HOW THE CA WORKS

Large organizations with a planned giving staff will typically issue a charitable annuity backed by the assets of that organization. They will manage the assets, cut the income checks and prepare the tax reporting documents.

For a small charity, the expense of setting up and managing a Charitable annuity in that fashion is not feasible. Also, donor's may be reluctant to rely on their income from a small organization with limited experience and assets to back the income.

The solution is to use a commercial annuity to back the donors gift. The commercial annuity can be purchased from an old large highly rated insurance company.

The donor has the peace of mind that there income is backed not by the assets of the organization but by the insurance company.

The charitable organization benefits by retaining any un needed assets required to purchase the commercial annuity. These assets can be used by the charity immediately or reinvested in their own account.

The charity has no assets to mange for the donors income, cuts no checks and has no tax documents they need to issue. Thus greatly simplifies things for the charity so much that they can now offer a Charitable Annuity to their supporters without the usual problems that limited their ability to do so previously.

Example:

John Williams age 65 decides to establish a Charitable Annuity with the local Animal Shelter in the amount of $100,000. Based on his age he will receive a guaranteed annual income for the remainder of his life in the amount of $6,000.

In exchange for the gift the Animal Shelter purchases an annuity from an insurance company. The annuity will pay John his guaranteed income for the remainder of his life.

The Animal Shelter then retains the portion of the gift that was not required to purchase the annuity.

If John makes a gift with any cost basis or cash, a portion of his income will also be tax-free. In addition, John will receive a charitable tax deduction for his contribution.

If John gifts an appreciated asset such as Stock, Bonds, Mutual Funds or Real Estate he will also avoid any capital gains taxes.

In our example John made a gift of $100,000 in cash. His income of $6,000 will be taxed on just 38% of the $6,000. This will give him a taxable equivalent yield of 11.3% assuming john is in a 28% tax bracket. After paying taxes, John has $5,400 of net spend able income.

If John had been taking income from a CD paying 4%, he would have to pay taxes on the full $4,000. That would provide a net income of just $2, 875. With a Charitable Annuity John has an additional $2,525 of net after tax income.

Note:

Every situation is different, the examples above are shown as an illustration of how a Charitable Annuity can be used. If you would like a review of your specific situation, give one of our Planned Giving Advisors a call toll free at 800-535-4720. They can run the numbers based on your situation and the current IRS rate of the month that is used to determine charitable tax deductions for planned gifts.

If you operate a charitable organization, feel free to contact us to discover how easy it can be to offer Charitable Annuities to your supporters.