A SIOP Foundation Charitable Gift Annuity:
An Attractive and Creative Option for Financial Planning
As the economy slows and people are looking for different
ways to invest or place their monies, a charitable gift annuity through the SIOP
Foundation may be an interesting, financially sound option. A charitable gift
annuity (CGA) allows an individual to transfer cash, securities, or other
assetsin exchange for a contract for payment of a fixed rate of income to one
or two persons for the remainder of their lives (Marks, 2002). The age of the
individual determines the rate paid by the overseeing institution/foundation
(see Table 1). In addition, a CGA allows annuitants to take a significant
contribution deduction (ranging from 15% to 49% depending on the value of the
assets), which can be taken the year the contract is funded.
Below are several scenarios illustrating how a CGA can workprovided by The
Dayton Foundation newsletter, Futures. The SIOP Foundation is a fund of
The Toledo Community Foundation.
Example One
Joan and David had been supplementing her mothers income. They have a
substantial income themselves, and sizable income taxes. A CGA purchased for
Joans mother allowed them to have distributions made directly to the
mother, without increasing their own income or their taxes. In the mothers
case her exemption and standard deduction may offset her total income,
resulting in no income tax to her. If her income is more than the exemption
and deductions, the income will be taxed at a far lower rate than Joan and
Davids.
Example Two
A few years ago, John, 47, and wife Mary, 46, invested $420,000 in a
commercial annuity that grew to a value of $600,000. They considered gifting
the annuity directly to their church. They did not, however, want to have to
report the $180,000 accumulated income from the annuity. They also wished to
receive income from the asset at a later time.
Their attorney referred them to The Dayton Foundation. They cashed in their
annuity and transferred the net cash received to The Dayton Foundation in
exchange for a deferred CGA. Quarterly annuity payments at an annual rate of
11.5% are scheduled to start 12 years later, following Johns expected
retirement, and will continue as long as both or either of them is alive.
Sixteen percent of the income received will be nontaxable for the 30 years of
their normal life expectancy.
Given that John and Marys annual income from other sources was $450,000,
the income on an annuity increased their reported income to $630,000. Their
deferred CGA contribution of $272,000, however, offset the $180,000 commercial
annuity income, as well as $92,000 of their regular income. In summary, John
and Mary receive both tax and income benefits from their deferred CGA, and
their church will receive income from an endowed fund at The Dayton Foundation
after John and Mary pass away.
Example Three
Charles and Treva were married for 35 years before being divorced. Treva
received a substantial property settlement and was granted $5,000 alimony per
month. Charles has made the payments each month, but Treva has been finding
fault with the timing of the payments and several other matters. Charles would
like to find a way for monthly payments to go to Treva directly and get him
out of the middle.
He has a security that he inherited from his father several years ago. The
present value is $1 million. His tax basis is $350,000. Charles transferred
the stock to The Dayton Foundation in exchange for an immediate CGA. The
payment rate, based upon his age, is $60,000 per year. Charles has requested
that the Foundation make the monthly payments directly to Treva. He has to
report the income from the annuity on his personal income tax return, but part
of the income is tax-free, part is taxed as a capital gain, and the balance is
ordinary income. He received a substantial contribution deduction in the year
the contract was funded. He also receives a deduction on his tax return for
the $60,000 alimony payments to Treva. Furthermore, he has the satisfaction of
knowing that what remains after he passes away will go the fund charities he
cares about.
As illustrated above, a charitable gift annuity is truly a creative and
attractive financial option for many individuals. This article was meant to
provide only a brief introduction to the benefits of a CGA. Please contact Lee
Hakel at the SIOP Administrative Office for more details.
Table 1.
Rate Examples through June 30, 2002
____________________________________________________________________
Single
Two
Annuitant
Annuitants
Age
Rate
Ages
Rate
____________________________________________________________________
| 60 |
6.4% |
60/62 |
6.2% |
|
65 |
6.7% |
65/67 |
6.4% |
| 70 |
7.2% |
70/72 |
6.7% |
| 75 |
7.9% |
75/77 |
7.1% |
| 80 |
8.9% |
80/82 |
7.8% |
| 85 |
10.4% |
85/87 |
8.9% |
| 90 |
12.0% |
90/92 |
10.5% |
____________________________________________________________________
Note: Rates provided by The Dayton Foundation
Reference
Marks, W. H. (2002, Winter).
Creative Ways to Use Charitable Gift Annuities. Futures. The Dayton
Foundation.
October 2002 Table
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