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Gift and Charitable Annuities


Question:  I am 69 and my wife is 65.  Why would we want to consider a gift annuity?  We have some stock, but is not producing much dividend income.


Answer:  A gift annuity would provide you with an income for the rest of your lives and at the same time, provide you with tax savings.  Then after you both pass away, your annuity can help the charities of your choice.


Question:  Tell me about the income for the rest of our lives.


Answer:  You could be paid an annual rate of about 6 % of the total amount of the gift each year, depending on the applicable Federal rates in effect at the time you set it up, and that amount can be paid monthly, quarterly, twice per year or once per year, but can never be changed or taken away from you and your wife.  The amount is guaranteed and does not change if the stock market or national economy goes down.  If you want to do additional gift annuities as you get older, you can; and the older you are, the higher the payout percentage can be.  For example, if you were to do another gift annuity in ten years, you could be paid about 6¾% each year, depending on the applicable rates.


Question:  Those are pretty attractive guaranteed rates right now and about four times as much as the dividends we receive, but you mentioned additional tax benefits.  Tell me about those.


Answer:   You will have income tax savings, and you may well also enjoy estate tax savings.  The income tax savings come in two ways.  First, you can save income taxes because you get a charitable income tax deduction this year of about 20% of the total market value of the stock you contribute to the annuity for setting it up, and secondly, some of the income you receive will be tax free, some will be taxed at the lower capital gains rate and some will be taxed as ordinary income, like all of the dividends you now receive.  In addition, your loved ones will enjoy estate tax savings if you have a taxable estate, because the amount you put in to the annuity is no longer included your taxable estate at all.


Question:   I am interested in leaving a legacy gift for the charity of my choice, but I still need to receive an income from my gift.  I have read about both gift annuities and charitable trusts.  Which would you recommend for me?


Answer:  That is a great question! Gift annuities and charitable trusts are both powerful tools.  They have some similarities, but also have significant differences as well.  Which one would be better for you would depend upon your particular situation.  Let’s look at the main similarities and differences.



(1) Both gift annuities and charitable trusts would give a gift for the charity of your choice at your death while providing you with income for the rest of your life. 

(2) Both offer you the ability to receive a charitable tax deduction for part of the value that you contribute. 

(3) Both allow you to give appreciated assets and have them sold without triggering any capital gains tax. 

(4) A contribution of an asset to either will remove that asset from your taxable estate as well as usually remove the asset from the reach of creditors.

(5) Unfortunately, under current law, neither can be used to take a tax-deferred retirement account, such as an IRA or a 401(k), and give it to charity without any income tax. 



(1) A gift annuity is managed by the charity to which it is given, while a charitable trust is managed by its trustee.  Therefore, with a charitable trust, if you are trustee, you would still have to concern yourself with the management of the asset. 

(2) A charitable trust is more complicated and expensive to set up, so it probably would only make sense for a larger gift, say above $200,000 in value. 

(3) A charitable trust has annual maintenance charges paid by the trust, where a gift annuity may have none. 

(4)  A charitable trust will usually allow its grantor a larger payout each year in percentage terms than will a gift annuity, but that larger payout would be more likely to result in shrinking income over the years. 

(5)  All other factors being equal, a gift annuity will usually generate a smaller charitable deduction than a charitable trust, but will usually result in a slightly lower tax on income distributed to you, because some of the annuity income paid to you is considered tax-free, and some is considered capital gain.


Conclusion:   Because results in your case will vary, you may benefit from contacting Estate Planning Attorney Rodney Piercey to have him run computer generated forecasts showing what your actual results for each approach would look like, so that you could compare these two very exciting tools and decide which one is better for you.  Page an attorney now by clicking here.




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