by David Clark, Gift Planning Advisor for Kendal at Oberlin

As individuals seek financial planning that can serve both their needs and an organization like Kendal, some Kendal at Oberlin donors have found a Charitable Gift Annuity offers advantages. Gift annuities can supplement one’s income with fixed annual payments of 6-8% through the remainder of life with partially tax-free income. Gift annuities are a combination of an outright gift and purchase of a guaranteed annuity. A commercial annuity paying $1,000 annually would cost a donor less than a Kendal Gift Annuity paying the same amount, and the difference between the two is considered a gift, which is fully deductible.

With the typical commercial annuity the principal sum is returned to the annuitant over his or her lifetime. Kendal has learned, however, that by investing both the "gift" portion and the "annuity" portion, our payment rates can usually be covered completely by investment income, so that the entire amount transferred is preserved for the original gift purpose. Nevertheless, the total assets of Kendal at Oberlin stand as a guarantee to meet the annuity commitment. You cannot "outlive" your annuity contract.

The peculiar nature of the Gift Annuity brings some unusual benefits to the donor-annuitant. First, as indicated above, a charitable deduction is available for a portion of the value transferred. Furthermore, because in theory each payment is part earnings and part return of principal, a certain percentage of each annuity payment is tax-free. The combination of the tax savings at the time the annuity is set up, plus the sheltering of much of the annuity income, means that the after-tax return from a gift annuity almost always exceeds the most favorable of alternative investments.

EXAMPLE: Clara, age 80, gives Kendal at Oberlin $10,000 for a Charitable Gift Annuity. Kendal guarantees Clara an annual annuity of $800 ($200 at the end of every quarter). Clara may claim a charitable deduction of $4,696. If she is in the 25% Federal tax bracket she will be able to reduce her taxes by $1,174, so that her net investment is only $8,826.

As her $800 annuity is partially tax-free, she would pay only $59 in income tax and her after-tax return from her net investment of $8,826 would be $741. Clara shrewdly calculates that she would have to find an investment that pays her a taxable return of over 11% to match the return on her Kendal at Oberlin annuity.

Gift Annuities can be established with appreciated property with no immediate payment of tax on the realized gain. That part of the gain allocated to the gift portion is permanently exempt from gains tax; the portion used to purchase the annuity is subject to gains tax, but that tax is spread over the full life expectancy of the annuitant and is reported as a small portion of each year's annuity.

EXAMPLE: If Clara had given stock to Kendal valued at $10,000 with a cost basis of $5,000, she would still have an annuity paying her $800 and a charitable deduction of $4,696. That gift portion would wipe out nearly half of any gain tax Clara would otherwise have to pay if she sold her stock. The balance is covered when she reports her annual annuity income of $800 as $236 tax-free, $282 capital gains tax (@15%), and $282 as ordinary income (@ 25%). Net after taxes: $699.

Gift annuity rates may be obtained from Kendal by securing a personal, and confidential discussion on this option or other planned giving techniques. To request an appointment with Kendal at Oberlin’s Gift Planning Advisor, contact Kendal at Oberlin’s Chief Executive Officer or Chief Financial Officer at 440-775-0094.

The information provided on this site should not be construed as tax, legal or investment counsel. We recommend you refer to your personal advisors for legal, investment or tax counsel prior to making financial decisions

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