From the November 2002 issue of Investment Advisor • Subscribe!

November 1, 2002

An Annuity That Keeps Giving

The Charitable Gift Annuity is increasingly popular these days. Here's how it works. Using the example of a donor with $100,000 of capital gains, advisor Ray Ferrara of ProVise Management in Clearwater, Florida, explains how two annuities differ, starting with an insurance-based annuity. Assuming a zero tax basis (stock held since the New York Jets last won the Super Bowl, in 1969), $20,000 in tax would be owed, leaving the donor with $80,000 to invest. In this scenario, a 70-year-old who bought a commercial annuity would probably end up with a payout of about $6,400 a year for the rest of his life. At death, whether he lived one month or many, the remaining funds would go to the insurance company.

Take the same $100,000 of property with zero basis and set up a charitable gift annuity, and the results differ dramatically. There would be no capital gains tax, and the donor would receive a tax deduction for the calculated residual value of the annuity. This would leave him with $100,000 to invest, instead of $80,000. At present this could provide the investor with about $7,300 of annual income. At death, unlike the insurance annuity, with a CGA the remainder goes to charity. As Ferrara notes, taxwise this approach works only with appreciated property. From a pure charitable standpoint, both cash and appreciated property work well.--Cort Smith

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