Strategies in Philanthropy: An informational series on how you can make a difference

Have You Considered… A Charitable Gift Annuity

A charitable gift annuity is a contract between a donor and a charity. The donor makes a gift of cash or low-appreciated assets. In return, the charity agrees to pay the donor an income that is equal to a percentage of the value of the gift. The donor will receive a federal income tax deduction equal to the present value of the gift (the value of the gift in today’s dollars that the charity may expect to receive once the pooled income fund ends).

Ideally, cash or low-appreciated assets are desirable to fund annuities because there is some capital gain tax that is recaptured. However, this tax is recaptured over a period of years and is only partially recovered.

Example: I, John Q. Public, do hereby agree to give $100,000 to The Antioch College Annual Fund, in return for which Antioch College shall pay me an annual annuity of $6,000 for the rest of my life and the life of my spouse, Jane Q. Public.

The income generated by a gift annuity will remain constant over the term of the agreement. A minimum of $10,000 is required to establish the annuity. Unlike charitable remainder trusts, there is no cost to establish the annuity. Annuities may be deferred so that the donor can time the receipt of income to an important life event, such as retirement, or for educational costs for children.

Have You Considered… A Charitable Remainder Trust

A charitable remainder trust is a trust given special tax treatment by the Internal Revenue Code. Essentially, a donor places an asset that produces income into trust. In return for placing funds into trust, the donor receives an income. The donor may elect to have the income paid over his/her life, or his/her life and the life of a spouse, or for a period of time not to exceed 20 years.

For establishing the trust, the donor will receive a federal income tax deduction equal to the present value of the gift. (Present value = the amount the charity can expect to receive in today’s dollars at the ending of the trust.) If a donor contributes appreciated assets such as securities or real estate, the donor avoids taxation on the appreciation while enjoying income from the full value of the contributed funds.

There are two types of charitable remainder trusts: the charitable remainder annuity trust and the charitable remainder unitrust.

With the charitable remainder annuity trust, a donor will receive a fixed amount of income based on the initial contribution on a yearly basis. The donor may make only one lump sum contribution to establish the trust. The income tax deduction is larger than that for a unitrust established for the same amount.

In contrast, multiple payments may be made to a charitable remainder unitrust. In addition, the income stream from the trust may grow as principal grows. The income stream is valued by a particular percentage of the principal valued annually. Therefore, if the donor’s income = 7 percent and actual trust income = 9 percent, a 2 percent increase would be added to the trust. Thus, the donor would have an investment that grows.

Example:

$100,000   Trust principal

  + 9,000   Trust income = 9 percent year 2

   – 7,000   Donor’s income = 7 percent year 2

  + 9,180   Trust income = 9 percent year 3

   – 7,140   Donor’s income = 7 percent year 3

Charitable remainder trusts are great ways to make a significant gift and a wise investment at the same time. A minimum of $50,000 is needed to establish a charitable remainder trust.

Have You Considered…A Life Estate

A gift by life estate most commonly involves real estate. Essentially, a donor who has real estate that can be used or sold by the charity deeds the title to the charity and retains the right to live on the property for the remainder of his/her life. If the donor has a spouse, the donor may have the life estate last for two lives.

In return for establishing the life estate, the donor receives a federal income tax deduction for the present value of the gift (the value of the property in today’s dollars that the charity may expect to see at the end of the life estate).

During the life estate, the donor may use the property as if he/she still owned it, paying taxes, insurance and maintaining the property. If at any time the donor decides to relinquish the life estate, he/she may do so. Most attorneys are familiar with life estates. Life estates have been an estate planning tool for approximately 400 years, having been developed in England about the time of King Henry VIII.

This is a great way for donors with real estate to “have their cake and eat it too.”

Note: An independent appraisal of the property must occur to assign value for income tax purposes. Tests may be necessary prior to completion of the gift to determine if the property has any defects that could affect its value or marketability. All gifts of land must be approved by Antioch College prior to completion of the gift.

Have You Considered… A Will Bequest

Many charitable gifts are made via will bequests. Basically, a donor makes a gift of a definite amount (specific bequest), a partial interest in the estate (percentage bequest), or makes a gift of whatever is left over after all other costs and bequests have been honored (residuary bequest).

In this way, the donor may retain control of his/her assets up until he/she no longer has a need for them. In return for the donor’s contribution, his/her estate receives an estate tax deduction that is dollar for dollar. One note of caution: by making a gift via a will bequest, a donor may be deferring financial benefits that he/she may never see. For many individuals, gifts made via an annuity or a charitable remainder trust may provide benefits now, rather than later when the donor is unable to use them.

For more details, please contact the Office of Development and Alumni Relations, 795 Livermore St., Yellow Springs, Ohio 45387. (937) 767-6380.