You probably already know two basic facts about wealth management: 1) you can deduct certain amounts of charitable giving that you make from your taxable income; and 2) that annuities are a unique investment vehicle by which you can receive a fixed amount of income for as long as you live, regardless of how much money is put in, meaning that if you live a very long time, your return could far exceed your investment. But what you may not know is that you can combine the beneficial effects of a charitable tax deduction and a fixed annuity income through the use of a charitable gift annuity, all while supporting a charitable organization of your choosing.
Charitable Gift Annuities Explained
A charitable gift annuity is in some ways like any other annuity, in that you hand over a significant amount of assets (the minimum investment for many annuities is $5,000 or $10,000) to an organization selling you the annuity, but instead of buying the annuity from an insurance company, you are buying it from a charitable organization like the Salvation Army or your college. The assets you hand over will stay with the organization, and the organization will pay you a fixed amount of your investment, often between 4% and 7%, for the rest of your life. The younger you are when you invest in the annuity, the lower the payout will generally be, as you will have more years to collect income.
What makes a charitable gift annuity different is that the organization will generally keep at least 10% of the annuity immediately for itself, and so your income percentage will be based on the other 90% of the assets. And when you die, the organization will keep whatever is left from the initial investment that has not been paid out.
Your Charitable Gift Annuity Tax Deduction
When you make your initial purchase of the charitable gift annuity, you will be able to take as an immediate deduction whatever portion of the purchase is kept by the organization and not included in the annuity. Thus, if you transfer $300,000 worth of appreciated stock that you bought for $100,000, and the organization keeps $30,000 while providing you with a $270,000 annuity that pays 5%, then you may take the entire $30,000 as an immediate tax deduction. Furthermore, even though $20,000 of that $30,000 was due to appreciation, you will not have to pay any capital gains tax on the $30,000 and thus may deduct it in its entirety.
Your Charitable Gift Annuity Income
As you receive your income on the annuity over the course of your life, you will pay the capital gains tax that you would have owed on the appreciated initial purchase (the $200,000 increase over the $100,000 purchase of stock, minus the $30,000 retained by the organization), but that will be spaced out over all the years it takes to pay back your initial investment. The remainder will not be taxed for the time it takes you to recoup your initial investment.
Support a Charitable Organization, Not a Financial Institution
Perhaps the most compelling aspect for why a charitable gift annuity may be a better choice than a traditional gift annuity is that, with a traditional annuity, the insurance company is making a bet that it will make money off your not living as long as it will take to pay you back what you invested. If you do live longer, then you get the benefit of the perpetual income, but if you do not, then the insurance company reaps the benefit. With a charitable gift annuity, you still get the same benefit of a perpetual income for as long as you live, but if you do not live for an extended period of time, then it is your favorite charity that gets the benefit of your investment.
Contact a Pasadena Estate Planning Attorney Today
Estate planning and probate attorney Christopher B. Johnson, located in Pasadena, California, has years of experience in all aspects of estate planning, and works with clients from all walks of life to create wills that reflect their needs and work towards bright futures. To request an immediate consultation regarding setting up a charitable gift annuity or any other aspect of estate planning, contact him today at (877) 755-9178.