Thursday, 21 November 2013 09:08 Last Updated on Thursday, 21 November 2013 09:12
Your Money Matters, October 13, 2013
I've had the privilege over the past month of spending time with the folks of the Salvation Army, both here and in their West Nyack, N.Y., office.
I'm continually impressed by their passionate dedication to extending a hand up to those who need help. One of the many ways the Salvation Army reaches out to the community is by providing education. Our local Salvation Army citadel in East Stroudsburg holds a free estate planning seminar for the public each year, and this year also hosted a day of free continuing education on estate planning and charitable giving. If you're an attorney, CPA, or financial planner looking for credits, mark your calendars now for next year's event on Sept. 16 in East Stroudsburg.
It's true what they say, 'tis better to give than receive. But what if giving could give back to you? As a followup to last column's tax efficient giving, let's take a look at another way to make your charitable giving a win-win for you and the organization.
Charitable gift annuities
If you're a retiree living off the interest on your CDs, I'm sure I don't have to tell you how much harder that's been in recent years. For those in need of income payments, but are not concerned with retaining the principal amount, a charitable gift annuity can be an alternative. A charitable gift annuity is much like an immediate annuity issued by an insurance company, but with additional tax and benevolent benefits. With both types of annuities, you essentially trade a sum of money for a promised stream of income that you can't outlive. The amount you receive varies depending on your age, gender, the issuing company, and how you want your payments based on your life alone or with a spouse (immediate annuities offer some additional options as well).
Let's say Sally, 75, a widow, has $100,000 in a maturing CD that she would like to use to generate income. She has additional funds, so access to the principal is not important to her, but getting a monthly income is. Sally looks into an immediate annuity to get more in monthly payments than she can with a CD, also realizing that she cannot access that $100,000 any longer, or change her mind, in return for an income stream that she cannot outlive.
Sally heard, however, that she could support her favorite charity and still receive an income through a charitable gift annuity. A gift annuity also comes with the promise of a steady income stream for life (although typically a bit smaller than with a commercial annuity), and whatever funds are left after Sally dies stay with the charity. Most charities use the payout rate suggested by the American Council on Gift Annuities, which for Sally, is currently 5.8 percent.
That means Sally would receive about $5,800 a year, which again, may be less than she can get with a commercial insurance immediate annuity. Why would she do that? In Sally's case, it's not a pure dollars-and-cents decision. She has the desire to use her funds to make a difference, which the gift annuity allows. In addition to the tangible payout, she also is entitled to a tax deduction for a portion of her gift. The amount of the deduction is determined by taking her gift amount and subtracting the net present value of the stream of payments she is expected to receive.
For Sally, the value of her charitable gift is $45,663. She itemizes deductions and is in the 25 percent bracket, so the value to her is $11,415 in tax savings (note that gifting appreciated assets like stocks have different tax rules). She may take that in the year of her gift, or she may need to carry some forward if the deduction exceeds 50 percent of her income
In a way, she will receive more than 10 percent of her original gift back up front. That closes part of the gap between the two types of annuities, but more than that, since the charity has use of Sally's $100,000 while she is alive, and keeps what is left after she dies, she is able to leverage her funds to do good things through the charity she chooses, which will yield a payoff many times over.
Many charities offer gift annuities, so how should she choose? Since most charities do follow that suggested payout rate, the more pressing questions become which organization lines up best with her personal charitable wishes, and (very important) how financially sound that organization is. There is no backstop for charitable gift annuities, so if her chosen organization goes belly up, she's out of luck.
Charity with solid financials
It's vital for her to choose a charity with a proven history of on-time payments and solid financials going forward. By the way, you needn't be a retiree to use a charitable gift annuity strategy; it is also a way to save in advance for retirement through a deferred gift annuity. That means that you contribute the money now in anticipation of a regular income payment in retirement. A charitable gift annuity is not for everyone, but for Sally, the opportunity to have a reliable stream of income and multiply her funds for the benefit of feeding the hungry in her community was the right one for her.
The Salvation Army is one charity that offers gift annuities, and that is one way to contribute to the newly created Hometown Endowment Fund. It's no secret that the problem of homelessness and poverty in our county is growing while government funding is shrinking, making it more important than ever for community members who can step in and bridge the gap. The Hometown Endowment Fund is designed to build a sustainable, reliable, pool of funds that can be drawn on for years to come to benefit our local community. It's an ambitious undertaking, with a goal of raising $3.5 million over the next few years, but we live in a community of great need and also great generosity. The fund welcomes gifts of all types; cash, appreciated stocks, gift annuities, as well as legacy gifts like naming the fund in your will or as your IRA or life insurance beneficiary. No gift is too small and is much appreciated.
You may already know that the Salvation Army provides emergency shelter, Christmas toys and a food pantry, but they do so much more. Some of the many other services and programs they provide include rental assistance, a camping program for underprivileged children, disaster relief, fighting against human trafficking and even a brass band. Those programs are always in need of funds and you can help not only through direct donations, but also by participating in fundraisers such as the Harvest Ball and golf outings.
In fact, according to Maj. James Gingrich, the recent golf outing raised enough funds to feed 450 families for a year. Last year our Salvation Army provided 62,509 hot meals and 6,880 nights of shelter. The statistics for what they've accomplished in 2012 alone are astounding.
To learn more about the Hometown Endowment fund or other ways to support the local mission, call 570-421-3050; for information on planned giving opportunities like the gift annuity, contact Sharon Somers, Planned Giving director for our area, at 215-787-2840.
This should not be construed as an endorsement of any kind for charitable gift annuities. It is important to consult your tax or financial advisor and conduct due diligence on any annuity in which you may invest.