A type of charitable gift known as the income gift can help you fulfill your philanthropic goals and generate an income stream for yourself or others. Here are five things to know about gifts that pay you income.
Life income gifts benefit you now, charities later.
Life income gifts are a way to for charitably minded individuals to both give and receive. Here is how they typically work. After you make a gift of cash, securities, or other assets, you receive a stream of income for life or a specified number of years. If you prefer, you can name a different beneficiary to receive the income. The assets remaining after the last beneficiary dies or the trust ends are then used by the charitable organization.
This approach is designed to help protect your financial security now and support your favorite charities later.
The tax benefits can be significant.
When you make a life income gift, you can claim a charitable deduction for a portion of your gift, assuming you itemize deductions on your tax return. The exact amount of your deduction will depend on the amount of your gift that is expected to eventually pass to charity.
Another potential tax benefit is that in certain situations when you donate long-term appreciated assets, you do not pay capital gains tax at the time of the gift. This means that your entire gift may be available to be reinvested. If you donate assets that are currently yielding little or no income, you may receive a larger income stream than if you sold the assets yourself, paid the tax on the capital gains immediately, and reinvested the remainder.
There is more than one way to make a life income gift.
The first way is with a charitable gift annuity, which is a contract between you and your chosen charity in which the charity promises to pay you and/or another beneficiary a fixed income for life in return for your gift of cash, securities, or other assets. The promise of life-long income is backed by the charity’s assets.
The amount of your income payments will depend on several factors, including your age when the payments begin and whether the payments are for one life or two. Generally speaking, the older you are when the income payments begin, the higher your payments will be.
The second way to make a life income gift is with a pooled income fund. This type of giving arrangement is a trust created by a charitable organization in which your contribution is “pooled” for investment purposes with contributions from other donors. Each quarter, the fund pays you and/or another beneficiary a proportional share of the fund’s net income. The amount of income you receive each period will vary, depending on how the fund’s investments have performed.
The third way to make a life income gift is with a charitable remainder trust, which is a type of private trust that you set up and fund to generate income for yourself or others with the remainder going to your favorite charities.
Many charities offer charitable gift annuities and pooled income funds.
Many religious, educational, and charitable organizations have charitable gift annuities and pooled income funds available to donors who want to support their organizations. They typically require a donation of at least $5,000 or $10,000 and will generally accept cash or securities.
A charitable remainder trust offers more flexibility.
With a charitable remainder trust, you choose the individual or the organization who will manage the trust. You can name more than two beneficiaries to receive the income payments. You can choose to have he income payments last for life or for a specified period of years. You can choose more than one charitable organization to receive the trust’s remaining assets. And depending on the type of trust you choose; the trust can pay you a fixed amount each year or a fixed percentage of the trust’s assets as they are valued each year.
All this flexibility comes at a price. Because charitable remainder trusts are custom designed and individually managed, there are significant costs associated with setting them up and running them. A minimum contribution of $50,000 to $100,000 may be needed to justify the cost.
Please consult with us for advice on life income gifts, as well as other ways to meet your philanthropic and financial objectives. With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life. Our approach is to provide clarity and calm amidst the chaos. Where there is uncertainty, we look for facts. We call our approach evidence-based investing. Call us today at 802-878-2731 to schedule a strategy session and begin building your road map to financial success.
Article published in March 2021 edition of Eye on Money. If you would like to be added to our mail list please email [email protected].