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Working with Life Income Options: Moving to the Next Level

Raising money in a bad economy? Learn how to work with life income options to navigate market risk, meet donor needs, and capture meaningful dollars that count.

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Working with Life Income Options: Moving to the Next Level

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  1. Working with Life Income Options: Moving to the Next Level Jeff Lydenberg PG Calc 617-497-4997 jeff@pgcalc.com http://www.pgcalc.com Working with Life Income Options

  2. Raising money in a bad economy • Focus on how giving helps • Don’t assume everyone equal • Acknowledge reluctance • Modify gifts to meet donor need • Life income gifts can help Working with Life Income Options

  3. What donor’s are thinking • I’m not as rich as I once was. • When is the market going to come back? • I have multiple priorities. • How can I make a gift and meet other needs? • Can I position myself for recovery? Working with Life Income Options

  4. What charity is thinking • We still need money. • How are we going to fill the shortfall in fundraising? • How can we meet commitments but respect our donor’s needs? • How can I capture dollars that count? Working with Life Income Options

  5. Market Risk/Volatility • Swings in giving are not as severe as broader economic conditions! • 100 point change in S & P 500 = $1.5 billion change in philanthropy • 37% drop in the S & P in last year • $1.161 trillion of philanthropy lost as of 3/18/2009 Working with Life Income Options

  6. Effect of Economy on Charity • Decrease in value of endowments • Fewer and smaller private foundation grants • Reduced corporate giving due to smaller profits • Smaller bequests with shrinkage of estate assets • Probable reduction in major outright gifts and life-income gifts Working with Life Income Options

  7. Qualified Retirement Plans • Limits on contributions • $22,000 for most • Concerns about market risk in IRAs, 401(k)s Working with Life Income Options

  8. Capital Gain Taxes • 15% for most • Dramatic declines in market values • Long term investors still concerned • Recovery will come Working with Life Income Options

  9. How to respond to planned gift donors • Gift annuities • Safe, guaranteed payments for life • Backed by all of Partners assets • Not subject to market risk • Payments not tied to asset performance • Gift annuities counter-cyclical Working with Life Income Options

  10. Gift Annuity Essentials • Charity pays fixed amount to one or two individuals for life • Deduction = contribution minus present value of annuity • Immediate annuity: payments begin immediately after gift • Deferred annuity: payments begin at designated future time • Annuity rates based on age of beneficiary Working with Life Income Options

  11. Gift Annuity Essentials • Prototype CGA prospect • Ages: mid-70s and older • Fiscally conservative • Not wealthy (or do not think they are) • Loyal annual fund donors, usually very low amounts Working with Life Income Options

  12. Gift Annuity Taxation: Cash • For duration of life expectancy: • Payments partially ordinary income • Payments partially tax-free return of capital Working with Life Income Options

  13. Gift Annuity Taxation: Cash $100,000 gift, $6,100 annual payment Working with Life Income Options

  14. Gift Annuity Taxation: Cash Tax free return of capital: $58,917 ÷13.1 = $4,497 Ordinary income $1,603 $6,100 Working with Life Income Options

  15. Gift Annuity Taxation: Appreciated Property • For duration of life expectancy: • Payments partially ordinary income • Payments partially capital gain • Payments partially tax-free return of capital • No tax-free if zero basis Working with Life Income Options

  16. Gift Annuity Taxation: Appreciated Property $100,000 property, $40,000 cost basis $6,100 payment Working with Life Income Options

  17. Gift Annuity Taxation: Appreciated Property Tax free return of capital: $23,567÷13.1 = $1,799.01 Capital gain: $35,350 ÷13.1 = $2,698.47 Ordinary income $1,602.52 $6,900.00 Working with Life Income Options

  18. Charitable Remainder Trust Essentials • Deduction for present value of remainder • At least annual payments • Life or no more than 20 years • No more than 5% or 50% payout • Deduction at least 10% of principal • Payable as an annuity or unitrust amount Working with Life Income Options

  19. Charitable Remainder Trust Essentials • Prototype CRT prospect • Ages: mid-50s to 70 • Fiscally savvy and often aggressive investors • Wealthy or very affluent • Less likely to be loyal donors, but average gifts are high Working with Life Income Options

  20. Charitable Remainder Annuity Trusts • Annuity amount negotiated • Only 20,000 in existence • More expensive and complicated than gift annuities • Subject to market risk • Can run out of money!! Working with Life Income Options

  21. Charitable Remainder Unitrusts • Standard Charitable Remainder Unitrust Pays the fixed percentage • Net-income Charitable Remainder Unitrust Pays lesser of fixed percentage or actual net income. • Net-Income with Make-up Charitable Remainder Unitrust Pays lesser of the fixed percentage or actual net income, but can pay make-up distributions to beneficiaries to the extent of accrued past deficiencies in payments. • Flip Trust Converts from net income trust to straight payout upon the occurrence of a triggering event. Working with Life Income Options

  22. Charitable Remainder Trust Taxation • WIFO (worst-in, first-out) • First: Ordinary income to the extent payments consist of interest, dividends, and rents earned by the trust. • Second: Capital gain to the extent payments consist of capital gain realized by the trust. • Third: Tax-exempt income from tax-exempt securities. • Fourth: Tax-free return of principal. Working with Life Income Options

  23. Pooled Income Fund • PIF is a trust operated by charity, not tax-exempt • Distributes income proportionate to beneficiaries interest in the fund • Poor man’s CRT • Highly disfavored due to low interest and dividends Working with Life Income Options

  24. Gift Annuity Funded with Cash • Ms Sylvester, age 75 • $50,000 invested in CDs • $1,080 after-tax income • $50,000 gift annuity • $3,150 before-tax • $2,926 after-tax Working with Life Income Options

  25. Remainder Unitrust Funded with Stock • Mr. and Mrs. Coronado, ages 72 and 70 • $250,000 stock, $20,000 cost basis • $3,188 after-tax income • 5% Charitable Remainder Unitrust • $12,500 before-tax • $9,275 after-tax • Year 5 $14,069 before-tax • Year 10 $16,310 before-tax Working with Life Income Options

  26. Flip CRUT to Supplement Retirement • Dr. Bernard, age 50 • Contributing maximum to qualified plans • Heavily invested in market • 5% Flip Unitrust • Adds to trust each year till retirement • Pays net income during working years • Pays unitrust amount beginning at age 65 • $1,000,000 principal at retirement • $50,000 income in first year of retirement Working with Life Income Options

  27. Remainder Annuity Trust for Income Security • Ms Carmelo, age 84 • $500,000 of appreciated stock • $15,000 dividend income • 8% Charitable Remainder Annuity Trust • $40,000 annual payments • No capital gain • Income tax deduction Working with Life Income Options

  28. Build-up Deferred Gift Annuity • Mr. and Dinofrio, ages 58 and 57 • Contribute $20,000 each year to fund DGA • Each annuity start date staggered • Year Annuity payment Annuity Rate • $1,340 6.7 • 2,680 6.7 • 4,040 6.8 • 5,400 6.8 • 6,800 7.0 • 8,200 7.0 • 9,620 7.1 Working with Life Income Options

  29. Flexible Deferred Annuity • Mr. Jasper, Age 54 • Stock worth $100,000, $60,000 cost basis • Start dates between 9/30/2020 and 9/30/2029 • Lowest deduction of all possible start dates Elective Age at Annuity Total Start Date Start Date Rate Annuity 9/30/2020 66 8.6% $8,600 9/30/2021 67 9.0% $9,000 9/30/2022 68 9.6% $9,600 9/30/2023 69 10.1% $10,100 9/30/2024 70 10.8% $10,800 Working with Life Income Options

  30. Promoting Gift Annuities Despite the Economy • Gift annuity rates at historic lows • Still competitive with fixed income vehicles Working with Life Income Options

  31. Leveraging Depressed Asset values • Contribution $2,000,000 • Taxable gift to daughters $1,271,860 • Taxable gift to daughters $1,907,790(if gift delayed until stock appreciates to previous $3,000,000 value) • Reduction of taxable gift $635,930 if trust funded now Working with Life Income Options

  32. Questions and Answers Working with Life Income Options

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