These slides are taken from the graduate financial planning course "Introduction to Charitable Planning" at Texas Tech University. Details at www.EncourageGenerosity.com
2. All slides are
taken from this
book which
includes
detailed
explanations of
all concepts.
Available from
Amazon.com
Full color version available at
www.createspace.com/4707238
7. Find the §7520 rate
http://www.irs.gov/Businesses/Small-Businesses-&-Self-
Employed/Section-7520-Interest-Rates
Multiply annual payment by
annuity factor in IRS Pub. 1457
http://www.irs.gov/Retirement-Plans/Actuarial-Tables
Value of annuity
8. Find the §7520 rate
http://www.irs.gov/Businesses/Small-Businesses-&-Self-
Employed/Section-7520-Interest-Rates
I can choose
current or
one of last
two month’s
rate
$4,000/year
age55donor
on10/31/13
Aug 2.0%
Sept 2.0%
Oct 2.4%
10. Find the §7520 rate
2.4%http://www.irs.gov/Businesses/Small-Businesses-&-Self-
Employed/Section-7520-Interest-Rates
$4,000/year
age55donor
on10/31/13
For the
lowest
annuity
valuation
[highest
charitable
deduction]
select
Oct. 2.4%
11. Section 1 Table S - Based on Life Table 2000CM
Interest at 2.4 Percent
Life Life
Age Annuity Estate Remainder Age Annuity Estate Remainder
0 34.2376 0.82170 0.17830 55 18.1993 0.43678 0.56322
1 34.3011 0.82323 0.17677 56 17.7570 0.42617 0.57383
2 34.1418 0.81940 0.18060 57 17.3129 0.41551 0.58449
3 33.9727 0.81534 0.18466 58 16.8678 0.40483 0.59517
4 33.7967 0.81112 0.18888 59 16.4213 0.39411 0.60589
Find the §7520 rate
2.4%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-
7520-Interest-Rates
Multiply annual payment by
annuity factor in IRS Pub. 1457
$4,000 X 18.1993www.irs.gov/Retirement-Plans/Actuarial-Tables
$4,000/yearage55
donoron10/31/13
12. Find the §7520 rate
2.4%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-
7520-Interest-Rates
Multiply annual payment by
annuity factor in IRS Pub. 1457
$4,000 X 18.1993www.irs.gov/Retirement-Plans/Actuarial-Tables
Value of annuity
$72,797
If annuity
pays more
than
annually, add
adjustment
factor from
Table K
$4,000/yearage55
donoron10/31/13
14. 2011 2012 2013 2014 2015 … Death
…
2010
IRS requires
annuity
value <90%
of transfer
If charitable
deduction is
not >10% of
transfer, it
doesn’t
qualify
15.
16. Find the §7520 rate
www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-
7520-Interest-Rates
Multiply annual payment by
annuity factor in IRS Pub. 1457
www.irs.gov/Retirement-Plans/Actuarial-Tables
Value of annuity
For two
lives use
Table R
Annuity factor is
(1-remainder)
§7520 rate
19. Part of each annuity check just gives you
back some of the money you paid
Initial Gift
Annual Payments
Charity $100,000
10/31/2014
Donor $4,000
10/31/2015
10/31/2016
10/31/2017
+ Return of InvestmentEarnings
20. Initial Gift
Annual Payments
Charity $100,000
10/31/2014
Donor $4,000
10/31/2015
10/31/2016
10/31/2017
+ Return of InvestmentEarnings
The rest is earnings (taxable)
21. Initial Gift
Annual Payments
Charity $100,000
10/31/2014
Donor $4,000
10/31/2015
10/31/2016
10/31/2017
+ Return of InvestmentEarnings
There is NO tax on getting back your own
money
22. Initial Gift
Annual Payments
Charity $100,000
10/31/2014
Donor $4,000
10/31/2015
10/31/2016
10/31/2017
+ Return of InvestmentEarnings
There IS a tax on getting earnings on your
money
32. Do you pay
taxes on the
interest
earned?
Yes.
That is new
money you
didn’t have
before
33. The idea of
taking all of
the interest
and some of
the principal
each year is
similar to an
annuity
34. Each annuity check has some earnings
and some return of original investment
earnings
returnof
original
investment
35. How much of each annuity check is return
of the money you put in originally?
earnings
returnof
original
investment
36. $ used to buy annuity
Original life expectancy
earnings
returnof
original
investment
Annual return
of investment=
NOT the deductible gift
part of the transaction
41. 2014 2015 2016 2017 2018 Life Expectancy
2013
Taxfree
returnof
investment is
divided
among each
expected
payment
Original Investment
…
42. 2014 2015 2016 2017 2018 Life Expectancy
2013
Annuity payments
after life
expectancy are
100%taxable
because alloriginal
investment has
beenreturned
…
43. 2014 2015 2016 … 2025 Life Expectancy Death
2013
…
$4,000
Ordinary
income
$4,000
Ordinary
income
$3,355
Taxfree
return
ofinvest-
ment
$645
Ordinary
income
$3,355
Taxfree
return
ofinvest-
ment
$645
Ordinary
income
$3,355
Taxfree
return
ofinvest-
ment
$645
Ordinary
income
$3,355
Taxfree
return
ofinvest-
ment
$645
Ordinary
income
44. 2011 2012 2013 … Death… 2022 Life Expectancy
2010
$3,355
Taxfree
return
ofinvest-
ment
$645
Ordinary
income
If early death,
donor’s last tax
return deducts
original investment
not yet given back
$3,355
Taxfree
return
ofinvest-
ment
$645
Ordinary
income
$3,355
Taxfree
return
ofinvest-
ment
$645
Ordinary
income
45. Compare a cash charitable gift annuity vs.
splitting the gift amount between a
commercial annuity and an immediate gift
vs.
$4,000
$4,000
Charity
Donor
Insurance
Company
Donor
Charity
49. I paid for it
I sell it for
fair market
value of
I have a
capital
gain of
Normal Capital Gain Rules
50. I paid for it
I sell it for
fair market
value of
I have a
capital
gain of
Normal Capital Gain Rules
51. I paid for it
I give it to
charity for
an annuity
worth
It has a fair
market
value of
I have a
capital
gain of
52. % of the
property value
used for
annuity
% of cost basis
allocated to
annuity
=
53. Step 1: Divide property value
Original cost
$500,000
Value
$1,000,000
Gave to charity for
$800,000 annuity
$800,000
Annuity Part
80%
54. $800,000 of value to donor
Original cost
$500,000
Value
$1,000,000
Gave to charity for
$800,000 annuity
$800,000
Annuity Part
80%
55. Step 2: Divide cost basis
Original cost
$500,000
Value
$1,000,000
Gave to charity for
$800,000 annuity
$400,000
Annuity Part
of Cost Basis
80%
56. 20%gift part of
cost basis
$100,000
Annuity part of cost basis
Original cost
$500,000
Value
$1,000,000
Gave to charity for
$800,000 annuity
$400,000
Annuity Part
of Cost Basis
80%
57. Annuity
part
$800,000 value to donor
─$400,000 annuity part of
basis
Gain:Annuityvaluelessannuitypartofbasis
Original cost
$500,000
Value
$1,000,000
Gave to charity for
$800,000 annuity
58. Original cost
$500,000
Value
$1,000,000
Gave to charity for
$800,000 annuity
Gain:Annuityvaluelessannuitypartofbasis
Annuity
part
$800,000 value to donor
─$400,000 annuity part of
basis
$400,000 Gain
59. If donor purchases
annuity for another
person with
appreciated
property, tax on
capital gain is paid
immediately
60. If donor is
annuitant (or if
jointly purchased
annuity for donor
and spouse), tax on
capital gain is paid
over
life expectancy
62. 2014 2015 2016 2017 2018 Life Expectancy
2013
Totalcapital
gainis
divided
among each
expected
payment
Capital Gain
…
63. 2014 2015 2016 2017 2018 Life Expectancy
2013
5yearlife
expectancy
and$10,000
gain $2,000
ofeachcheck
for5yearsis
capital gain
$10,000 Capital Gain
$2,000
$2,000 $2,000
$2,000
$2,000
…
68. $4,000
Annuity
Donor gives $100,000
stock (cost$60,000)
Charity
paysage
55donor
$4,000
peryear
forlife
Value ofannuity
-Basisusedforsalepart
Total capital gain
$72,797
(previousslides)
$60,000basis X
($72,797/$100,000)
69. $4,000
Annuity
Donor gives $100,000
stock (cost$60,000)
Charity
paysage
55donor
$4,000
peryear
forlife
$72,797 (Annuity)
-$43,678 (Basis used)
Total capital gain
$72,797
(previousslides)
$60,000basis X
($72,797/$100,000)
77. $4,000
Annuity
Donor gives $100,000
stock (cost$60,000)
Charity
paysage
55donor
$4,000
peryear
forlife
$2,013
Returnof
Basis
$645Ordinary
Income
$4,000Check
$1,342
Capital
Gain
78. 2014 2015 2016 … 2025 Life Expectancy Death
2013
…
$4,000
Ordinary
income
$4,000
Ordinary
income
$645
Ordinary
income
$1,342
CapGain
$2,013
Return
ofBasis
$645
Ordinary
income
$1,342
CapGain
$2,013
Return
ofBasis
$645
Ordinary
income
$1,342
CapGain
$2,013
Return
ofBasis
$645
Ordinary
income
$1,342
CapGain
$2,013
Return
ofBasis
79. 2014 2015 2016 … Death… 2022 Life Expectancy
2013
If early death,
donor’s last tax
return deducts
allocated basis not
yet given back
$645
Ordinary
income
$1,342
CapGain
$2,013
Return
ofBasis
$645
Ordinary
income
$1,342
CapGain
$2,013
Return
ofBasis
$645
Ordinary
income
$1,342
CapGain
$2,013
Return
ofBasis
81. If donor names a different annuitant, the
donor has made a gift to that person
1/1/2018
1/1/2017
1/1/2016
1/1/2015
1/1/2014
3rd Person 4,000
FiveThousandandno/100
Charity
Donor 3rd Person
Charity
82. This gift (to a non-spouse) may reduce the
remaining gift tax exclusion
1/1/2018
1/1/2017
1/1/2016
1/1/2015
1/1/2014
3rd Person 4,000
FiveThousandandno/100
Charity
Donor 3rd Person
Charity
86. Long term
capital gains for
collectibles (art,
antiques,
stamps, coins,
jewelry) are
taxed at a
higher rate
(31.8%) than
other capital
gains
87. I give $100,000
in collectible
items in
exchange for a
gift annuity.
What is my tax
rate for the
capital gain
portion of the
payment?
$100,000
($60,000basis)
Donor
gives
$100,000
Charity
paysage
55donor
$4,000per
yearforlife
$4,000
Annuity
89. The nature of the capital gain income doesn’t
change, it is simply deferred. We don’t know in
advance what tax rate will apply at that time.
0% rate if
ordinary income
tax rate is 15%?
15%rateifordinary
income taxrateis
25%?
3.8%Medicaretaxif
purchasedafter
1/1/13?
20%rateifordinary
income taxrateis
39.6%?
28%rateon
collectiblescapital
gain?
90. Donor gives $100,000
of unrelated use
tangible personal
property with
$60,000 basis.
What is the
deduction?
$100,000
Art
Donor
gives
$100,000
Charity
paysage
55donor
$4,000per
yearforlife
$4,000
Annuity
91. What is the
deduction?
Remember: A
charitable gift of
unrelated use
personal property is
deducted at lower of
basis or FMV
$100,000
Art
Donor
gives
$100,000
Charity
paysage
55donor
$4,000per
yearforlife
$4,000
Annuity
92. % of the
property value
used for
annuity
% of cost basis
allocated to
annuity
=
93. Step 1: Divide property value
Original cost
$60,000
Value
$100,000
Gave to charity for
$72,797 annuity
$72,797
Annuity Part
72.8%
94. 27.2% of value to charity
Original cost
$60,000
Value
$100,000
Gave to charity for
$72,797 annuity
$72,797
Annuity Part
72.8%
95. Step 2: Divide cost basis
Original cost
$60,000
Value
$100,000
Gave to charity for
$72,797 annuity
$43,678
Annuity Part of
Cost Basis
72.8%
96. Gift Part of Cost Basis
Original cost
$60,000
Value
$100,000
Gave to charity for
$72,797 annuity
$43,678
Annuity Part of
Cost Basis
72.8%
97. Because I can deduct only cost
basis for unrelated
use tangible
personal
property my
deduction
is $16,322
Original cost
$60,000
Value
$100,000
Gave to charity for
$72,797 annuity
$43,678
Annuity Part of
Cost Basis
72.8%
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101. This slide set is from the curriculum for
the Graduate Certificate in Charitable
Financial Planning at Texas Tech
University, home to the nation’s largest
graduate program in personal financial
planning.
To find out more about the online
Graduate Certificate in Charitable
Financial Planning go to
www.EncourageGenerosity.com
To find out more about the M.S. or
Ph.D. in personal financial planning at
Texas Tech University, go to
www.depts.ttu.edu/pfp/
Graduate Studies in
Charitable Financial Planning
at Texas Tech University