A Selfish Reason to Donate Money to your School
Charitable Gift Annuities
Imagine…
You donate money to a nonprofit (University, Hospital, Museum, etc).
You deduct a portion of your donation from taxes (potentially for five years).
That nonprofit pays you income for a lifetime.
What I’m describing is a Charitable Gift Annuity and here is why you should or shouldn’t do it.
Why you should do it:
Guaranteed Income for Life
Retirement planning is hard… managing a known quantity (your nest egg) over an unknown timeline (your lifetime) is likely one of the most challenging things we do financially — guaranteed income makes this quandary easier.
If Cornell (my alma mater) can play a role in making my retirement stress free… it seems like a win-win.
Leaving a Legacy
A Charitable Gift Annuity is a Charitable Gift before it is an Annuity.
These contracts are designed to help you scratch your itch for philanthropy.
Paying Less Taxes
Generally speaking, there are 3 “tax-things” going on when you donate via a Charitable Gift Annuity.
One, a portion of your donation is considered tax deductible – this portion is effectively the difference between the size of your gift and the present value of what you expect to earn in annuity payments.
Two, a portion of your donation is not (tax deductible) – this is quantified as the present value of your annuity payments.
Three, a portion of your annuity payment does not get taxed – since your annuity has after-tax “cost (the portion of your donation not eligible for tax deduction),” a percentage of your annuity payments are seen as a return of basis (the charity giving you your money back) as opposed to earned income (the charity giving you your money back with interest). This “return of basis” is non-taxable.
To add a fourth tax wrinkle, the money used to seed this donation can come from cash or other investments.
If you’re using investments like appreciated stock, you’ll avoid needing to pay tax on their capital gains once you’ve elected to gift them.
It’s pretty nice to give investments away, not pay taxes, and still receive a lifetime of income.
Why you shouldn’t do it:
(Most) Gifts are Irrevocable
When you give the money away you cannot change your mind and get it back.
Less Money for You
Traditionally annuities are designed to ensure the annuitant receives the maximum benefit allowable based on money paid.
Charitable annuities are different in that they are often designed to ensure the charity receives the bulk of the donation – this means lower payments (or less money) for you.
There’s Risk
There’s risk that you’ll pass away before realizing most of the benefit — for example: you donate the money today and die tomorrow.
Further there’s risk the charity goes bankrupt and stops paying you – yes this can happen.
As with any financial decision it’s best to consult with an advisor (I wonder where you can find one 😊?).
Cheers