©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
Working with Life Income Options:
Moving to the Next Level
Jeff LydenbergPG Calc
http://www.pgcalc.com
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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?
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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?
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
Qualified Retirement Plans
• Limits on contributions
• $22,000 for most
• Concerns about market risk in IRAs, 401(k)s
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
Capital Gain Taxes
• 15% for most
• Dramatic declines in market values
• Long term investors still concerned
• Recovery will come
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
Gift Annuity Taxation: Cash
• For duration of life expectancy:– Payments partially ordinary income– Payments partially tax-free return of
capital
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
Gift Annuity Taxation: Cash
Present Value of an Annuity Gift Value
A$58,917
B$41,083
$100,000 gift, $6,100 annual payment
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
Gift Annuity Taxation: Cash
Tax free return of capital:
$58,917 ÷13.1 = $4,497Ordinary income $1,603
$6,100
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
Gift Annuity Taxation: Appreciated Property
Present Value of Annuity Gift Value
ACost
$23,567
BGain
$35,350
CCost
$16,433
DGain
$24,650
$58,917 $41,083
$100,000 property, $40,000 cost basis$6,100 payment
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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!!
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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.
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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.
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
2020 $1,340 6.72021 2,680 6.7 2022 4,040 6.8 2023 5,400 6.8 2024 6,800 7.0 2025 8,200 7.0 2026 9,620 7.1
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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 TotalStart DateStart DateRate Annuity9/30/2020 66 8.6% $8,6009/30/2021 67 9.0% $9,0009/30/2022 68 9.6% $9,6009/30/2023 69 10.1% $10,1009/30/2024 70 10.8% $10,800
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
Promoting Gift Annuities Despite the Economy
Gift Date 10-Year Treasury After-Tax Income
Gift Annuity After-Tax Income
Differential
6/12/08 $2,827 $6,353 $3,526
10/31/08 2,626 5,995 3,369
2/1/09 1,675 5,772 4,097
•Gift annuity rates at historic lows
•Still competitive with fixed income vehicles
©2009 PG Calc Working with Life Income Options
PG Calc | Invested in your mission
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
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