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Kenneth, 83, and Barbara, 80, have strong ties to their local charity. They funded their first charitable gift annuity in 2010 and their second in 2015. They used a total of $400,000 of appreciated stock to fund the annuities. Both were immediate annuities, meaning they each began to make payments within one year of their funding date. The $200,000 CGA funded in 2010 when Kenneth and Barbara were 75 and 72, with a payout rate of 5.4%, makes quarterly payments totaling $10,800 per year and provided an initial charitable income tax deduction of $66,079. The 2015 CGA funded when Kenneth and Barbara were 80 and 77, with a payout rate of 5.5%, makes quarterly payments totaling $11,000 per year and provided an initial charitable income tax deduction of $82,017.30.
Kenneth and Barbara recently downsized their home and have since realized they no longer need the payments from one of their gift annuities. Their income is more than sufficient for their lifestyle and they are looking for ways to lower their tax burden. Because of their affinity for their local charity, they wish to make additional charitable donations as a tax planning strategy.
When Kenneth and Barbara approached the local charity's planned giving department to discuss an additional gift, Pam Planner suggested that they make a gift of their gift annuity interest coupled with a bequest in their estate plan. Pam explained some of the concepts related to this blended gift. Specifically, she described that the gift amount would be based on the lesser of either the present value of the annuity interest or the sum of their unrecovered basis and unreported long term capital gain in the annuity. Based on calculations, Pam recommended that Kenneth and Barbara make a gift of their income interest in the 2015 CGA. This gift would generate a charitable income tax deduction of $98,192 compared to a deduction of $80,424 if Kenneth and Barbara made a gift of their CGA interest in the 2010 annuity. Kenneth and Barbara agreed to make a gift of the 2015 annuity interest and update their estate plan to include a bequest of $500,000. The bequest may reduce their estate taxes by $200,000.
By making a gift of the annuity interest, Kenneth and Barbara will free up money for the charity's immediate use. This provides them with the additional benefit of seeing how the charity will put their gift to use during their lives. Kenneth and Barbara also receive satisfaction in knowing they will be providing for the charity's future through the substantial bequest in their estate plan.
A few weeks later, Kenneth passed away. Barbara wishes to make a gift in her husband's honor and update her estate plan with an additional bequest of $500,000 to their favorite local charity. Barbara remembered the annuity interest was a great gift option previously. Barbara met with Pam to discuss the details of making a gift in honor of her late husband. The two-life annuity is now treated as a one-life annuity payable to Barbara as surviving spouse. The present value of the annuity interest is based on Barbara's life only. The combined unreported basis and unreported long term capital gain remain the same at $80,424. However, the present value of the annuity interest has decreased from $104,856 to $85,599. The income tax deduction is limited to the combined unreported basis and unreported capital gain. Barbara will be required to obtain a qualified appraisal since the charitable income tax deduction is over $5,000. Barbara receives a substantial charitable income tax deduction and honors her husband's memory. Barbara will also reap the benefits of the bequest of $500,000, which may reduce her estate tax further by $200,000.
Jim, 65, and Paula, 60, created a unitrust with their favorite charity as the vested remainder beneficiary. It has been a few years since they set up the unitrust. Their unitrust's current value is $100,000 with a 5% payout quarterly. They want to allow the charity to use those funds for its current fundraising campaign. Jim and Paula want to allow the charity access to the total amount in the unitrust. They obtain the required qualified appraisal to gift the entire income interest to the charity. They then visit with their attorney to execute the proper paperwork. They also include a $500,000 bequest to the charity in their estate plan. They receive a charitable income tax deduction of $69,843 and a possible future estate tax deduction of around $200,000. Once the unitrust income is transferred to the charity, the charity owns the entire interest in the unitrust and is able to use the funds to meet its campaign goals. The bequest will also further the charity's mission and leave a significant amount to charity at their passing.
William, 72, and April, 69, heard that their friends Jim and Paula made a gift of their entire interest in their unitrust to charity. They would like to make a gift of their income interest to charity as well but do not feel comfortable gifting their total income interest. They decide they would like to make a gift of 20% of their income interest in their unitrust with a value of $100,000 and include a bequest of $200,000 in their estate plan. They execute the documents to make a 20% gift of the income interest in their unitrust to their favorite charity. This 20% undivided interest in the unitrust income interest results in a charitable income tax deduction of $11,664, which requires a qualified appraisal. Because the charity has a vested remainder interest it has access to 20% of the funds in the unitrust and the unitrust remains in effect for the remainder of William and April's lives. The bequest of $200,000 may produce estate tax savings of $80,000.
Blended Gifts - Part IV
Blended Gifts - Part III
Blended Gifts Part II
Blended Gifts – Part I
Navigating the Unrelated Business Income Tax – Part II
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