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[Due to their similarity, a Charitable Gift Annuity ("CGA") has been referred to as a "poor man's Charitable Remainder Trust" -- not an apt reference as it takes some wealth and great compassion to enter into either transaction. More properly, a CGA could be called a "simplified Charitable Remainder Trust" as the plan produces somewhat similar results with far fewer administrative headaches.] Testing Financial Tolerance For Charitable Gift Annuities Case Study Background: Roger and Delores Bacon are age 75 and 70 respectively. If they were both to die today, their net worth would total $8,100,000 (plus $500,000 of life insurance on Roger's life). Please take a moment to examine their asset profile on the Client Information Summary [Click here]. Roger and Delores want $200,000 a year in spendable cash flow in their retirement years -- increasing by 3% a year as an inflation offset. They also want to be certain to maintain a growing cushion of Net Worth in case unforeseen emergencies occur. The analysis extends until their ages 95/90 and, over this term, their assets are more than enough to sustain these expectations. We will call this scenario (the Status Quo) Strategy 1. One of their assets is $2.2 million of farmland. They were in hopes it would be sold to the state to make way for a new highway but the route went in another direction. Consequently, the farmland has very low expected growth of, perhaps, 3% a year. Unfortunately, they are reluctant to sell it since their cost basis is only $100,000. Their advisers have suggested a CGA, but the Bacons are concerned that they might need the funds later in life. Further, they are worried that this large a gift to charity will deprive their children of a large portion of their inheritance. If the Bacons decide to do it, the CGA will create an immediate income tax deduction of almost $827,000 which they will spread over six years, producing just under $50,000 in income tax savings each year. When the charity sells the land, the entire proceeds of $2.2 million is available for investment by the charity. Based on their joint ages, the charity can pay out 7% ($154,000) annually to the Bacons for life, the tax treatment of which is as follows:
Income tax bracket: 36% Let's call the CGA approach Strategy 2 and examine the differences between "doing it" and "not doing it". Our calculations will include the Bacons' retirement income needs as noted above, and the InsGift graphic below shows that the Bacons' Net Worth does take a "hit" but it is recoverable. The same is true for the heirs.
The charity's Strategy 2 values have been calculated within InsGift by taking the difference between the CGA's annualized payout rate of $154,000 and an assumed investment rate on the charity's part of 9% on the donated funds. Over the next 20 years, the Charity's residual value of the CGA is estimated to be in excess of $3.7 million. (At the death of the final income beneficiary, some charities allow this residual value to be directed to a donor-advised account, letting heirs make suggestions as to charitable contributions from the fund.) We can avoid the initial decrease in Wealth to Heirs by adding a wealth replacement trust funded with $2.2 million of survivorship insurance on Roger and Delores' life. The policy used is a variable survivor life policy with annual premiums of $50,000 and an illustrated rate of 10% (net). The graphic below shows the results of this approach. We'll call it Strategy 3.
The addition of the wealth replacement trust funded with $2.2 million produces powerful results. A slight dip in the Bacons' Net Worth generates a substantial increase in Wealth to Heirs along with a considerable gift to charity. This is an easy strategy to like. Conclusion: This evaluation has been designed to produce a tolerable reduction in Roger and Delores' Net Worth (only they can say for sure) and a substantial gift to a favored charity -- while improving the wealth transferred to their heirs. Like other InsGift studies, the power of the analysis lies in the fact that the Bacons can make informed decisions in the context of their own needs and desires as well as those of their children and charity. This is by no means the end of the evaluation process for the Bacons. Obviously, their wealth preservation plans need further tax mitigation recommendations as their wealth transfer taxes are still projected to be considerable; however, the procedure outlined in this article has allowed you to gather all the data necessary to calculate additional strategies for their consideration. Working With Charities: Using our InsGift System, you can help charitable organizations that issue Charitable Gift Annuities make a convincing case for implementing the strategy with their wealthy donors. Don't take my word for it -- show this article to some of your local charities and listen to what they say. Downloading Data: Space prevents the inclusion of the various backup reports from InsGift that support the graphs displayed in this report; however, InsGift 4.0 users can review all the reports and related menu inputs we used to create this analysis by downloading the InsGift Workbook named MA115.!wb from the Workbook Download section of our website at www.insmark.com. On our main webpage, click on Producer's Center, then click on the Workbook Download icon at the top of the next page, then "Marketing Alerts". After downloading the Workbook, you can import it into your InsGift 4.0 System by clicking on Client Workbook/Import Workbook on the Main Toolbar of Version 4.0 of your InsGift System. To download the Workbook now, click here. InsGift System: If you are not licensed for the InsGift System and want more information about it, please contact an InsMark Account Executive at 1-888-InsMark (467-6275). Other Charitable Resources: InsMark has recently released five screen shows (we call them Computer Business Cards) that feature all the charitable techniques discussed in recent articles. They are: Testing Financial Tolerance for Family and Charitable Gifts, Charitable IRA, Charitable Remainder Trusts, Charitable Gift Annuities, and the Zero Estate Tax Plan. Featuring InsGift-type solutions, each screen show is customized with your name and is suitable for individual client/adviser presentations or seminars. We also provide you with the rights for unlimited duplication so you can use them as prospecting tools. We also have a video available entitled Testing Financial Tolerance for Family and Charitable Gifts. If you would like more information, please contact an InsMark Account Executive at 1-888-InsMark (467-6275), or click here. Your InsMark Account Executive can provide you more information about all of these strategic tools. Special thanks to InsMark Power Producer George P. Brown, CLU, ChFC, President of Brown Investment Advisors, Inc., Colmar, PA, for the CGA data reflected in this report. |
