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Advisor's Quarterly Update

Advisor's Overview Of Life Income Gifts - CGA and CRUT

A life income gift may be of interest to clients who would like to support the American Red Cross but are concerned about their future income. These gift plans are especially appealing for clients who have experienced declining interest or dividend yields in recent years. Depending upon the type of life income gift, such a plan can provide fixed or variable payments to the donor or others for one or more lifetimes, a term of years, or a combination of the two. Payments to the beneficiary can be taxed at favorable rates, or even partially tax-free. What is more, there is no capital gains tax on the transfer of appreciated property to the life income gift, and the donor receives a current income tax charitable deduction for the value of the charitable contribution.

Here are two examples of life income gifts that might be interesting to your clients:

Charitable Gift Annuity

In exchange for an irrevocable gift, the Red Cross issues a contract promising to pay a fixed annuity for the lifetimes of one or two individuals. The amount of the annuity depends upon the age(s) of the annuitant(s) at the time of the gift and does not change.

For example, Edgar, who is age 78, was surprised when his bank notified him that his $25,000 certificate of deposit would be renewing at a rate of just 1%. After consulting with you, Edgar instead chose to contribute the money to the Red Cross in exchange for a charitable gift annuity. Based upon his age, the annuity will pay him 6% annually ($1,500) for life, which is significantly greater than offered by the certificate of deposit. What is more, most of the gift annuity income will be tax-free for the first ten years. Edgar will receive a current income tax deduction of more than $11,500 for his contribution.

The exact amount of the annuity, tax-free portion, and deduction will vary depending upon your client’s specific situation.

Charitable Remainder Unitrust

A charitable remainder unitrust is a special trust that pays a fixed percentage of the value of the trust fund, as revalued each year, to its income beneficiaries each year and then, when the income beneficiaries’ interests have ended, distributes its remainder to the Red Cross. Charitable remainder unitrusts work particularly well with gifts of securities, real estate, or other property that has increased in value because the charitable remainder unitrust is tax-exempt. It does not pay capital gains tax when it sells the contributed property and can distribute tax favorable long term capital gain income to its income beneficiaries.

For example, Alice, who is age 76, owns shares of stock now worth $500,000 which cost her $100,000 several years ago. Although the stock has increased in value, its dividend yield is a modest 1.5%, about $7,500 per year. Alice is eager to sell the stock and diversify her investments in order to produce higher income, but she is concerned about the capital gains tax she will pay if she sells the stock. Instead, Alice works with you to create a charitable remainder unitrust and contributes the stock to the trust.

In this example, the trustee pays Alice an amount equal to 5% of the value of the trust fund each year. In the first year Alice’s trust income will be $25,000, and she understands that the amount will vary each year. Depending upon the investment choices made by the trustee, a significant portion of Alice’s annual income could be long-term capital gains, which will be taxed at favorable rates compared to ordinary income. In addition, Alice will receive income tax charitable deduction this year of more than $307,000, which she can use to reduce her income taxes even further.

Life income gifts offer extraordinary flexibility for your clients who wish to support the work of Red Cross or other charitable organizations. Please reach out if you would like additional information on these life income gift opportunities. We would be happy to work with you to develop an illustration for you and your clients