Creative Giving Ideas- Week 4
Life Income Gifts
The churches, associations, institutions and agencies of the Kentucky Baptist Convention and Southern Baptist Convention are making a difference for the Kingdom of God in our state, nation and around the world. They are worthy of significant and sacrificial support that will enhance and undergird their missions and ministries.
Perhaps you would like to make gifts above what you give out of income as tithes and offerings to provide on-going support to one or more of these causes, but you may be concerned that such gifts could affect your financial security and that of your family. This lesson provides ideas on how you can make a gift that will ultimately benefit causes that are important to you, while retaining the right to receive an income for life for yourself and/or others.
Scripture Reference: 2 Corinthians 9: 6-15; 1 Timothy 6:17-19.
Please read these passages in your Bible now.
Does Giving Have to Be “All or Nothing”?
Making gifts for the benefit of your church or other Baptist causes does not have to be an “all or nothing” proposition. There are a number of giving options that allow you to make a charitable gift either during your lifetime or at death, while retaining the right for you and/or others to receive income for life or a term of years. Charitable gift annuities and charitable remainder trusts are “life income gift” options.
What is a Charitable Gift Annuity?
A charitable gift annuity is a simple contract between you and the Kentucky Baptist Foundation under which we agree to pay you (or you and one other person) a fixed amount (the “annuity”) each year for your lifetime(s), in exchange for your gift of cash or appreciated stocks, bonds or mutual fund shares. The payments are backed by the assets of the benefiting organization; they’ll be paid no matter what happens to the investment of your gift. At death, the remaining balance can be distributed to whatever Baptist causes you specify or used to establish (or add to) a permanent endowment fund in your name the income from which will be divided among the causes you designate.
The payment rate is determined by your age at the time you make the gift; the older you are, the higher the payment rate. For example, the payment rate for a 60-year-old is 4.4%; for a 70-year-old it is 5.1%; for an 80-year-old it is 6.8%; and for someone age 90 or older it is 9.0%.
The amount of the annuity payments is determined by multiplying the payment rate designated for the person(s) who will receive the payments (the “annuitant”) by the value of what you gift.
What are the Benefits of a Charitable Gift Annuity?
Income that cannot shrink and that you cannot outlive. The payments are fixed at the time you make the gift and will never vary, no matter what the actual investment performance of what you give. They will continue to be paid no matter how long you and/or the other annuitant live.
A portion of the annuity payment amounts you receive each year is not taxable to you. This may result in an increase in your cash flow, but not your taxable income. In these days of lower interest rates and smaller stock dividends, increasing the cash in your pocket, but not your income tax bill may be very appealing.
An immediate income tax deduction is allowable in the year you make the gift equal to the present value of the charity’s interest.
Here’s an example: Martha Smith, age 70, makes a gift of $5,000 from a matured Certificate of Deposit (CD) to the Kentucky Baptist Foundation in exchange for a 5.1% charitable gift annuity
(5.1% is the payment rate for a person age 70). Martha will receive $255 per year for the rest of her life—a 155% increase over the $100 per year CD interest she has been earning on this money. Only $50 of the $255 annuity amount she will receive each year will be taxable income, the remaining $205 is received by Martha tax-free—her taxable income has actually decreased, even though her cash flow has increased. The value of her charitable contribution for tax deduction purposes is $1,735.
What is a Charitable Remainder Trust?
A charitable remainder trust is an arrangement whereby you, as donor, transfer cash, investments or real estate to an irrevocable trust which you set up to pay you (or you and/or others) a designated income stream for life or a term of years. At your death, or the end of the term of years, whatever remains in the trust is distributed to the charitable causes you have named in the trust agreement.
There are two options for the income stream you can receive. If you want to receive a fixed payment that is determined at the time the trust is created and never changes, a Charitable Remainder Annuity Trust
is the choice for you. If you would prefer a payment that varies with the investment performance of the trust assets, a Charitable Remainder Unitrust
which pays you an amount each year equal to a designated percentage of the value of the trust assets, as revalued each year, is the option that will meet your objectives.
What are the Benefits of a Charitable Remainder Trust?
Diversification of assets without incurring capital gains taxes. You may be faced with the fact that one of your holdings has increased in value to the point that it makes up too large a portion of your estate—to many “eggs” are in one basket—or you may have assets that are highly appreciated but are no longer yielding much income or which have become a nuisance to manage. If you sell a highly appreciated asset, you will be taxed on the capital gain, thereby leaving you with less than the full value of the asset for future investment/use. Gifting the appreciated asset to a charitable remainder trust is not treated as a sale, so there is no recognition of gain. When the charitable remainder trust sells the asset, the trust pays no capital gains taxes because it is tax-exempt. The result—the full value of the gifted asset(s) remains in the trust to produce the income stream you and/or others will receive.
Potential increase in your cash flow. The payout rate you select (the law mandates that the rate be at least 5%) may result in payments to you from the trust of larger amounts than the asset(s) you gift were paying.
An immediate income tax deduction is allowable in the year the gift is made equal to the present value of the charitable remainder interest.
Here’s an example: Martha Smith, age 70, and her husband, Sam, age 72, own a vacation home in another state which they bought many years ago for $25,000. Its current market value is $75,000. Health issues are limiting their ability to continue to use the vacation home; however, they know that if they sell the property they’ll have $50,000 of capital gains on which they’ll owe capital gains taxes. If they gift the property to a 5% charitable remainder unitrust
, their first year’s income from the trust will be $3,750 (5% x $75,000), they will be entitled to a charitable income tax deduction of $31,780 and they will avoid $7,500 of capital gains taxes. When the trust sells the real estate, the full amount of the sale proceeds will be retained by the trust, it will not owe any capital gains taxes, because it is tax-exempt. If the sale proceeds are invested to earn an average annual return of 5.5%, Martha and Sam will receive approximately $68,500 over their 19-year joint life expectancy and there will be approximately $69,000 left to be distributed to the designated Baptist causes at the survivor’s death, if at least one of them lives for the full 19 years.
Take time now to pray for God’s guidance as you consider whether a life income gift is the way that you can make a lasting difference in this world for the cause of Jesus Christ.
For more information, please call us at (502) 489-3533 or toll free in KY at 1-(866) 489-3533
The information in this article is provided as general information and is not intended as legal or tax advice. For advice and assistance in specific cases, you should seek the advice of an attorney or other professional adviser.