If you are a boomer who has already maxed out your contribution to your IRAs, an estate planning tool to consider is discussed in an article in Lee’s Summit Journal, “Retirement planning power tool.” A Deferred Charitable Gift Annuity has many benefits, including building a legacy and achieving tax benefits.
A Charitable Gift Annuity (CGA) is a contract with a non-profit. The agreement states that, in exchange for a contribution, the non-profit guarantees an annual payment of a set amount to an individual or a couple for their lifetime. The remainder of the gift is used by the charity for their own purposes. A Deferred CGA is where the contribution is made now and the annuity payment is deferred to a later time.
Here’s an example to illustrate how this works and the benefits. Let’s say we have a married couple, Bob and Fran, who are now both 56 and in the prime earning years of their careers. They have IRAs and are making the maximum contribution annually, but they’d still like to put some more away into a retirement account.
They could always use another tax deduction, and they’d like to create a legacy gift to benefit their church. Bob and Fran create a Deferred CGA contract with a local community foundation. They are planning on contributing $4,200 annually for six years. That’s a total contribution of $25,200. Bob and Fran will defer their annuity payment, until they reach their full retirement age for Social Security, age 67. Over the six years they’re making the contribution, Bob and Fran receive a partial tax deduction for their contribution of $5,392. This saves them $1,779 in taxes, since they’re in a 33% tax bracket.
At age 67, they start to get an annual annuity of $1,512 based on a 6% annuity contract (that’s 6% of the contribution amount), which they’ll keep receiving for the rest of their lives. This amount doesn’t change from year to year, but will remain at $1,512. In addition, more than half of this amount ($858) will be income that’s tax free. A similar taxable investment would need to earn 8.2% to have the same return. It’s estimated over their lifetimes that Bob and Fran will receive $42,741.
The foundation investment committee and professional advisers will invest the contributions and track the investment returns and annuity payments in a fund specifically set up for this annuity. Estimating a conservative average annual return of 5%, the fund would have $54,547 remaining in the fund after their lifetimes, to create an endowment to benefit their church that would pay out approximately $2,700 annually to their church.
For Bob and Fran, using a Deferred Charitable Gift Annuity gave them an opportunity to make a difference at their church, enjoy tax deductions and be assured of receiving reliable income during their retirement.
If you think a Deferred Charitable Gift could be part of your legacy, speak with an estate planning attorney at Cottrell & Jacobs, who will be able to identify the best options for you and your family.
Reference: Lee’s Summit Journal (March 28, 2017) “Retirement planning power tool”