| By Robert D. Cavanaugh, CLU,
on 23-01-2007 06:51
|
Views : 5603  |
Favoured : 134 |
Word Count: 738 Given the fact that most seniors are interested in a secure income, reducing
risk and lowering taxes, here is a planning technique to consider if you are
trying to increase your income.
Maybe you have a CD that is coming up for renewal and you discover the rate is
going to be lower. You could have some stocks or mutual funds that were invested
for growth and are thinking about selling some off and re-investing in something
that would pay you an income. The only reason you haven’t sold them is that you
don’t want to pay the capital gain.
I would suggest including a charitable gift annuity in your list of options.
A charitable gift annuity is a combination of a gift to charity and an annuity.
For older people, annuity rates may be 8%, 9% or even higher. Since part of the
annuity payment is a tax free return of principal, the gift annuity may provide
you with a substantial income. The combination of partially tax free income and
the initial charitable deduction makes this planning device attractive.
While this arrangement has its own unique benefits, the rate of return is less
than if you had bought a commercial immediate annuity. Therefore, your decision
to use a gift annuity should include a desire to eventually leave money to a
qualified charitable organization that you have an interest in, such as a
church, school, hospital, etc.
Gift annuities are easy to set up. You simply transfer property to the charity
and the charity promises to pay a given amount monthly, quarterly, semi-annually
or annually to you for as long as you live. Alternatively, you could elect to
have the payments paid to you and another person for as long as you both live.
Or you could elect to have the payments made to you for the rest of your life
and then to the second person for the rest of their life. But the maximum number
of people per gift annuity is two.
Gift annuity rates are set by the American Council on Gift Annuities. Charities
don’t have to use these rates, but most do. So you don’t have to out shopping
for the best rate. Make your choice based on the charity that you would like to
support.
There are two tax issues that you should take into consideration when comparing
a gift annuity to your other alternatives.
The first is that if you fund the gift annuity with cash, part of the payment
you receive is taxed (as ordinary income) and part of it is not taxed as it is
treated as a return of principal. If you fund it with appreciated property, and
are the recipient of the income, part will be taxed as capital gain, part as
ordinary income and part could be treated as a return of principal and not
taxed. However, if you live past your life expectancy, all later annuity
payments will be ordinary income.
The second tax issue is that when you give the charity your asset in exchange
for a life income, you get a large income tax deduction. For most people, this
income tax deduction is so big it cannot be taken in one year. So there are
provisions to spread the deduction out over the year of your donation and five
more. Your accountant can tell you if this will eliminate income taxes for the
next 6 years or not. Chances are good that it will.
Please note that I am only giving general guidelines about taxation. Before you
set up a gift annuity, you should sit down with your tax advisor to determine
the exact tax ramifications for your situation.
There are a number of charitable gift annuity options and applications. This
brief overview has given you some of the basics. If this seems like it may fit,
contact the charitable organization of your choice and get a proposal. Then sit
down with your accountant and financial planner and have them help you compare a
gift annuity with your other options.
Article Source: www.webraydian.com
Robert D. Cavanaugh, CLU is a 36 year financial and estate
planning veteran and author of the free newsletter,
“The Estate Preservation Advisor”. To subscribe and get
a free video of one little known planning concept, go to
http://theestatepreservationadvisor.com/freevideo.htm
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