20,000) so your income would then be $1300.

Of course, nothing is quite that simple. The amount remaining for the charity at the death of the annuitant(s) must be at least 50% of the original contribution. The annuitant’s taxable income is calculated in part by the nature of the income. It could be ordinary income, capital gains, or return of principal, which may mean that a portion of the income is tax free, depending on the annuitant’s age. The donor gets a charitable income tax deduction that is based on a discounted value of the charitable gift, (discounted because of the life-income component.) If you are considering the purchase of a charitable gift annuity, please talk to your financial and legal advisors. This column only provides basic information, not legal or accounting advice!

It is important to remember that the charitable gift annuity is an agreement with the charity to pay you (or your designee) a fixed income for life in return for making your gift. It is a contract (not a trust) and the rate and frequency of payments are determined at the time you make your gift. The income payments are dependent on the charity’s ability to honor the contract, so you want to be sure you are dealing with a reputable organization.

Planned giving is what we all do when we engage in more than checkbook philanthropy.

But planning your gift is, first and foremost, about giving. The planning is an important component, but be sure that the concepts and vehicles you use are appropriate to your financial goals and needs.

Enid Ablowitz is the Vice President for Advancement at the University of Colorado Foundation, Inc., and Director of Advancement for the Coleman Institute for Cognitive Disabilities. She has been working as a donor advocate for more than a dozen years. Her book, Making Money Matter: Eight Steps to Thoughtful Giving was recently published. For information on how to obtain a copy, contact her at enidablowitz@hotmail.com.

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