BroMenn Foundation Charitable Gift Annuities
The concept of the charitable gift annuity in America dates back to 1843, when a merchant in Boston first donated a gift of money to the American Bible Society in exchange for a flow of income. Today, the concept includes valuable tax benefits for donors. But perhaps more valuable than the financial advantages is the satisfaction donors gain by helping to continue the mission and good works of BroMenn Foundation.
Gift Annuities Defined
A gift annuity is a simple, contractual agreement between a donor and BroMenn 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:
- contract for a fixed payment for yourself or yourself and another individual, if you choose, and
- make a gift to BroMenn. 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:
- the gain allocated to the gift portion completely avoids the capital gains tax, and
- 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 the annuity interest is assignable only to the charitable organization).
A special type of annuity is the deferred payment gift annuity. With this type, the start of payments is delayed until a specific date, initially determined by the donor. Deferral of payments increases the initial income tax charitable deduction, tax savings and the annuity rate. However, it also reduces the nontaxable amounts to be received. This option is appealing to younger donors who wish to improve future income, such as at retirement.
Understanding Annuity Rates
Annuity rates are higher for older annuitants and lower for younger annuitants, based on life expectancy. As a result, gift annuity contracts are generally more appealing to older donors because the purchasing power of a fixed dollar return can shrink over any long period, even with modest inflation.
Rates are also adjusted according to the number of annuitants, with rates for two-life contracts often lower due to the extended life expectancy. The age of an annuitant is the age reached at the nearest birthday when the contract is made, and rates are the same for men and women.
A specific annuity rate is a matter of agreement between the donor and the issuing charitable organization. Below you'll see how one-life annuity rates increase with age. These rates are recommended by the American Council on Gift Annuities and are re-determined periodically.
|
Your Age
|
Rate of Return
|
|
50
|
5.3%
|
|
55
|
5.5%
|
|
60
|
5.7%
|
|
65
|
6.0%
|
|
70
|
6.5%
|
|
75
|
7.1%
|
|
80
|
8.0%
|
|
85
|
9.5%
|
|
90
|
11.3%
|
A Case Study of Benefits
Linda, age 75, 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. At the time of purchase, the charitable midterm federal rate (a figure used in calculating the charitable deduction) is 4.6 percent.
Although Linda's annuity rate is 7.1 percent, her actual earnings will be higher for several reasons.
First, because Linda 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 Linda'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 Linda 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
Payments are backed by the full faith and credit of the BroMenn Healthcare System. They are not insured by an insurance company or backed by any government agency. Rates are subject to change. Gift minimum: $5,000. Sample rates are for single life. Contact us for other rates.
View definitions and use our planned giving calculator.
For More Information
Charitable gift annuities are an excellent method of achieving your philanthropic goals and gaining substantial tax benefits. As with most contract agreements, however, before establishing a charitable gift annuity, it is best to consult knowledgeable professionals.
BroMenn Foundation is available to answer any questions and provide projected results for your specific situation, in confidence and with no obligation.
Please call BroMenn Foundation at (309) 268-5966, or e-mail srigo@bromenn.org for a brochure or more information.
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.
BroMenn Foundation is a not-for-profit 501(c)(3) organization.
