Christian Money Management: The Silver Lining In The Current Bad Economy
Every cloud has a silver lining. There are two sides to every coin. The knife cuts both ways.
The dire state of the economy has given rise to some of the best opportunities to make a gift to your church seen in decades.
Many gifts in the planned giving arena use the IRS’s current “Section 7520” rate, commonly referred to as the AFR, in the calculation of the income tax deduction you receive as a result of your gift.
Just to give you some historical perspective, a couple of years ago, in March 2007, the AFR was 5.8%. A year later, in March of 2008, it had dropped to 3.6%. In February, 2009, it hit the lowest it has ever been since Sec. 7520 was put into effect in 1989: 2.0%. As I write this, March 2009, it is 2.4%.
What does this have to do with me you say? Let me give you a couple of examples.
Let’s say you are age 75 and have a $50,000 CD down at the bank paying 4%. This only spins off $2,000 a year in interest and the interest is taxable. If you are in the 15% tax bracket, that leaves you with $1,700 to take to the store and buy groceries.
You need more income. Hey, have you noticed the price of bread and milk today? You would not be opposed to increasing your income and helping your church at the same time. In meeting with your financial planner, she suggests you look at a charitable gift annuity. CGAs are pretty plain vanilla—they have been around for over 100 years.
Here is a quick summary of the benefits of using a CGA.
- Your income will increase from $2,000 a year to $3,150.
- The rules say you can use the February AFR of 2.0 even though you make your gift in March of 2009. This means that 78.7% of the $3,150 is not subject to tax. Bottom line: More money for groceries.
- When you die, your church receives $50,000.
Let’s change the assumptions a little. Let’s say you were age 75 in March of 2000 and set up the same CGA when the Sec. 7520 rate was 8.0%. The amount excluded from tax would have been only 53.7%.
Translation: With today’s low AFR, you pay less income tax and have more money for groceries.
Another example on the other end of the spectrum. Let’s say you are a multimillionaire and are looking for ways to pass your estate on to your children with the least tax impact possible.
One option may be to use a charitable lead trust. The way this works is:
- You contribute (generally income-producing) property to a charitable lead trust that your attorney drafts for you.
- Your church (or another qualified charity) receives income from the trust for your life or a certain number of years.
- When you die, or when the number of years has expired, the property is distributed to your children.
In a nutshell, given the current AFR, the payout percentage chosen and the number of years the payout will last allows the property to pass to the children at a lower tax transfer cost or even no cost at all.
There’s a lot more to it than that, but for our discussion let’s see how the current low Sec. 7520 rate makes the charitable lead trust more attractive than ever before.
Assume you funded the lead trust with $1,000,000 and set it up to pay 7% ($70,000) a year to your church for 15 years at which time the trust would end and the property dispersed to your kids.
If the AFR was 8% (as it was in Feb. 2000), after doing the math the taxable gift resulting in transferring $1,000,00 to the next generation is $295,040. That is a substantial savings.
However, if the AFR was 2%, the taxable gift would only be $100,549!
In fairness, I should point out that other planned giving vehicles, a lower AFR produces worse results.
I hope the take-a-way from this is that if you are a person who is interested in increasing your income, reducing your taxes, preserving your estate from undo taxation while simultaneously helping your church, it would be prudent to examine the various planning giving techniques which may apply to your situation.
If you represent a church and are interested in raising more money for your ministries and/or building an endowment fund so that eventually your church can finance its operations from the interest on the investments in your endowment fund instead of primarily relying on pledges, it would be wise to communicate and publicize the planned giving techniques that currently have high value due to the low AFR.
This is no small potato. During a planned giving seminar I attended in June of 2008, the attorney from the software company that I use to crunch the numbers indicated that the average lead trust that they consulted on in 2008 was $5,000,000.
If you are a church, I’ll leave you with this thought: A $5,000,000 lead trust that paid out 6% for 15 years would generate an annual income to your church of $300,000. Over the 15 years, it would add up to $4,500,000. If the $300,000 were put in your endowment fund and earned 6% for 15 years, it would grow to $7,400,000 (and change). $7,400,000 at 6% would spin off $444,000 a year forever.
What ministries do you have that could benefit?