Charitable Gift Annuity Example
EXAMPLE OF A
CHARITABLE GIFT ANNUITY
This is an educational illustration and does not represent legal or tax advice. The value and cost numbers have purposely been selected as round numbers to allow for personal interpretation. The value used is not a minimum, maximum or suggested amount. Please consult your legal and tax advisors about your specific situation.
Alan and Connie Richards, both 70 years old, have watched interest rates fluctuate for years.
They have not been satisfied with their money market fund earning 4.00%. They have looked at ways they could get back to the 6-7% rate of return they were used to. However, they do not want to increase their market risk by investing in securities that would fluctuate in value.
| Money Market | |
|---|---|
Value |
$100,000 |
Interest Rate |
4% |
Annual Return |
$4,000 |
For a number of years they have been actively involved with several local charities. In addition to supporting them financially, Connie and Alan have enjoyed volunteering their time and getting to really know the staff and having a deeper understanding of their mission and how they change lives. One charity in particular provides services that resonates with Connie. One day while helping out, Connie had an opportunity to drop in on the development officer and asked her if there was anything that they could do that could help the charity and provide Alan and Connie with some income. Connie excitedly brought back a brochure on Charitable Gift Annuities to show Alan.
The Development Officer explained that a Charitable Gift Annuity is a contract between the Richards and the charity. The charity will promise to pay Connie and Alan a fixed rate of return for both of their lives. In this case, the Richards were thinking of a $100,000 annuity. Based on the market conditions and other factors, such as their age, the rate* suggested by the American Council on Gift Annuities (ACGA) is 5.9%. This means that the charity promises and guarantees to pay $5,900 a year, regardless of changes in interest rates, to the Richards for the rest of their lives. Because they are not using appreciated assets to fund the gift annuity, part of their payment will be considered tax-free return of principal for the Richards.
| Charitable Gift Annuity | |
|---|---|
Amount |
$100,000 |
Annual Income |
$5,900 |
Effective Annual Rate |
7.59% |
Current Year Tax Savings |
$12,484 |
Based on current calculations, $3,139.00 of the $5,900 annual income will be free from tax. This means the Richards' effective annuity rate (what they would have to earn to equal it with a commercial annuity that returns fully taxable income) is 7.59%. Also, part of their $100,000 is a charitable gift and therefore the Richards get a charitable tax deduction in the current year of $29,179.35. That deduction will save Connie and Alan $12,484 (based on their 35% federal tax bracket). These numbers are not considering any state taxes that may be applicable.
Based on current assumptions, the Richards have a life expectancy of 20 years. The annuity will pay them approximately $118,000 over that time frame in addition to the tax benefits described above. It is estimated that their charity will receive $145,095 based on the above assumptions. Connie and Alan are happy with the increased income and the tax savings, and they are really excited about what their gift will mean to their charity.
Example assumes a 5.8 percent applicable federal rate.
* Based on the ACGA suggested rates effective 7/1/03.
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Please note, individual financial circumstances will vary. The information on this site does not constitute legal or tax advice. Donor stories and photographs are for purposes of illustration only. As with all tax and estate planning, please consult your attorney or estate specialist. All material is copyrighted and is for viewing purposes only. Use of this site signifies your agreement with the terms of use. The content in this Planned Giving section has been developed with CSUN by Future Focus.
