Philanthropy Focus: When Giving Really Is Receiving

More On Tax Planning

from The Advisor's Professional Library
  • Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
  • Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.

Charitable giving strategies are as varied as estate planning strategies. Selection of the right charitable giving strategy depends on many of the same factors that go into an estate plan:

(1)    the client’s net worth

(2)    the number of causes that the client feels strongly about

(3)    the client’s general giving strategy

(4)    the client’s liquidity

(5)    the client’s retirement income needs. 

For asset-rich clients who want or need supplemental retirement income but who are willing to give up their access to principal, a charitable gift annuity can be the right tool for planned giving.

A charitable gift annuity is a contract between a charity and a donor under which the donor transfers property to the charity in return for a lifetime stream of income payments. Payments may be structured as a deferred or immediate annuity. The donor has a right to take an immediate charitable deduction for the gift, although the deduction will be less than the full amount of the gift. The charity retains the gifted assets when the donor dies, regardless of how many payments the donor has received from the annuity.

The amount of the immediate charitable deduction allowed for a contribution to a charitable annuity is equal to the value of the contribution less the present value of the income stream received by the annuitant. A portion of each payment received by the donor will be received as tax-free recovery of  basis in the stock transferred. The amount of tax-free recovery will be determined by application of the Section 72 exclusion ratio generally applicable to annuities.

The issuance of a gift annuity in exchange for appreciated property is treated as a

bargain sale. As a result, the donor will realize long-term capital gain on the transaction equal to the amount by which the value of the annuity received exceeds a pro-rated portion of the basis of the stock transferred. Assuming that the annuity is not assignable, the annuitant is permitted to spread this capital gain over a period of time.

The Risk for Grantors
Charitable gift annuities are a great tool in principle, but can carry risk for grantors. If the charitable institution files for bankruptcy, annuitants can lose their assets and income stream. Charitable gift annuities hit the news in 2009 when the National Heritage Foundation filed for Chapter 11 bankruptcy protection. Eighteen of the charity’s twenty largest creditors were annuitants holding charitable annuities with National Heritage. Annuitants were owed as much as $165,000 a year—payments that were suspended during the bankruptcy. The cessation of payments was devastating for families counting on the regular income stream.

Despite the slight risk associated with charitable annuities, they are a powerful tool for your clients who have supplemental income needs and assets to spare. Charitable annuities are a unique, low-cost giving mechanism that can satisfy your clients’ charitable objectives while providing the income they need in retirement.

See the following summary table for a comparison of charitable annuities and other giving techniques:


 

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See also The Law Professor's blog at AdvisorFYI.

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