What Are Gift Annuities? How Are They Used In Tax Advantage Giving?
A charitable gift annuity is a contract between a donor and a charity. The donor gives money to the charity and the charity guarantees to pay a periodic income to the donor for the donor’s lifetime. These are usually paid out on a quarterly basis from the charity’s general operating budget. In contrast, if we do a charitable lead trust or a charitable remainder trust, then the funds in those trusts are kept separate from all of the other assets of the charity and are used simply to satisfy the purposes of the trust.
With the charitable gift annuity, the charity gets the money from the annuity immediately, and the payments to the donor are made from the charity’s ordinary budget. If you do a charitable gift annuity, you need to make sure that you only work with a charity that has a very strong financial position. This is because your future payments depend on the financial position of the organization. Because of this, charitable gift annuities are more highly regulated by states than are the charitable trusts. So not all charities can do a charitable gift annuity.
Is There A Way To Replace The Value Of The Charitable Gift For The Donor’s Children?
There is absolutely a way to replace the value of the charitable gift for the donor’s children. One of the great advantages to doing a charitable remainder trust is that there is an increased income to the donors. The donors can use a portion of that extra income to purchase the life insurance policy on their lives so that upon their death, their children will receive the proceeds of the life insurance policy and the charity will receive the funds that are left in the trust. Essentially, we are doubling the gifts that the donors are making at their death. If we set this up properly, then the distributions to the children from the insurance policy will be completely tax free. There would be no income tax and no estate tax for the children.
How Can IRA Accounts Be Used For Tax Advantage Giving?
There are a couple of ways that IRA accounts can be used for tax advantage giving. There is a relatively new law that allows donors to gift directly from their IRA accounts to a charity. In the past, if a donor wanted to contribute money from an IRA to a charity, they would have to take the money out as a withdrawal and then give that money to the charity. The problem was that the money became taxable once it was taken out of the IRA. The donor would get a deduction for it on their income taxes, but it never quite covered the amount. As a result, it ended up being a tax negative situation for the donor.
In 2015, congress set up a law that established a qualified charitable distribution. If the donor is over 70½ years of age, then that donor can contribute up to $100,000 each year from their IRA directly to a charity with absolutely no tax impact on the donor. The money goes directly from the IRA account to the charity, and the donor never takes it as income. Since the charity is not a tax-paying entity, that money in the IRA changes from being tax-deferred money to completely tax-free money. The other way is to name the charity as the beneficiary of the IRA at the donor’s death. That way, the money comes out of the IRA and transfers directly to the charity, tax free.
What Are The Common Mistakes That People Make In Tax Advantage Giving?
One mistake is to wait too long to do tax advantage giving and try to reduce the value of the estate for inheritance taxes. If someone waits too long, there may not be enough time for some of these methods to work. Many of these methods require the time value of money, which refers to the fact that we can earn income over time to replace the amount that’s gone to charity.
Another mistake is simply leaving the wrong assets to charity. It is far too common for people with charitable intent to name the charity as an ordinary beneficiary of their trusts or of their will, and then leave their tax-deferred accounts (their IRA and 401(k)) to their children. When people do this, their children will eventually have to pay taxes on all of that money. If they reversed it and left their charitable gifts out of their IRAs, then that money would never be taxed. As a result, there would be more assets available for charity or for the children, because there would be less taxation on those assets.
How Can My Attorney Assist Me In Tax Advantage Giving?
Your attorney can help you with strategies that you would otherwise not know of. Most people don’t think about this every day and aren’t familiar with all of the different methods of planning. You need to have a professional help you understand what all of your options are before you make your decisions and do your planning.
Call for a free assessment of your needs