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Oct. 11, 2012

Giving News

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Mark your calendars for the 2013 Austin Advisors Forum

We are pleased to announce that the 2013 Austin Advisors Forum will take place on Friday, May 10, on the campus of The University of Texas at Austin. Once again, this annual conference will be jointly hosted by the Estate Planning & Probate Section of the Austin Bar Association and the Gift and Estate Planning team at The University of Texas at Austin. The event provides a full day of continuing education for attorneys, accountants, financial planners, and other advisors working in the areas of financial, estate, and charitable planning.

We are also very excited to announce that our keynote speaker for the conference will be Judge Mark V. Holmes of the United States Tax Court. Among his many cases, Judge Holmes wrote the opinions in Estate of Christiansen v. Commissioner and Petter v. Commissioner (approving the use of defined value clauses to benefit charity, or “charitable lids”), which have had a significant impact in the field of estate and charitable planning.

Stay tuned for more speaker announcements and conference information in the coming months.

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2012 IRA gifts from donors 70½ years of age and older

In several years prior to 2012, individuals age 70½ and older could direct the custodian of their individual retirement account (IRA) to distribute an amount of up to $100,000 to The University of Texas at Austin as a direct contribution. The amount that was transferred to the university was not reportable as income to the owner of the IRA but also did not qualify for an income tax charitable deduction.

The Internal Revenue Code provision that authorized these so-called “IRA rollover gifts” expired on Dec. 31, 2011, and as of early October 2012 has not been renewed for calendar year 2012.

The fall of the calendar year is the time that many individuals age 70½ and older consult with their advisors about the minimum amount that must be withdrawn from IRAs and other qualified retirement plans before the end of the calendar year to avoid penalty taxes.

Individuals who are forced to withdraw money that they don’t need for living expenses may want to discuss the following idea with their tax advisor.

It has been suggested that individuals age 70½ and older consider directing their IRA custodian to distribute a specific dollar amount directly to a charity, such as The University of Texas at Austin, before the end of 2012. Then, if at the last minute the Congress of the United States approves the IRA rollover gift extension for calendar year 2012, the amount distributed directly to UT Austin could qualify for IRA rollover gifts treatment so long as all the requirements of such gifts were met.

If Congress does not authorize IRA rollover gifts for 2012, it is our understanding that the donor would have to report the amount distributed to UT Austin as income on his or her 2012 income tax returns but could also claim an itemized income tax charitable deduction on the federal income tax return (subject to certain limits based on adjusted gross income — AGI). The availability of charitable deductions to reduce state income tax varies by state.

If Congress does not authorize IRA rollover gifts for 2012, the goal might be to direct the IRA custodian to distribute to UT Austin not more than the amount that could be claimed as an itemized income tax charitable deduction on the donor’s 2012 federal return so that the additional reportable income is fully offset by the deduction, resulting in $0 taxable income on the federal return.

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Charitable gift annuities: the gift that keeps on giving

 

This is the first in a series of articles about planned giving vehicles and assets.

If you have clients who are considering a charitable gift as part of their overall financial plans, consider talking to them about a charitable gift annuity to support the charitable organization they love.

A charitable gift annuity (CGA) is a life income plan*, meaning that a donor who makes a gift to charity through a CGA will receive a guaranteed income for life. That income can be paid to the donor alone or to the donor and another beneficiary, such as a spouse, partner, or other family member (although there is no requirement that the second beneficiary be a relative). Charitable gift annuities were first offered in the 1840s by the American Bible Society, and by the mid-1900s many U.S. charities offered them. At The University of Texas at Austin, charitable gift annuities are issued and managed by the University of Texas Foundation.

A charitable gift annuity is the simplest charitable life income plan, consisting of an irrevocable contract between a charity and a donor. The contract stipulates that in return for a contribution from the donor, the charity agrees to pay the donor for his lifetime (or the donor and another for their lifetimes) a fixed annual amount. Because the payment is fixed, the amount of the annual payment never changes, no matter the actual investment performance during the lifetime of the annuitant(s). The annuitant’s interest ends with the last payment prior to his death, at which time the remaining value of the annuity may be used by the charity to fund the gift specified by the donor at the creation of the annuity.

The age of the donor and the size of the gift determine the amount of income the donor receives from the annuity. Almost every charity in the United States follows the American Council on Gift Annuities (ACGA) payout rate recommendations. The ACGA is a voluntary association of charities, with one of its stated purposes to recommend standard annuity rates for current and deferred gift annuities. These recommended rates change periodically (most recently in January 2012) and are based on two tenets: that 50 percent of the original funding amount will remain for charity and that the investment is invested in a mixed portfolio using historic return rates.

The older a donor is at the time he or she establishes an annuity, the higher the payout rate the donor receives. For example, a donor who establishes a CGA with a $100,000 gift at age 65 would receive a payout rate of 4.7 percent, or $4,700 of annual income. The same donor establishing a CGA at age 85 would receive a payout rate of 7.8 percent or $7,800 per year.

Charitable gift annuities can be created to benefit one or two people. For many donors this would likely include the donor and a spouse or partner, the donor and a parent, or the donor and a special-needs family member. When a donor establishes a two-life annuity, the ages of both donors are considered in determining the payout rate. A two-life CGA can either be “joint,” where the income is split between two recipients, or “survivor,” which pays first to one annuitant, and then to a second annuitant after the death of the first. A two-life CGA can be an excellent tool to guarantee income to a loved one. The donor can receive the income while he is in a position to provide for a loved one, but the donor has made certain that the joint or survivor beneficiary has lifetime income even after the donor is gone.

In addition to the standard charitable gift annuity, some donors prefer the benefits of a deferred charitable gift annuity, where the donor makes an immediate charitable gift and establishes the CGA, but payments do not begin until at least one year into the future. By establishing the annuity now but deferring the income until later, a donor can receive a higher payout rate and ensure a larger future income. For example, if the 65-year-old donor from the previous scenario establishes a deferred CGA with the income payments to begin at age 70, her payout rate would increase from 4.7 percent to 5.9 percent. Depending on the size of the charitable gift and how long the donor lives, this increase in payout rate could add up to significant additional income during the donor’s lifetime.

A deferred charitable gift annuity most often appeals to donors on the verge of retirement. These donors have the assets now to fund a planned gift, but they do not actually need to receive the income at this time. By deferring the annuity payments, they will receive a higher rate of income later, during the years when they need the income more. By establishing the deferred CGA now, the donor does, however, receive an immediate tax deduction for the present value of the charitable interest. This allows the donor to defer and maximize income from the annuity but take the tax deduction now while her income is likely higher.

In some cases a donor may not know exactly when she wants to start receiving income from her annuity. For example, a donor might know that she plans to retire five to 10 years in the future but not the exact date, and she doesn’t want to start receiving income until after she retires, to maximize her payout rate. In that case, the donor would want to explore a flexible deferred charitable gift annuity, which allows a donor to choose a range of years to begin receiving income. The donor specifies the range of years in the annuity contract, and then must elect a start date before the final date. The longer the donor waits to begin receiving income, the higher the payout rate. The donor would only need to notify the charity some specified period in advance to begin the payments, with said period also outlined in the annuity contract (for example, The University of Texas Foundation requires one payment period — or at least three months — of notice).

Charities may differ somewhat in the assets a donor can use to fund a charitable gift annuity, but virtually all charitable organizations will accept either cash or marketable securities. For many donors, appreciated stock is a particularly beneficial asset to use to make this type of charitable gift, as it produces reduced capital gains tax liability. The donor would owe no capital gains taxes at the time of the contribution, and only a portion of the annual income would be taxed as long-term capital gain income over the donor’s average life expectancy. Moreover, the portion of the income payments that comprise the donor’s basis in the stock would be tax-free, typically reducing the amount of the payments taxed as ordinary income (note that after the donor reaches his or her average life expectancy, all payments are taxed as ordinary income).

For your philanthropic clients, how do you know if a charitable gift annuity might be an appropriate giving vehicle? In general, consider your clients who are either age 75 and older and capable of making a significant outright gift to charity, or clients who are age 60 and above and looking to supplement their retirement income. Remember that the older the donor, the higher the payout rate on a CGA. In fact, given the low rates for younger donors, most charities have age limits for issuing CGAs. As an example, the University of Texas Foundation will issue gift annuities to donors age 55 and older only (younger donors may be considered for deferred CGAs, as long as payments do not begin until age 55).

Clients who want to diversify their investments and increase their fixed income might also have an interest in charitable gift annuities, as well as clients with low-yield appreciated assets who would like increased income and reduced capital gains taxes. A CGA might also be a good choice for your clients who want to include a charity in their overall financial and estate plans but who don’t have large sums to contribute. For example, at the UT Foundation the minimum amount to establish a CGA is $10,000 (although we have established CGAs for as high as $1 million).

If you or your clients are interested in or have questions about the potential benefits of a charitable gift annuity, the Gift Planning team at The University of Texas at Austin is happy to explore these and other charitable giving options at no cost or obligation. Please feel free to contact us at:

The University of Texas at Austin
University Development Office
Gift Planning Team
P.O. Box 7458
Austin, Texas 78713-7458
Phone: 512-475-9632
Toll free: 866-488-3927
Fax: 512-471-3439

*The other type of life income plan is the charitable remainder trust, which will be reviewed in a later article.

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