John R. Bullis: Another look at charitable gift annuities

Suppose you own shares of a publicly traded stock or an investment in a mutual fund.

If your original cost was $10,000 and the current value after holding it many years is $50,000, if you sell it there will be a $40,000 gain. That would be long-term capital gain, and if you have enough other income to be in the 25 percent tax rate, it would probably be taxed at 15 percent. That could be about $6,000 of income tax if you sell it ($40,000 multiplied by 15 percent).

Further, suppose you have a favorite charity that you contribute to and you plan to contribute to that charity in the future. If instead of selling the investment and paying the income tax on the gain, you could consider gifting the investment to the charity in exchange for a lifetime annuity contract, a Charitable Gift Annuity.

The annuity will usually pay you quarterly or once a year, whatever you choose.

If you, at age 70, choose an annuity that pays only to you, the American Council on Gift Annuities suggests a rate of 5.1 percent per year. That is about $2,550 per year.

If you, at age 70, choose an annuity that pays you and after you die pays to the person you designate (spouse, sibling, friend) who is age 72, the suggested rate is 4.7 percent per year.

That is about $2,350 to you as long as you live and the same amount to the designated survivor as long as they live.

A portion of each payment is not taxable, representing your investment coming back. That is until you have recovered tax free the full $50,000 less the charitable contribution.

Also, a portion of your investment is an immediate charitable contribution to claim on your Individual Income Tax Return, Schedule A Itemized Deductions.

Note that at your death in a Single Life Annuity or at the second death in a Joint and Survivor Annuity, there is nothing left to give to family or others. Instead, you have a guaranteed income.

There are many choices to consider (Single or Joint and Survivor) and which charity. Some charities pay more than others. This type of annuity is a contract. You want a charity that will be around longer than you will be. Maybe you could try the Internet to get more information. Or you could meet with an adviser and look at the options together.

Many large charities will consider accepting certain real estate parcels in exchange for the Annuity Contract, but they prefer it be debt free (paid for).

In this time of low interest rates, this can give a higher return than a savings account. Since it is expected interest rates will increase or rise in the future, you might consider only doing a small charitable annuity now with plans to do another one later. The rate will increase with your older age and with the higher regular interest rates.

Did you hear? “Cheerfulness is contagious, but don’t wait to catch it from others. Be a carrier,” by Author unknown.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.


Use the comment form below to begin a discussion about this content.

Sign in to comment