Thomas wishes to fund a charitable gift annuity with his alma mater. He plans to transfer $25,000 in cash to the university in exchange for a 5.4% annuity payout. He is satisfied with the payout amount but is curious what the value of his charitable deduction will be. The university's gift planner explains to Thomas that the rate of the month for the date on which Thomas plans to make his gift is 1.2%. The rates for the two previous months are 1.8% and 2.2%. Thomas itemizes his deductions and therefore decides to elect the highest available AFR of 2.2%. He receives a charitable income tax deduction of $10,377. He also receives annuity payments totaling $1,350 each year, $1,008 of which is tax-free.
Thomas' cousin Steven wishes to fund a gift annuity with the same university. Just like Thomas, Steven will transfer $25,000 in cash to fund the gift annuity for a 5.4% payout. Steven does not itemize his deductions, so he realizes he would not benefit from electing the highest possible AFR. Instead, he elects the lowest available AFR of 1.2%. Like Thomas, Steven receives annual payments totaling $1,350. However, the tax-free portion of his payout is $1,091. If he were to itemize his deductions, he would be able to take a deduction of $9,174 this year.
Example 3Charitable remainder annuity trusts (CRATs) with a duration of life or lives must pass a unique test to qualify as tax-exempt charitable trusts with the IRS. The probability that the trust will exhaust must be less than 5%. The calculation for this 5% probability test is also influenced by the AFR. The lower the AFR, the harder it is for younger CRAT donors to pass the test. As the AFR rises, beneficiaries at lower ages qualify for life-duration CRATs.
Robert and Sally owned appreciated stock valued at $250,000 and were interested in the benefits of a charitable remainder unitrust (CRUT). They liked the idea of bypassing capital gains and receiving a stream of income for their lifetimes. Robert asked his advisor what the deduction would be if he and Sally were to fund a two-life CRUT with the stock. The advisor explained that the amount of the deduction would depend on the AFR they select. For the month of the gift, the AFR was 1.2%, the previous month's AFR was 1.8% and the month before that, it was 2.2%. The current month's AFR would lead to a deduction of $130,185. Robert and Sally were able to elect to use the AFR from two months prior, which allowed them to take a deduction of $130,683.
Several months ago, George and Maggie, ages 75 and 73, were considering funding a charitable remainder trust with $300,000 in appreciated stock. While George enjoys the idea of potential growth in the value of payouts provided by a unitrust, Maggie prefers the safety of annuity payouts. They asked their gift planner for an illustration showing the benefits of a CRAT. The available AFRs at the time were 2.0%, 2.0% and 1.8%. The gift planner informed George and Maggie that a two-life CRAT would not pass the 5% probability of exhaustion test at their current ages. They decided to let some time pass as they mulled over their decision. The gift planner called back two months later and informed George and Maggie that he had re-run the numbers using the current month's rate of 2.2% and the proposed CRAT passed the 5% test. The maximum allowable payout for George and Maggie's CRAT was 5.05%, slightly above the 5% minimum CRT payout.
Mia has been very successful in her career and has proven to be a savvy investor. Recently she decided to reevaluate her estate plan. She realized that she now has a taxable estate and wanted to explore options for transferring a portion of her wealth to her nephew and niece. After exploring her options, Mia decides to transfer $2,000,000 to a charitable lead annuity trust. Using the current month's AFR, which was the lowest available, Mia's gift tax deduction for the transfer would total $1,768,730. The highest available rate would have led to a deduction of only $1,604,020.
Alex has lived in her home for over 30 years. As a resident of the Bay area, she realized that her modest home has greatly appreciated in value. She was hoping to generate a sizeable charitable income tax deduction this year to offset an unexpected increase in her income. Her advisor suggests that her home might be a great source of value that could be transferred to charity. When Alex objected, stating that she does not want to move out of her home, her advisor assured her that she would be able to donate an interest in the home while remaining there as long as she wants. He showed Alex a proposal with an income tax deduction of $845,394 based on the current month's 1.2% AFR. He also pointed out that if she had elected the highest possible AFR, Alex's deduction would have only been $776,572, a difference of over $68,000.
Byron and Amelia, age 80 and 78, have lived in the same house for many years. While they do not have a large stock portfolio or other real property, their home is valued at $800,000. The couple does not have any children. They reached out to the gift planner at their favorite local charity to ask whether there are any creative ways to make a charitable gift, generate a charitable deduction and receive extra income. The gift planner at their favorite local charity explained to them that a gift annuity for home might be a good option for them. With an AFR of 1.2%, the present value of the remainder interest in Byron and Amelia's home is $638,189. This amount will fund a gift annuity with an annual payout of $35,739 and a $238,142 deduction. If instead they had used a 2.2% AFR which was available at the time, the gift annuity would be based on a lower $569,798 remainder interest, with a $236,285 deduction and a $31,909 annual payout.