Gift Annuity Advertising: Cautions & Recommendations

October 19, 2009 by  
Filed under Featured

featuredpresentation150x131The summer of 2009 brought gift annuities into the limelight, but not under the best of circumstances. A Ninth Circuit Court of Appeals case, Warfield v. Bestgen, found that gift annuities are subject to securities law. The appeal came from financial planners who were paid commissions (a no-no) to place gift annuities for the Mid-America Foundation.

Actually, there was much more behind this case. Long story short: The President of Mid-America misused $55 million of funds from 400 people, which was to fund their gift annuities. Mid-American went bankrupt and the receiver went about collecting the commissions paid to the planners as part of the recovery process for the 400 gift annuitants. Hence, the lawsuit referenced.

This case and an article published on the web site, Charities Use Dubious Annuity Pitch, brought attention to the manner in which gift annuities are marketed. The rub was using a picture of a donor that was not a picture of the real donor, but rather a picture of a younger looking person and what amounts to a testimonial that was not an actual testimonial, but one meant to be representative of results of actual donors.

In my blog, and on my video podcast site, I have examples of gift annuities that in very clear language indicate a gift annuity is meant for an older person (I suggest at least age 70) and that the older a person is the higher the payout rate.

Apparently, the challenge arose because some gift annuity literature used an 8% gift annuity payout rate alongside a donor who obviously was not old enough to buy a gift annuity paying 8%. Using the AFR for October 2009, and assuming a gift annuity payout begins 11/1/09, a person would have to be 85 years old to qualify for an 8.1% payout rate.

My take on all this is as follows:

  1. Don’t let one bad apple in the Mid-America Foundation bankruptcy discourage or prevent you and your church from promoting gift annuities. They provide a valuable benefit to the donor and the church. Like anything else, they just have to be applied to the proper situation.
  2. Whatever you do, don’t offer a commission to anyone to market gift annuities on behalf of your church.
  3. I am a big proponent of re-insuring gift annuities anyway. Most churches don’t have a formal gift annuity program. Simply re-insuring by buying a commercial single premium annuity from an insurance company simplifies the entire transaction and gives the donor the peace of mind knowing that his or her gift annuity payments are backed by a multi-billion dollar insurance company. So I would suggest taking a close look at re-insuring all gift annuities unless your national church has a gift annuity program.
  4. Columnists are under great pressure to produce content for their publications. I think that in some cases a resulting story comes from nit picking a situation beyond what I would consider reasonable bounds. If you work with a competent financial professional – CPA, attorney, financial planner, insurance agent, gift planner—you probably will be given accurate information based on your circumstances and, most likely, the pros and cons of moving forward with any financial decision, such as a gift annuity. Who cares if the picture of the person in the brochure that prompted you to explore a gift annuity in the first place looked 20 years younger than the numerical example? Maybe he or she has taken great care of themselves, exercised and even was lucky enough to have good genes. Where’s the foul?

If you are over 70, want to increase the yield on an asset, set up a guaranteed income that you cannot outlive, have a very large percentage of that income excluded from tax, could use a tax deduction and have no objection to ultimately benefiting your church, I would suggest that you get with a financial professional, tell them about your situation and what you are trying to accomplish and have them throw a gift annuity into the mix of your alternatives.

SocialTwist Tell-a-Friend

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.

SocialTwist Tell-a-Friend

IRAs: Overlooked Major Gifts

August 5, 2009 by  
Filed under Featured


Major Gifts and IRAs

Naming a church as the beneficiary of one of your IRAs is a great idea. It will provide tax benefits in some instances and help many people after you are gone. However, you must be careful to structure the IRA and the beneficiary arrangement properly or you can run into problems.

Churches would be wise to educate their membership on all the planning techniques with regard to IRAs as they are a tremendous source of major gifts.

An Estate Planning Example

Naming a church as an IRA beneficiary provides an estate tax charitable deduction at death. This is a simple way to reduce the taxable estate. Given the mega-IRAs of today, this would represent a major gift to the church. Here’s an example that eliminates any estate tax altogether.

Assume a single person with an estate of $4,500,000. If the person dies in 2009, current law allows them to pass $3,500,000 to their heirs free of estate tax. This leaves $1,000,000 subject to estate tax. However, if this $1,000,000 were the balance of a traditional IRA with the beneficiary properly set naming a church or charity as the beneficiary, the $1,000,000 estate tax charitable deduction would reduce the estate to $3,500,000 and no tax would be due.

The charity would receive the $1,000,000 completely free of income tax. The income tax issue does not apply to a Roth IRA as Roth IRA distributions at death are generally received income tax free.

Communicating this one simple example could result in several major gifts from an average-size congregation.

Cautions to Preserve the Stretch IRA Option

Even though the stretch IRA would defer major gifts to a church, the ultimate gift can be substantially greater. Retaining the ability to stretch the required minimum distributions (RMD) out as far as possible is important. If you stretch the RMD over several generations, I can show you how an IRA balance of $100,000 can generate 10 million dollars in income.

If a person other than an individual is named as a beneficiary of a traditional IRA, the IRA will be treated as having no beneficiary. This means the distribution must be paid out over five years or the remaining life expectancy of the IRA owner, depending on the age at death, and the ability to use any stretching techniques is lost.

Educating members within a church about the proper beneficiary arrangements for a Roth IRA may result in major gifts, as Roth IRAs with no beneficiary must be paid out over five years.

The key here that may inadvertently create a problem is that a church is not an individual. Typical examples would be an IRA, which named both the spouse and a charity as a beneficiary, or a trust with a charitable beneficiary.

The solution is to use a separate IRA for the church. If you have more than one IRA, pick one if the amount is what you want to give or split one IRA into two.

Lifetime Gifts to Charity

A person can receive the same estate-reducing benefits by gifting IRA assets during their lifetime. A number of major gifts can be obtained by setting up a campaign to inform parishioners about the IRA Charitable Rollover discussed below. Here, generally, are the rules:

  1. You must take a distribution from your IRA.
  2. This distribution may be fully or partially included in your income. The exception is the exclusion provided by the Pension Protection Act of 2006 (PPA 2006) summarized below.
  3. This inclusion, however, is offset by the ability to take an income tax deduction for your charitable contribution if you itemize.

Cautions for Lifetime Giving

The amount of your charitable deduction may be limited to 50%, 30% or 20% of your adjusted gross income depending on the asset given and the charity to which it is given. Excess amounts can be carried over for five more years. You will want to sit down with your tax advisor and do some projections to assure that you are getting the maximum deductions in the years you want and that no deductions are wasted.

The good news is that the inclusion of the distribution increases your adjusted gross income. Therefore, the applicable charitable deduction percentage is applied to a higher number. However, there may be an unfavorable result if the increase in income causes itemized deductions and personal exemptions to be phased out. Again, see your tax professional.

The exception to this discussion lies in a section of PPA 2006 that allows certain distributions made to charity to be excluded from income. Here are some of the rules that apply:

  1. The IRA owner must be 70 ½.
  2. Only traditional and Roth IRAs are eligible; SEPs and SIMPLE IRAs are not.
  3. The maximum amount you can give which is excluded from income is $100,000.
  4. The charity must be a 50% public charity. Churches are 50% charities.
  5. The transfer must be made directly from the IRA trustee to the charity.
  6. This only applies in 2009 (unless Congress extends this beneficial provision).
  7. You can’t also take an income tax deduction for the distribution to charity.

If you have a SEP, SIMPLE IRA, any qualified plan such as a 401(k), a tax sheltered annuity or a 457 government plan, think about rolling all, or a portion, over to a traditional IRA and then making the desired charitable distribution. Don’t roll over to a Roth as conversions to Roths are taxable.

For more information on IRA Charitable Rollovers and how your church can be the recipient of major gifts, see my post on the subject at How To Make Tax Free Transfers From Your IRA.

As you can see, naming a church as the beneficiary of your IRA can provide tax benefits.  If you make a gift during your lifetime, you can have a warm feeling in your heart as you see the tangible results of your gift. However, the beneficiary arrangement has to be set up properly and the rules followed.

A church needs to communicate the IRA gifting options to its members. Not to do so is leaving a ton of major gifts on the table.

SocialTwist Tell-a-Friend

How To Attract Major Gifts

July 27, 2009 by  
Filed under Featured


An IRA is one of the worst assets to leave to your heirs. Here’s an alternative that can save tax on your IRA and benefit your church.

Meet Bill and Ann. Bill is retired and has an IRA worth $1,000,000–not unusual in today’s mega-IRA world. They both have other assets: Ann’s 401(k) from her career, their home, other investments and the proceeds from the sale of Bill’s business.

Bill has named Ann the beneficiary of his IRA. When he dies, Ann will re-name the IRA in her name, continue to draw income for the balance of her life and then leave it to their three children.

A “typical” plan. Exactly what most people do.

But it’s a tax disaster.

Take a look at the “before and after” results (just with respect to Bill’s $1,000,000 IRA) in the chart below. Plan A is Bill and Ann’s current plan. Plan B shows the results of a technique I teach in The Smart Giver.


Which looks like a better plan to you?

Most people are what I call “flying blind.” They don’t even know there is a Plan B.

Your church probably has a number of “Bill and Anns.” Knowing about Plan B can endow your church in just a couple of transactions.

The Treasury Department estimates there are currently 3 trillion dollars in IRAs. Right behind this are 60+ million Baby Boomers (the oldest turning 63 this year) who hold 12 trillion dollars in qualified plans such as 401(k) plans.

Will your church get its fair share? Could you help people within your congregation divert money that otherwise would go to the government to their heirs and your church?

For more information about this plan, see the video entitled, “How To Leave 100% Of Your Estate To Your Children Tax Free” on my video podcast site.

This concept is also the subject of one of the 16 lessons in The Smart Giver, an educational series designed to help people increase their income, reduce taxes and help their church all at the same time.

SocialTwist Tell-a-Friend

Charitable Gifts of Life Insurance – What’s Deductible?

May 1, 2009 by  
Filed under Featured

warmsmile150x131Gifts of life insurance to charity are popular. However, the transaction is a bit more complicated than it might seem at first blush. 

There are caveats. Do some things wrong and adverse tax consequences and/or penalties could apply.

In this post, I will examine what is deductible in three different life insurance policy gift scenarios.

Meet Jane

Jane was widowed at an early age. Her husband left her with two children. He also left her financially secure by virtue of having bought a sizable life insurance policy after their children were born.

After her husband’s death, Jane followed his planning and bought several life insurance policies, naming her children as beneficiaries.

Fast forward 20 years. Her two children are now grown, out of college and have successful high-income careers of their own.

Consequently, Jane has concluded that the life insurance policies have served their purpose and are no longer needed. She wants to give the policies to the church where she and her husband attended in his memory.

First Steps

The first thing Jane needs to do is to make a copy of her policies and obtain an “in-force ledger statement” (IFL) on each policy from the respective insurance companies. The IFL projects the values of a policy from today forward, using the current dividend scale/interest rate.

Second, she needs to meet with the church’s planned giving resource professional and give him/her this information. Not all churches accept gifts of life insurance. Those that do generally have a Gift Acceptance Policy. The type, status and characteristics of her policies will be compared to the criteria set forth with regard to life insurance gifts.

Jane has three types of policies. Let’s take a look at how each is valued for charitable tax deduction purposes and see what her tax deduction and best option is for each policy.

Policy #1: Paid up

This policy was purchased 18 years ago from a highly regarded mutual company. Jane elected to pay a level premium and have the dividends buy more insurance each year (called “paid up additions”). Two years ago, the death benefit had grown to one and a half times the original face amount.

Jane met with her agent and she helped her with the paperwork to discontinue her premium payments and take a paid up policy.

The resulting death benefit was less than the total death benefit the policy had grown to over the 18 years, but still a little greater than the original face amount. The death benefit, after electing the paid up policy, would continue to pay dividends, which buy more insurance each year.

Her charitable tax deduction for the gift of this paid up policy is the lesser of her cost basis, essentially the total premiums she has paid in this case, or the policy’s “replacement value.”
Replacement value is defined as the premium she would have to pay at her age for a single premium policy with the same death benefit. This premium can be easily obtained from the insurance company.

Policy #2: On-going Premiums

Jane is still paying premiums on this policy. The charitable tax deduction is the lesser of her cost basis or the “interpolated terminal reserve” plus any unearned premiums.

The interpolated terminal reserve is a value close to the cash value, and is the value required by the IRS. This number is also easily obtained from the insurance company. It is calculated by actuaries, incredibly smart mathematicians.

Policy #3: Group Life Insurance

Jane is the head of the HR department for a large local company. The company provides a $50,000 group life insurance plan for all employees. In addition, there is a supplemental plan for department heads and above equal to three times salary. As such, Jane has $350,000 of group term life insurance.

There are no income tax ramifications for group term life policies up to $50,000. However, for amounts greater than $50,000 the government requires including in taxable income their view (the Table I cost) of the value of the excess amount.

On the advice of her astute life insurance professional, Jane elects to change the beneficiary on her group life policy and name the church as the beneficiary of the death benefit in excess of $50,000.

This move erases her requirement to include the Table I cost in her income each year. Therefore, she has made a $300,000 charitable gift possible for which she is paying nothing. Very cool.

Furthermore, she can change the beneficiary; the election is revocable. Nor can the government recapture the tax she would have been paying on the Table I costs during the time the church was the beneficiary. Of course, group term life is only in effect during a person’s employment.


There are more factors to assess when contemplating a gift of life insurance to a church or charity. However, this should get you thinking. Are you in a situation where a life insurance gift would be beneficial to you and your church? If so, get the ball rolling by setting up a meeting with your insurance agent and the church’s legal advisor.

SocialTwist Tell-a-Friend

A Church Building Fund’s Friend: The Lead Trust

April 24, 2009 by  
Filed under Featured

electrician150x131The current poor economy provides a climate for some planned giving techniques to yield greater benefits than any time in recent history. One example is the charitable lead trust.

A lead trust is normally funded with income-producing assets. In one model, the trust pays a stipulated percentage for a certain number of years to a charity. At the end of the designated time frame, the trust assets either revert to the donor or are passed to children or grandchildren.

If you are a church leader, you’ll want to pay special attention because lead trusts are funded with an average of five million dollars.

What could your church do with an income stream of 5-10% on 5 million dollars paid for 5 to 20 years?

 A lead trust can be a solution for people who have specific problems or goals. For example…

  • They’ve received a large bonus or just sold a business and need a large current tax deduction.
  • They have a stock portfolio that has decreased substantially in value but feel certain that the stocks will rebound in time.
  • They have a large estate that will be taxed at 50%+ and they want to pass their estate on with little or no inheritance tax.
  • They have a large estate and don’t want to dump significant wealth all at once on children who may not yet be financially responsible.

So why is a lead trust such a good deal now?

One of the components of the formula that computes the income tax deduction a person gets is the Applicable Federal Rate, AFR for short. Due to the decline in interest rates, the AFR has reached record lows. The lower the AFR the higher the tax deduction.

$1,000,000 Lead Trust Paying 5% for 10 Years


Tax Deduction

8 %


5 %


2 %



Charitable lead trusts have many applications and can simultaneously provide a benefit to your church.

Here’s one example…

Tom is the CFO of a software company. He’s 51 and wants to retire at age 60.

Tom’s income has averaged $400,000 for the last few years.

His company just landed a multi-year contract. Since Tom was instrumental in piecing together the financial part of the deal, he will receive a one million dollar bonus this year.

He really doesn’t need the additional million in income and is not too excited at the prospect of $400,000 going to taxes. He would like to sock as much away as he can for his retirement.

Tom is very active in his church and his church has just embarked on building a new addition.

Tom puts his million-dollar bonus into a 9 year lead trust which will pay 5% to his church for 9 years. This produces a charitable income tax deduction of $400,000, saving him $160,000 in taxes.

Since his million dollars will come back to him in 9 years, he is taxed on the $50,000 a year the trust pays to his church. One of Tom’s options is to have the lead trust invest in municipal bonds so there won’t be any tax due.

However, since the stock market is down, Tom feels he can do better by paying some tax with a good prospect of getting more than his million dollars back after nine years.

So he instructs the trustee to invest in high-grade stocks that are projected to grow at 8%.

Tom’s million dollars will grow to $1,375,000 after nine years. So not only did he save $160,000 in taxes in year one, the extra $375,000 comes back to him tax-free as well.

The trade off is to pay taxes on the $50,000 the trust will pay to his church each year for the next nine years.

In addition, Tom’s church receives $450,000 over the nine years to help pay for its church addition.

SocialTwist Tell-a-Friend

7 Little-Known Gift Annuity Applications

April 15, 2009 by  
Filed under Featured


Gift annuities are popular planned giving tools. They have been around for over 100 years. They are easy to understand, simple to set up and don’t have the higher administrative costs associated with other charitable giving techniques.

Most people think the income from a gift annuity is for the life of the donor or for the joint lives of the donor and spouse. There are, however, at least seven other ways a gift annuity can be used. Let’s take a look at the two traditional applications and then summarize the other seven options. Perhaps these will plant a seed for their use in your situation that will also benefit your church.

Your Life Only

This is the most common and straightforward way a gift annuity is structured. You contribute cash or an appreciated asset to your church in exchange for a life income. At your death, the church keeps your contribution for its use.

For as Long as You and Your Spouse Live

You can also set a gift annuity up to pay out for as long as either you or your spouse lives. This is the joint and survivor gift annuity option.

Here are the 7 techniques you may not be familiar with…

1.  For as Long as You and Another Person Live

The other annuitant does not have to be your spouse. For example, a woman could establish a gift annuity for her and her sister.

2.  For the Life of Someone Other Than You

Furthermore, the gift annuity does not have to be for you. You could have a disabled child who requires special care and set up a gift annuity to fund that care for the rest of their life.

3.  The Payments are Deferred for a Number of Years

Most gift annuities are paid out monthly, quarterly, semi-annually or yearly. Normally, the payments begin within the first year. However, it is possible to defer the start of the payments for a number of years.

For example, a person who is age 55 could set up a gift annuity with the idea that the payments would begin at age 65 to supplement their retirement income. Deferred gift annuities have the advantages of a higher payout and an increased charitable deduction.

4.  To Fund Education for a Child or Grandchild

Another example of a deferred gift annuity is funding the education for a child or grandchild. You set up a gift annuity now for your five year old grandson and when he is 18 and off to college, the gift annuity can be triggered to pay out over the next four or five years. There is some risk as the boy is not obligated to use the funds for college. You could be funding his Corvette Z06.

5.  The “Re-insured” Gift Annuity

In my opinion, this technique should be employed more often because it provides cash for the church immediately.

Instead of holding the contribution to a gift annuity, then investing and paying out the promised payment, the church buys a commercial immediate annuity from an insurance company. The insurance company is instructed to send the (i.e. quarterly) payments to the church and a check is cut to the donor.

The cost of the immediate annuity will vary and is dependent on several factors such as the age of the donor and the prevailing interest rate in the economy. Nevertheless, the cost of the immediate annuity is less than the amount received from the donor. This difference is available to the church immediately.

6.  Exchanging a Charitable Remainder Unitrust for a Gift Annuity

If you are the income beneficiary of a charitable remainder unitrust (CRUT), you can exchange this interest for a gift annuity. This move can satisfy many objectives.

This gives you another charitable income tax deduction for the new gift annuity. The advantage to the charity is that is frees up money immediately that may be needed for a building campaign.

7.  Creating a Gift Annuity at Death With an IRA

All, or a portion of, your IRA can be exchanged for a gift annuity at your death. This would be a way to establish  a safe, consistent income for your surviving spouse for as long as he/she lives with the funds ultimately going to the church you both desire it would go to anyway.

Your estate would get a charitable deduction for the charitable portion of the gift annuity. However, the IRA proceeds would still be income in respect of a decedent and subject to ordinary income taxes just as if you had left the IRA directly to your spouse.


These explanations of the various uses for a gift annuity only represent the tip of the iceberg. If one or more apply in your situation, you’ll need to consult a qualified tax professional. Each technique has positive and negative income and gift tax results.

SocialTwist Tell-a-Friend

Robert Cavanaugh, Platinum Author