Many people leave assets to their favorite charity in their will. But this is a foolish idea because it wastes a tax deduction, which is a common retirement mistake. You can make the charitable gift during life, retain the income from the assets and also get a tax deduction for the gift to reduce your taxes right now. This is called a Charitable Gift Annuity.For many people, the gift annuity is the proverbial having your cake and eating it too. While many resist making gifts during their lifetime in fear that they may need the asset for financial sustenance, the gift annuity allows you to give the assets and still get the income benefit from it for life.
Here's how it works. Decide on the charity or charities you want to benefit. You will select an amount of money to donate today (you can also donate other assets such as securities, real estate, etc). You will then receive an income from the charity for life. The income you receive is based on your age and is for your lifetime. The income can be to one person or a married couple.
You can find the income amount you receive at this web site, which updates the amounts each year (most charities use these same tables): gift annuity rates.
Here is a simple example:
Mrs. Donor, age 82, gives $100,000 cash as a gift annuity to a charity, in a single life annuity. She will receive an annual annuity payment of $9,400 (figured at 9.4%). Her charitable income tax deduction will be $52,810 the year the gift is given, or spread over five years following. Of the $9,400 received each year, Mrs. Donor can exclude $5,555.40 as tax exempt income for 10 years. That's because IRS considers part of each payment a return of principal, which is not subject to income tax. Also, the gift is excludable from estate taxes. Had Mrs. Donor made the gift when she was younger, her rate would be less than 9.4% but she would have received the income for more years.
Obviously, to maximize your income (which will also reduce your tax deduction), you want to make such a gift when interest rates are high. For example, those people who made such gifts in the early 1980s when rates were high are still receiving that same high rate today (assuming they are still alive). Also, the older you are a the time of the gift, the higher the interest rate you receive.
You also get a tax deduction as in the above example. The tax deduction is based on the size of the gift, your age and the amount of income you receive.
Before approaching your favorite charity with this idea, see a qualified financial advisor or estate planner as they may be able to get you a better deal or enhancements than you may be offered at first from the charity. While most charities use the income tables linked to above, each is free to entertain a different rate. Should the charity be your alma mater, you could be offered lifetime tickets on the 50-yard line to the home football games.