How to Build a Church Fund by Solving a Donor’s Problem

September 15, 2009 by  
Filed under Featured

lonetree150x131If your church’s church fund needs a boost (or is non-existent), here’s an idea that can add immediate funds and help the donor in several ways.

John, age 68, an active church member, retired three years ago. With Social Security and a pension, he gets along OK. Still, with the cost of living increases, especially heating oil during the winter, he could use more income.

John heads the stewardship committee at church. The committee’s primary goal this year is to build up the church fund.

John is an avid hunter and angler. He has waited a long time to be able to do more of both during retirement. The type of hunting and fishing expeditions he likes are expensive.

His other major concern is long-term care. He figures that if he ever needed to go into a nursing home facility, the cost would exhaust his assets in two years. The long term care policy that would solve his problem costs $3,500 a year.

His dad died 10 years ago and left him a piece of land that, at the time, was worth $100,000. Lucky for John, the town has expanded in that direction and the land is now worth $400,000.

What John really needs to do is sell the land and re-invest in something that would produce an income.

If he could find a buyer, the capital gain on the land would be $300,000 and the capital gain tax $45,000. It would probably cost him 10% to sell, so he would net out about $315,000.

One of John’s fishing buddies at church is a financial planner. He is aware of John’s need for more income. Recently, as they were hip-deep in water fly fishing in Montana, the financial planner asked John if he would be interested in selling his land and pay no tax nor real estate commission if he were willing to make a donation to the church fund.

And, he added, John would net out about the same as if he sold the land himself and paid the tax and real estate commission.

John nearly jumped out of his waders. This would allow him to re-invest in something that produced an income to offset the cost of living, allow him to buy a long-term care policy and book more hunting and fishing trips. The fact that he could also contribute to the church fund was very appealing. When they got home, his friend ran the numbers.

The financial planner’s idea involved a charitable planning technique known as a bargain sale. In its simplest terms, a bargain sale involves a purchase of an asset by a charitable organization for less than the market value. In John’s case, the buyer would be the church fund.

A bargain sale has two parts: a sales portion and a gift portion. John’s sale of his land to the church fund would entail a capital gain tax on the “sales” portion of the bargain sale. John would receive a charitable income tax deduction on the “gift” part.

The key to zeroing out the capital gain tax is to “give” just the right amount so that the tax deduction cancels out the tax. Here’s what works in John’s case.

Bargain Sale
“Sale” amount from church fund $ 290,909
“Gift” amount from church fund + 109,091
Land value $400,000
Capital gain on the “sale” aa32,727
Tax savings on “gift” (30% TB) –   32,727
Net tax aaaaaa0
Gift to church fund – 109,091
Net to John a290,909

Let’s summarize what has happened here:

  1. John sells his land to the church fund and his charitable income tax deduction cancels out his capital gain tax.
  2. He pays no real estate commission, thus saving about $40,000.
  3. The $290,909 he receives represents an internal rate of return over the last 10 years of 10.7%. He would have been happy with 6%.
  4. He can re-invest the $290,909. At 5%, this creates an income of $1,200 a month he didn’t previously have.
  5. He can now easily afford the $300 a month long-term care premium. He has preserved his assets and achieved peace of mind by covering this base.
  6. He has $900 a month for hunting and fishing outings. He doesn’t blink an eye at $600 rods and $300 reels.
  7. He has a warm feeling because he gave his church fund $109,000.

Moreover, he has provided an example of how one planning technique can have an immediate significant impact on the church fund. Others in the church may have similar circumstances where this technique would also apply.

The key is to communicate this and other charitable planning techniques to a church’s membership. People cannot implement what they do not know. Providing this information is the goal of The Smart Giver.

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Robert Cavanaugh, Platinum Author