Charitable Gift Annuities and their Potential Tax Benefits

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Financial Planning

Charitable Gift Annuities and their Potential Tax Benefits

When it comes to making a generous and meaningful gift, charitable gift annuities can bring many desirable benefits. Not only are gift annuities tax deductible, they also offer a steady and reliable income stream to help meet the long-term financial needs of donors. Charitable gift annuities are agreements between a donor and a charitable organization or institution. The donor transfers property or assets to the charity in exchange for a fixed income stream for the donor, or a designated beneficiary, over a certain period of time. For example, a donor who purchases a charitable gift annuity for $50,000 would receive an annual payment of about $3,000 for a set term. In addition to the guaranteed income, charitable gift annuities also offer donors valuable tax benefits. Because they are tax-deductible, donors can take a charitable deduction for the entire amount they give to the non-profit organization in the year of purchase. The deduction is based on the donor’s tax bracket and a charitable annuity rate established by the IRS.

Different Types of Assets Can be Used

Charitable Gift Annuities can also be a great way for individuals to make a robust tax- advantaged donation by transferring stocks and other appreciated assets to charity. In exchange, the donor receives both a charitable tax deduction and fixed income payments for the term. The amount of the payments may even exceed the rate offered by other sources, such as certificates of deposit. In addition to providing a reliable stream of income, the charity also benefits from the full market value of the assets, which can be used in their programs and other charitable activities. This charitable giving strategy is a powerful and elegant way to support a charity’s mission and provide yourself with financial security simultaneously.

Charitable Gift Annuities and Real Estate

A charitable gift annuity can be used to donate real estate while also obtaining a number of tax and financial benefits. It is also a great way to make a lasting contribution to a charity or other non-profit organizations. A charitable gift annuity involves an agreement between a donor and a non-profit organization. The donor agrees to donate an interest in real estate or other real property to the non-profit. In return, the donor will receive a fixed income stream for a fixed term. The income is usually a fixed percentage of the property’s market value, and is paid out in monthly, quarterly, or annual installments to the donor. The non-profit retains the right to use or sell the real estate. By donating real estate through a charitable gift annuity, a donor can gain a variety of financial benefits. These include tax savings, the ability to allocate capital gains on the real estate and keep existing capital gains on cash investments, reduced probate costs, asset protection, and a potential increase in income. In terms of taxes, donating real estate through a charitable gift annuity can offer some major advantages. Donors are typically able to write off the full value of the property on their annual tax return.

Let’s Meet Fred and Ethel

 Fred and Ethel own some income property they bought years ago. The original purchase price was $40,000 and it’s now worth $180,000 and gives them about $9,000 in income. They’re weary of the upkeep and would like to sell but the possible tax implications have them concerned. They learned about a charitable gift annuity and decided to set one up and help their church and missions in the process. This is how it worked:

1. Fred and Ethel signed an option agreement allowing the gift annuity sponsor to find an interested buyer. When a price was agreed upon and the sale completed, the sponsor absorbed the realtor fees and closing costs.

2. At closing, the sponsor issued Fred and Ethel a charitable gift annuity based on the full sales price.

3. Fred and Ethel received an immediate income tax deduction which will save them money on their taxes this year, with a potential 5 year carry-forward.

4. A portion of the capital gains taxes were completely eliminated, none were due at the time of sale.

5. The LTF LegacyPlan will provide income for them as well as a structured inheritance for their children.

6. Their church and missions will also benefit.

Current Market Value of Real Estate$180,000
Cost Basis of Property$40,000
Amount Subject to Capital Gains Tax$140,000
Initial Value of Charitable Gift Annuity$180,000
Tax Deduction with Charitable Gift Annuity$61,792
Tax Savings at 25% Tax Bracket$15,448
Capital Gains Tax Savings$7,209
Immediate Annual Payments for 20 Year Term Certain$9,600

A Charitable Gift Annuity can be a very powerful tool in the right situation. To be able to benefit from the tax advantages, the certain income and benefit a worthy cause such as missions make a charitable gift annuity worthy of consideration.

If you missed our previous webinar, you can watch the replay here

Please note: All charts and numbers are for illustration purposes only. Accuracy is neither warrantied nor implied. We are not attorneys or tax advisors. This information is educational only. Not to be considered as advice or recommendations. It is imperative that you consult with a tax advisor and/or attorney when considering any of these concepts. In addition, it is critical that the attorney, tax advisor, and financial advisor are knowledgeable and practiced in these areas.

If you would like help finding such an advisor, we will be glad to introduce you to an experienced planner with your best interest in mind. Please give us a call at 1-800-522-4324


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