The AOPA Foundation, Inc.
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A Charitable Antidote to a Volatile Bear Market
Posted December 2008
Over the past few months some investors have had to sell stock positions to meet margin calls. Others have liquidated a losing position to offset realized gain from sales earlier this year.
If you are one of these investors and find yourself wondering how to deploy the proceeds while not losing even more to taxes, may be able to provide you with solutions that can even include securing a life-income stream. At a time when stock market volatility produces swings of hundreds of points in a day, investors have become increasingly risk-averse and are seeking safety, stability, and predictability. Many are reluctant to reinvest in new stock positions and are looking for an alternative investment strategy.
It is time to reintroduce yourself to a simple and very attractive alternative plan—a plan offering you a safe harbor from the current financial turbulence while giving you the peace of mind you are seeking.
By incorporating this strategy into your own planning, the risk is removed from the equation and only the rewards remain—both for you and for . The benefits for you are impressive:
- Guaranteed life income—fixed and partially tax-free
- Valuable income-tax deductions
- Possible avoidance of capital-gain tax
benefits from your generosity, which in some instances may be designated for purposes you select.
Many of our friends have been surprised to learn that it is possible to make a gift to and receive a stream of income in the process. Even if you have been vaguely aware of the possibilities, you may never have examined in detail how such a charitable gift could address your own long-term financial needs. Better yet, current low-interest rates make these charitable planning strategies more appealing than ever.
The oldest and one of the most popular life-income gift arrangements is the charitable gift annuity. It provides the donor—or one or two beneficiaries—payments for life based on a fixed percentage of the amount of the gift.
The following chart shows the rates we are currently paying annuitants at selected ages. Remember, the rate in effect when you acquire your gift annuity never changes. It is guaranteed for life—and it is backed by 's full financial strength.
Benefits of a $100,000 Charitable Gift Annuity
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Viewed in the light of current market conditions, these rates are very appealing. But there are other factors that enhance them even more.
You receive a deduction in the year you fund your annuity, and each year—for the duration of your life expectancy—a portion of each payment you receive is tax-free. These tax benefits effectively increase your yield, as the following example demonstrates.
Example: Mary J, 70, contributes $10,000 in exchange for a gift annuity that will pay her $610 annually. The gift produces a tax deduction of $3,988 that, in her 28% marginal income-tax bracket, saves her $1,117. Thus, her out-of-pocket cost for the annuity is $8,883 and the $610 annual payment to her is equivalent to more than a 6.8% return.
Because part of the annual payment Mary J receives from the annuity is tax-free ($378 of the $610 is not taxed), her return is the equivalent of $757 of taxable income. Measured against her out-of-pocket cost ($8,883), this represents an equivalent, fully taxable yield of 8.5%.
Not Yet Retired?
If you are not yet retired, you still have time to build a nest egg that will be large enough to sustain you during your retirement years—perhaps even large enough to allow you to retire early. Yet you may be hampered because you are already contributing the maximum allowable to a qualified plan, such as a 401(k).
In that case, consider a deferred-payment gift annuity: There is no contribution limit, you can contribute appreciated securities and not be currently taxed on the gain, you don’t have to cover other employees if you own a business, and you can start payments as early or late as you wish.
Example: George F, 50, desiring a more secure retirement and wanting to make a gift, will contribute $20,000 per year for deferred gift annuities for the next ten years, arranging for payments to start when he reaches the age of 65.
| Total amount contributed | $200,000 |
| Guaranteed annual payments | $18,520 |
| Total charitable deductions | $78,742 |
| Tax savings (28% marginal rate) | $22,048 |
As these examples illustrate, the financial and tax benefits of either type of gift annuity are simply too attractive to ignore in the current economic environment. Give us a call to discuss how we may assist you.
Please contact us for our assistance with your gift plans.
Updated June 16, 2008
