Kelly J. Bullis: Help a charity, save tax

One of my readers asked me to talk about charitable gift annuities.

This just happens to be one of the best ways to invest your retirement savings in such a way you get a reasonable guaranteed rate of return, much not taxable because you get a charity deduction up front and at your death, the remaining assets go directly to your favorite charity — tax-free from estate tax.

One of the first requirements is you’re wanting to leave some of your estate to a charity instead of family.

Basically, you donate an appreciated asset (such as stock) to a charity (escaping paying capital gains tax). You get a deduction for the basic fair market value net of the estimated lifetime annuity benefit. You also get an annuity paying you a reasonable rate of return as if the funds were still yours to invest in a normal annuity product. Finally, the remaining assets not used up in paying your annuity go directly to the charity.

What a deal! Much of the annuity payments received are non-taxable because of the up-front charity deduction. If you live a long life, you have your investment continuing to pay you a monthly amount, so no loss if you need it, but if you end up passing away earlier than expected, a larger portion of your estate goes directly to your favorite charity and is not included in your estate for tax purposes.

Let me give you an example: Let’s say you have a taxable estate, so at your death you’ll pay about 40 percent in estate tax. Let’s assume your top tax rate on normal annual income tax returns is 39.6 percent. Finally, your capital gains rate is the 20 percent plus the Obamacare tax of 3.9 percent.

If you’re 80 years old and you have $1 million in publicly-traded stock that’s paying you about $30,000 a year in dividends with a built-in gain of $500,000, you decide to convert that to a higher paying annuity. By giving it to a charity (I’ll use the Salvation Army to give you an idea), you will realize the following savings. You get an annuity of 7.7 percent for your remaining life based upon the fair market value of the stock. That would be about $77,000 a year in annuity payments. (About a little bit less than a non-charity annuity). You would get an up-front charity deduction of about $475,000. It would take about six years to use of the charity deduction and the annuity began to be taxable, thus saving about $125,592 ($182,952 less tax not paid on original dividends of $57,360) in income tax.

Since you didn’t have to report the sale of stock, you also saved $119,500 in capital gains tax up front.

Finally, let’s assume you live for six more years, your estate saves having about $850,000 included, saving about $340,000 in estate tax. (If you had not done this charity gift annuity and just named the charity as an heir at your death, the estate tax savings would be the same).

Note: There’s no residual amount from a charity gift annuity left in your estate. Total accumulated tax savings: $245,092! All that and your charity got about $850,000 to spend on their charitable activities.

Did you hear? Proverbs 20:21 says, “An inheritance may be gotten hastily at the beginning; but the end thereof shall not be blessed.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. He’s on the web at BullisAndCo.com and also on Facebook.