Clients with modest net worth use charitable gift annuities

By Steve Savant

Ash Brokerage Corporation


A charitable gift annuity is similar to a single premium immediate annuity. However, the income is reduced so that money may be left over for the charity at death. That is the gifting aspect of this concept.

The concept allows fixed income retirees to increase their income and give to their favorite charities while living. We in effect improve both the lives of our clients and their charities of choice.

A charitable gift annuity is similar to a single premium immediate annuity. However, the income is reduced so that money may be left over for the charity at death. That is the gifting aspect of this concept. In effect, the IRS gives the client a partial deduction for the CGA based on their receiving a lower income than a commercial annuity.

Let’s look at an example of how a CGA works. A 75-year-old widow is struggling to pay her bills in retirement and wishes she could pay more money each year to her church. She has $300,000 in bank CDs earning 1 percent on average. If she takes $100,000 of those funds and puts it into a CGA she would get $5,800 instead of the current earnings on that money in the CD of $1,000.

The CD income is fully taxable. The income from the annuity is only partially taxable. Just like an SPIA, the client gets to amortize the tax basis over their lifetime on a straight line basis as a tax deduction.

And there is more an advisor can do for the client with their other assets that is not related to planned giving. More income concerns, LTC and legacy planning are opportunities to serve the client further. The CGA is the foot in the door.

With available bank CD and money market funds, there is a great opportunity to find charitably inclined clients who want to safely improve their incomes and give to charity. If you are involved with charities, your church or synagogue, offer to put on a seminar. I did, and I got a major sale in record time.

A more advanced example of a CGA is where the funding comes from the donation of appreciated stock. Instead of selling the stock, paying capital gains taxes on the sale and then contributing cash to the charity, in exchange for a CGA, the donor simply gifts the stock for a CGA.

The cool tax effect here is that no current capital gains are triggered. The charity takes the stock and sells it tax free. One hundred percent of the proceeds go into the CGA, thereby increasing the income the donor gets. As they receive the income they will have taxable ordinary income, capital gain income and exempt income portions of each payment.

A similar effect can be had with the donation of appreciated real property that is then sold and invested by the charity. The process of doing this for a client is primarily a free service provided by the agent for the donor and the charity. That by itself can be a nice emotional reward.

I think to work in this area you have to like to do that kind of thing. However, the agent will be privy to lots of client financial information in the process and may see other opportunities to serve.

And here is a fun possibility. You can suggest the client take the tax savings and do one of two things. They could pay a single premium into a life policy to be left to their kids to replace the gift or give the money to the charity to buy a single premium life policy for an endowment.

When we talk about estate planning, very high-net-worth people come to mind. However, most middle class people have much of their wealth tied up in IRAs or 401(k) accounts. When they die these balances may pass to heirs who must immediately include their receipts in their tax return for that year a maximum income tax rate. So the "middle class estate tax” is really an income tax on the kids' inheritance.

For example, let’s say a client has one child and they will end up leaving $300,000 in IRA money to them. The child receives the money in one lump sum in one taxable year. The result is they are forced into paying income taxes for both state and federal purposes at rates as high as 40 percent or more.

So, just as high net worth people replace retirement money gifting with a WRT, so can people with more modest estates do so.