Killian, a 75-year-old, who recently retired from his tailoring business, wishes to donate the property where he ran his business. He would like to make a gift that also includes fixed payments for his life. He purchased the building many years ago for $100,000 and it is now worth $500,000. He approaches his favorite charity hoping to donate the building. The gift planner recommends a charitable gift annuity funded with the building, which would satisfy Killian's goals of gifting the building and receiving payments for his life.The major difference between CGAs funded with cash versus appreciated property, such as real estate, is the partial bypass of capital gains. If the donor were to first sell the building and donate the proceeds of the sale to charity the donor would owe tax on all capital gains in the year of the sale. In the alternative, when a donor funds a CGA with appreciated property, the donor bypasses a portion of the capital gain on the gift portion and the capital gains attributed to the annuity portion are prorated in the annuity payments.
The creation of this gift will generate a charitable deduction of $213,092 in the year of the gift, which may save $46,880 based on Killian's 22% income tax bracket. His partial bypass of capital gain may save him $37,504. Based on his age, he will receive $27,000 per year in annuity payments based on a 5.4% payment with about $4,628 of that being tax-free. Killian is happy with the gift to charity, his tax savings and the payments from the charitable gift annuity. Of course, the charity is excited to acquire a property they could later sell. The charity will start making payments immediately, regardless of the timing on the sale of the property.
Mary, who is 80 years old, owns a rental property that she would like to donate to her favorite charity in exchange for lifetime payments through a charitable gift annuity. The property has a fair market value of $750,000 and a cost basis of $250,000. She asks her financial advisor whether it would be more beneficial to sell the property first and then fund the CGA with cash or to fund the CGA with the rental property. Mary's financial advisor informs her the major difference between the two options is the realization of capital gain. If Mary were to sell the property first and then donate the cash proceeds, the capital gain will be recognized in the year of the sale. If, instead, she was to transfer the property to fund the CGA, she would bypass a portion of the capital gain. The remaining capital gain would be spread out over the donor-annuitant's life expectancy.The bypass of capital gain benefit may not be applicable in all situations. If the annuity is created for the life of the donor or lives of the donor and spouse, the capital gain tax allocated to the annuity payments is prorated over the term of the contract. Because the capital gain recovery is only applicable to the annuity portion of the CGA, the capital gain allocated to the charitable gift portion will be bypassed.
Regardless of Mary's choice to sell or donate the property, she would receive an income tax charitable deduction of $354,057, which based on her 22% tax bracket may save her $77,893. Her one-life annual annuity payments will be $48,750.
If Mary sold the property first, the $500,000 in capital gain will be realized in the year of the sale. She would be using the cash proceeds to fund her annuity. Her annual annuity payments would be $42,120, comprised of tax-free and ordinary income. If Mary funded the CGA with the rental property, the partial bypass of capital gain may save her $51,928. Her annuity payments would be apportioned as $14,038 tax-free, $6,630 as ordinary income and the remaining $28,081 would be treated as capital gain. If she reaches her IRS life expectancy of 12.8 years, her subsequent annuity payments will be treated entirely as ordinary income under both scenarios. After sitting down with her financial advisor, Mary understands the benefit of funding the charitable gift annuity with the property before selling it and selects that option.
Tom, a 95-year-old donor, plans to donate one of his real estate properties to his favorite charity to fund a one-life charitable gift annuity for his eldest daughter Margaret, who is 70 years old. The property has a fair market value of $750,000 and a cost basis of $700,000. He desires favorable tax benefits, but his primary goal is to provide an income stream for his daughter. He asks his professional advisor how a one-life CGA for his daughter will be treated.
The advisor cautions Tom that because he is funding a CGA for another person, the capital gain on the annuity portion must be recognized in the year of the gift. Tom does not mind because the property has not appreciated much, and the primary goal is to provide an income stream to his daughter. He asks the advisor to continue with the one-life CGA. Tom will recognize $31,670 as taxable capital gain when he creates the CGA. He will receive a charitable income tax deduction of $274,943. Based on his 32% tax bracket, that may save $87,982. The partial bypass of capital gain may save $5,865. Tom may be required to file a gift tax return, Form 709, for the present value of the annuity to Margaret, valued at $475,027. Over her life, Margaret will receive annual annuity payments of $35,250. Of that amount, the tax-free portion is $30,632 and the rest is ordinary income, with no part treated as capital gain. Tom is happy with the tax benefits and the large amount of tax-free annual payments for his daughter and decides to proceed with the gift.
John, a 70-year-old retiree, owns property that he wishes to donate to his favorite charity in exchange for annuity payments. He is currently living comfortably off his retirement benefits. John is considering converting his property into an income stream of at least 5%, but is hesitant to do so because of the capital gain. The property is worth $400,000 with a cost basis of $100,000. He asks his financial advisor for advice and a comparison of an immediate and a deferred charitable gift annuity.
If structured as an immediate charitable gift annuity, John would receive the following tax benefits. John would receive an income tax deduction of $146,080, which in his 22% tax bracket may save him $32,138. His annuity rate based on his age will be 4.7% and would produce annual payments of $18,800. Over his life expectancy, John may receive $370,360 in total.
If structured as a deferred charitable gift annuity with a deferral period of three years, his benefits would be altered. His income tax deduction would increase to $165,788, which may save him $36,473. The annuity payment rate increases to 5.5%, producing annual payments of $22,000 and meeting his goal of payments of at least 5%. Over his life expectancy, he may receive $367,325. Despite the fact he might receive less in total payments based on his IRS life expectancy, he likes the idea of receiving a larger income tax deduction in the year of the gift and a higher annual annuity rate. John decides to create the deferred charitable gift annuity because it meets all his goals.
George, an 85-year-old donor, would like to make a generous donation to his favorite charity. He owns a home valued at $1 million with a cost basis of $500,000. He is considering using the home for a charitable gift, but he would prefer to remain in the home and, if possible, receive annual income. His financial advisor recommends funding a charitable gift annuity using a retained life estate. Excited about the possibilities, George asks him how this would work.
George would retain the right to live in his home for his life, while also receiving annual annuity payments based on the present value of the remainder interest transferred to the charity. He will receive a charitable deduction of $494,080 that may save him $182,809 based on his 37% tax bracket. His annuity rate based on his age is 7.6% and would produce annual annuity payments of $69,280. Over his life, George retains the right to live in his home, while also receiving annual annuity payments of $69,280. Satisfied that all his goals will be met, George decides to proceed with the gift.