Guaranteed Payments for Life

The Charitable Gift Annuity

 As people approach or start to think about

 retirement, they often wonder how they will

 ensure a steady income for themselves while

 maximizing whatever tax breaks are available. 

 In addition, many people think about their

 commitment to their favorite charities, such as

   Lake City Medical Center and want to continue to support causes they care about, even

   when forced to live on a fixed income.

   Many individuals have used gift annuities to accomplish both income and philanthropic goals. 

   A charitable gift annuity is part investment and part gift.  It can be an excellent option for

   donors who want to secure their own financial stability while ensuring some level of support

   for charities of their choice.  An annuity can be particularly attractive to the donor who wants

   to receive income from assets that have risen sharply in value, such as stocks.  A charitable

   gift annuity can provide:

• supplemental income payments for your lifetime (and the lifetime of your spouse);
• significant tax breaks at the time of the gift and every year thereafter; and
• support for Lake City Medical Center for generations to come.

In basic terms, a charitable gift annuity is a legal contract under which an individual in exchange for his or her gift to a qualified charity, will receive fixed payments for life.  The charity, or "payor," uses the interest and part of the principal to make the payment to the individual, or "annuitant."

We will be happy to answer any additional questions about gift annuities and/or provide a free analysis of a proposed gift that will demonstrate the income and tax savings you can achieve through such a gift to Lake City Medical Center.  Call 651-345-6707 for a confidential discussion on the benefits of this giving option.

  

   Q.  How does a charitable gift annuity work?

A.  In return for a gift of cash or property, a charitable organization, such as ours, will contractually guarantee to pay you a specified annuity for as long as you live.

  

   Q.  Can a charitable gift annuity be set up for more than one person?

A.  Yes.  Gift annuities are frequently arranged to provide annuity payments for two persons.  The most common type of two-life annuity is the joint-and-survivor annuity.  Under such an arrangement, payments are made to both annuitants for their joint lifetime.  Upon the death of the first annuitant, the payments are continued for the lifetime of the survivor.

Because payments are made as long as either beneficiary is alive, the rates we can offer for two-life annuities are slightly lower than the rates we can offer for the life of either person individually.  Please contact us at 651-345-6707 for information on current rates.

  

   Q.  How are the annuity payments taxed when received by the annuitant?

A.  As with other types of annuities, a portion of each annuity payment is treated as a tax-free return of the original principal over the life expectancy of the donor.  Note:  When a donor lives beyond his or her actuarial life expectancy, the entire annuity payment will be taxed as ordinary income. 

  

   Q.  What determines the amount of the annuity payment?

A.    The amount of the annuity payment depends upon the age(s) of the individual(s) receiving the annuity and the amount of the gift.  Lake City Medical Center generally follows the rates of return recommended by the American Council on Gift Annuities (an association of philanthropic organizations that reviews these rates), which apply to both men and women.  Generally, the older the person receiving the annuity payment, the higher the rate we are able to offer.  Please contact us for information on current rates.

  

   Q.  Since a contribution for a gift annuity is considered a charitable gift, is a charitable

   deduction allowed at the time the contribution is made?

A.  Yes.  A donor may claim a charitable deduction on his or her income-tax return in the year the gift is made.  We will be happy to compile a free confidential analysis for you.  Please call 651-345-6707.

Example:  Tom Smith contributes $25,000 in exchange for a Lake City Medical Center gift    annuity that will pay him $1,625-or 6.5%-per year for the rest of his life in quarterly payments    of $406.25.  Based on his age, Tom’s right to receive these payments has a “present value”    of $16,015.    Tom is entitled to a charitable income-tax deduction for the difference between the total value of    his contribution and the present value of his right to receive the payment.  In this case that    deduction is $8,985 ($25,000-$16,015).

 

The charitable deduction, in effect, reduces the cost of the gift annuity.  In the example above, Tom’s   gift generates an $8,985 deduction.  Assuming he is in the 28% marginal income-tax bracket, the deduction results in an actual dollar savings of $2,516 ($8,985 x 28%).  Thus, the cost of the $25,000 gift annuity is only $22,484 ($25,000 - $2,516 tax savings).  Since Tom will receive an annual annuity of $1,625-and the actual cost of the annuity is only $22,484-the effective rate of return for the annuity is 7.2% ($1,625 ÷ $22,484).

  

   Q.  Are there any advantages if a charitable gift annuity is funded with appreciated property rather

   than cash?

A.  Funding a gift annuity with appreciated property is an excellent way to minimize and spread out the capital-gain tax.  Part of the appreciation escapes capital-gain taxation entirely, and the portion of capital gain that is reportable may be spread out over the donor’s life expectancy.

Example:  Mr. and Mrs. Carlton fund a gift annuity with $40,000 worth of long-term appreciated    securities.  The securities originally cost them $20,000.  Payments will be made quarterly as    long as either is living.      What will the Carltons receive as a result of their funding of a gift annuity?

Charitable deduction of in the year of the gift, based on their ages.Since the securities contributed are appreciated, the deduction is limited to 30% of their adjusted gross income.  (Any unused portion may be carried over the next five years.) Quarterly payments of $690 for an annual return of Annual return of principal Amount includable in taxable income each year Amount reportable each year as capital gain spread over Mr. and Mrs. Carlton’s joint life expectancy

$15,753           $ 3,760     $    955     $    850     $    955

  

   Q.  How can a gift annuity increase current spendable income?

A.  One of the most attractive features of a gift annuity is that it allows you to receive a stream of income while making a significant gift.

You will recall in the example above that the Carltons funded their gift annuity with stock worth $40,000.  Assuming this was growth stock paying about 1% of its fair-market value in dividends, the Carltons would have realized about $400 in annual income from the stock.  By using the stock to fund the gift annuity, they are now getting annual payments of $2,760-almost seven times what they were receiving.

The degree of increase, of course, would depend on the specific property used to fund a gift annuity.  So, if you transfer property with a relatively low return to fund a gift annuity, you will generate a significant increase in spendable cash.

  

   Q.  Is it possible to make an immediate contribution for a charitable gift annuity but delay

    actual receipt of the annuity payments until later to supplement my retirement?

A.  Deferred-payment gift annuities are an excellent means of supplementing retirement income.

Example:  Mr. and Mrs. Smith wish to supplement their retirement income with a deferred-    payment gift annuity.  After consulting with their own financial advisors and a Lake City Medical    Center staff member, they decide to contribute $10,000 each year for the next 10 years to our    gift annuity program.    Under the deferred gift arrangement, the Smiths are entitled to a charitable deduction     for each annual contribution.  While the deductions vary from year to year, the total charitable    deduction over the 10-year period, based on current IRS mortality and interest assumptions,    will be $17,320 (more than 17% of the amount they contribute over the 10-year period).    At the end of ten years, when retirement income becomes important, the Smiths will receive    $7,670 each year from their well-planned annuity.  In addition, a portion of those payments    will be excludable from their taxable income for their life expectancy.

   

   Q.  Can the beneficiary of a gift annuity be someone other than the donor?

 A.  Yes.  You may name anyone-a parent, sibling, friend, faithful employee, etc. 

Example:  If you are contributing to the care of a parent with after-tax dollars, you    could transfer some cash or property and have the payments made directly to your    parent.  The payments would be taxed in your parent’s lower tax bracket, but you    would receive a deduction that reduces your income tax.

 

   FINAL NOTE

Lake City Medical Center’s charitable gift annuity offers many attractive benefits for the security-minded individual.  It is worth investigating if you are passionate about giving, you desire guaranteed, dependable payments for life, you wish to substantially reduce your  income tax, while providing cash flow for other family members, or supplementing your retirement.

Please call 651-345-6707 for a free brochure, confidential consult or more information.