Options for Charitable Giving
Christian Financial Network -- Many Christians have a burden to financially bless Christian ministries and other charities.
High net worth individuals and families can receive significant tax benefit from donating appreciated assets, but the cost to their heirs is a real concern and potential obstacle to giving.
As we look at charitable giving in this four part series, we will examine common financial planning techniques designed to allow you to bless a charity or ministry with charitable gifts, reduce your taxes and allow your heirs to be blessed as well.
Throughout this series, we will use our hypothetical family, the Smiths. They are a high net worth, married couple, desiring to donate $500,000 to a church or ministry they support. Although highly motivated to give, they are concern that should they make this commitment, the $500,000 will not be available for distribution to their heirs upon their death.
We plan to introduce several different gifting options that could be used to help the Smiths meet their objectives. In our first installment of this series we'll look at using Charitable Gift Annuities as the gifting vehicle and as a future source of retirement funds.
If you are considering a Charitable Gift Annuity as a way to suport CBN, you can get more information by contacting
CBN Planned Giving at
or send an email to
plannedgiving
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Let’s first define the Charitable Gift Annuity (CGA)
A CGA or gift annuity is a contract between you and a charity. The charity, in return for an irrevocable transfer of cash, appreciated marketable securities or other property, agrees to pay a fixed amount to the donor/annuitant for the life of the donor or donors if a joint gift.
The frequency of payment to the donor/annuitant can be monthly, quarterly, semi-annually or annually. Quarterly payment is the most frequent option.
The individual states have oversight of CGA's and set minumum reserve requirements for the charity to maintain to fund the promised annuity payments.
Types of Gifts Annuities
There are several types of gift annuities. Since each state regulates CGA’s they are not all allowed in every state (If you are considering a CGA you’ll need to consult with your charity to determine which CGA’s are allowed in your state).
Most common, is the Immediate Gift Annuity, which begins payment, as the name suggests, immediately upon the end of the first payment period. For example if you contract for an annuity which pays quarterly your first payment will be made upon the end of the first quarter and thereafter quarterly for life.
Another form of the gift annuity is the Deferred Gift Annuity. Under this plan, you and the charity agree to a time in the future when payments will begin. In order to establish a Deferred Gift Annuity the first payment cannot begin for at least 1 year.
The Tuition Annuity is a hybrid single-life deferred annuity used to fund the expected tuition payments of a child or grandchild. They are typically offered by Colleges, Universities and Foundations to establish pre-paid tuition plans.
Payments do not start until the child reaches age 18, at which time the child could elect to accept payment either over his expected life time or 4-5 annual payments. Most choose to accept 4-5 annual payment to cover annual tuition costs.
Minimum Funding Requirements
Most charities and ministries have a minimum donation require to fund CGA. Most non-profits usually begin at $10,000, but many ministries will offer CGA's with only a $2,500 donation.
The Deferred Charitable Gift Annuity and Retirement
Assuming a donor is highly motivated to give, the Deferred Charitable Gift Annuity can become an excellent retirement accumulation source.
For instance, lets assume the Smiths, our high net worth husband and wife couple, are considering a gift annuity contract. They decide to commit $25,000 per year for the next 20 years to a ministry they support. They will use the Deferred Gift Annuity, and contract for payments to begin 20 years in the future. Next year they will again use the deferred gift annuity and have payments begin in 19 years. They will continue this process until one year from retirement. They may even purchase gift annuities supporting various charities and ministries in order to spread their gifts around. Upon the death of the last surviving spouse the residual value in each CGA reverts to the church or ministry.
They get a charitable tax deduction in the year the CGA is contracted equal to the amount ($25,000 in our case) used to establish the CGA. In their 39.6 tax bracket this results in a tax saving of approximately $9,000 per year.
Upon retirement they will begin to receive payments on the gift annuities based upon the rate guaranteed in the gift annuity contract. A portion of each payment will be a tax-free return of the original gifts used to establish each CGA.
In total they will have met their goal and donated $500,000 to their ministry. A portion of which, the ministry gets immediate access (subject to the minimum reserve requirements).
The only downside to the CGA solution, and a concern of the Smiths, is that the gift of $500,000 is lost to their heirs. The solution to this problem is the Wealth Replacement Trust (WRT). A WRT is an irrevocable trust funded with life insurance. A $500,000 second-to-die life insurance policy with the children as the beneficiary will remedy this problem. In most cases the taxes saved when establishing the CGA is sufficient to pay the cost of the Wealth Replacement Trust including the insurance premiums.
The combination of the Motivation to Give, the Deferred Gift Annuity and the Wealth Replacement Trust is the perfect solution to this family’s desire to bless their ministry and provide for their heirs.
In our next installment of ‘Looking at Charitable Giving’ we will consider another option for accomplishing your personal financial and gift objectives.
The financial information presented here is hypothetical.
Your personal financial profile and changes in tax law should be considered before making any financial decision.
You are encouraged to talk with your legal and financial advisor prior to entering into any contracts.
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By Robert Wells, CPCU
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