For Some It’s Better To Give and Receive

Los Angeles Times
Kathy M. Kristof, Times Staff Writer
February 26, 2006

John M. Rau would like to make a big donation to charity, but the 80-year-old Orange resident is concerned about impoverishing himself by giving away too much of his money before he dies. One solution: a charitable gift annuity.

These annuities allow donors to give away a substantial asset with a string attached. In exchange for the gift, the charity will promise to give back a set return on Rau's money for as long as he lives.

And that return handily beats deposit rates. Rau is considering gift annuities that will pay him 8.8% to 10.5% annually on his donated dollar.

When he dies, the remaining value of the donated asset goes to the charity, not Rau's heirs. But in the meantime, Rau gets regular income and tax deductions for the donation.

"People who do this should clearly have some charitable intention and feel like they have enough property or assets that they can afford to make a gift," said Thomas Lawson, a partner at Los Angeles law firm Loeb & Loeb. "But the real benefit to the donor is that he has a lifetime guaranteed income. As long as the charity is good for the payments, he's going to get the contracted amount for as long as he lives."

Charitable annuities are much like so-called immediate annuities sold by insurance and mutual fund companies. The investor plops down a set amount, such as $100,000. And the investment company agrees to pay back a set amount each month. The monthly amount the investor gets depend on the individual's age, whether monthly payments continue through the lifetime of a spouse in addition to the original investor, and anticipated investment returns.

By and large, the monthly payments on an immediate annuity are calculated to return the investor's principal, plus a modest rate of return, over his anticipated lifetime. For instance, a 70-year-old man might have an estimated life span of 18 years. If he put $100,000 in an immediate annuity, he could get $700 a month, or about $8,400 a year, from the annuity. That represents a return of 5%, not 8.4%. Why? Part of it is a return of his money-the principal-not just on his money.

If the investor lives longer than average, he gets a relative bargain because the annuity company promises to pay the same amount each month, no matter how long he lives. If he dies early, however, the annuity company gets a windfall because the principal is not returned to the investor.

Charitable annuities are similar, but with a twist. The monthly return on a charitable annuity is lower to increase the likelihood that the charity doesn't eventually give back all of the principal. Consequently, instead of getting $8,400 annually, this hypothetical investor might get $6,500.

However, Rau notes that it's important to shop around because different institutions promise different returns. Most follow annuity schedules set up by the American Council on Gift Annuities. But some offer better rates.

Rau learned this inadvertently. He attended three schools and was interested in providing donations to all three. When he realized that each was offering a slightly different return on his money, he shopped some more. The roughly 10 charitable organizations he's contacted have offered him payments equivalent to 8.8% to 10.5% annually.

"There are some charities that I want to support enough that I'm not going to worry about the rate," he said. "But unless I find a good reason not to, the big gift is going to the [charity offering] 10.5%."

In addition to the monthly payment, he would also get a tax deduction in the year he agreed to the annuity. The amount of the deduction equates to the present value of the future gift-in the hypothetical example of the 70-year-old man, what $100,000 is worth 18 years from now-minus the monthly payments. That's a tricky number to calculate for most laypeople, but it's one that the technical folks at the Internal Revenue Service and most charities have down to a science.

Leah Bishop, an estate planning attorney with O'Melveny & Myers in Los Angeles, says the exact deductions vary with the donor's age, promised return and interest rates. But a 70-year-old could expect to deduct about one-third of the amount placed in a charitable annuity, assuming about a 6.5% return each year.

The combination of monthly returns and tax deductions can make charitable annuities an attractive option for the philanthropically minded, Lawson said.

They are a particularly good deal for people like Rau who have a particular asset that's appreciated in value and would otherwise cost them a fortune in capital gains taxes. Rau said he was interested in donating a piece of appreciated commercial property that he had written off for tax purposes over a long stretch. Because of the write-offs he's taken, he'd have to pay tax on 100% of the sales price in the year it was sold.

By giving the asset to the charity, he could spread out receipt of the investment gain over the time he's receiving annuity payments and use the deduction he's getting to offset a portion of it, Lawson said. That makes the charitable annuity both economically and psychologically appealing.

"It's great for those people who have a 1960s stock portfolio, where they bought shares for $1 that are now worth $100," he said. "That would be the ideal asset."

*Kathy M. Kristof, author of "Investing 101" and "Taming the Tuition Tiger," welcomes your comments and suggestions but regrets that she cannot respond individually to letters or telephone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For previous columns, visit latimes.com/kristof.

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