John Bullis: Charitable annuities can assist retirees
July 31, 2012
Charitable gift annuities are one way to convert assets into income, and at the same time help your favorite charity.
Suppose you have some stocks that have increased in value but pay small or no dividends. If you have a charity you want to help or support, you might consider transferring the stocks to the charity in exchange for payments for the rest of your life.
Suppose you (cleverly) own some shares of Apple that are worth $100,000 now and you paid only $25,000 for them years ago. If you give the Apple shares to a church or charity in exchange for a charitable gift annuity, you will get payments for the rest of your life. The amount depends on your age and whether it is only for you or for you and a spouse or other person.
If you are 70 years old at the time of the transfer, you should get about $7,200 a year in payments. Some of the payments are taxed at capital gain tax rates, figured on the long-term capital gain part of the transfer. The rest of the payments are taxed as ordinary taxable income, just like interest.
By doing the charitable gift annuity, you are NOT taxed on the increase in value.
And you get a charitable contribution deduction for part of the transfer – maybe $10,200 in this example. If that’s more than you can claim in the year of the transfer, the excess carries over and is a charitable contribution you can claim in the next five years or until all of the deduction has saved you income taxes.
The church or charity can sell the stock without paying any income tax since they are a tax exempt organization. The charity can use most of the proceeds to buy an annuity that will make payments to you for life and keep a small part to do their work.
You could be a good candidate for doing a charitable gift annuity if:
• You are in a high tax bracket, say 25 percent or more.
• You are OK with consuming part of your assets, leaving less to your heirs.
• Your health is good and life expectancy is average or above average.
• You have assets that have appreciated in value in a taxable account.
• You want to help the church or charity and were going to give them something anyway, probably at your death.
If this seems like it might be a good idea for you to look into, why not get the details that might apply in your situation?
If you use appreciated real estate, the payments may not start for a year to allow the charity time to sell the real estate.
Did you hear? “A boy becomes an adult three years before his parents think he does – and about two years after he thinks he does,” said Lewis Hershey.
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.