Charitable Gift Annuity
A gift annuity is a simple, contractual agreement between a donor and Kingsbury in which you transfer assets to us in exchange for our promise to pay one or two annuitants payments for life.
By donating through a gift annuity, you can accomplish two things: (1) contract for a fixed payment for yourself or yourself and another individual, if you choose, and (2) make a gift to Kingsbury. If you itemize deductions on your tax return, savings from the charitable deduction reduce the net cost of the gift.
For a period of years, based on a government table of life expectancies, a portion of each payment received is considered a nontaxable return of your investment in the gift. This further increases your after-tax dollars available for spending or investing.
In addition to the annuity payment you receive, an annuity funded with appreciated property results in these advantages: (1) the gain allocated to the gift portion completely avoids the capital gains tax, and (2) the portion of gain to be recognized can be spread over the expected term of the contract (provided that the donor is a primary annuitant and
A Case Study of Benefits for a Gift Annuity
Lydia, age 69, plans to donate a maturing $25,000 Certificate of Deposit. Since she needs continuing income, Linda decides to use the cash for a one-life charitable gift annuity that we will issue at the suggested rate of 7.1 percent. Payments will be made quarterly. Although Lydia's annuity rate is 7.1 percent, her actual earnings will be higher for several reasons. First, because Lydia itemizes income tax deductions, she earns a federal income tax charitable deduction of $10,742. With a marginal income tax rate of 28 percent, the tax savings of $3,008 will reduce the net cost of the gift to $21,992. Her annual payments of $1,775 will mean an effective rate of total return of 8.1 percent, which is Lydia's annual payment expressed as a percentage of the net cost.
The second advantage she will enjoy is that for the next 12.4 years, more than half of every dollar received will be considered a return of her investment in the contract and will not be subject to tax. Her after-tax, spendable dollars received over this significant length of time are calculated as follows:
- Ordinary taxable income portion $625
- Less 28 percent marginal income tax rate ($175)
- After-tax income from taxable portion $450
- Nontaxable portion of cash received $1,150
- After-tax dollars annually, to spend or invest from annuity, for 12.4 years $1,600
For the sake of comparison, we've determined what all-taxable return would produce the same after-tax amount over the period the investment in the contract is being recovered. A marginal income tax rate of 28 percent means that Lydia keeps 72 percent of each added dollar of taxable income. Her equivalent all-taxable dollar return is calculated as follows:
- $1,600 = $2,222 equivalent all-taxable dollar amount
- These dollars represent an equivalent taxable rate of return on net cost of 10.6 percent for the first 12.4 years.
- Keep in mind that these figures are not directly comparable to results of noncharitable reinvestments; since your primary objective is to make a gift to a charitable organization of your choosing, like Kingsbury Country Day School, you will receive the added benefit of the annuity.
Note: The information on this site is not intended as legal, tax, or investment advice. For such advice, please consult an attorney, tax professional, or investment professional.
