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IRA "Rollover" Keeps on Rolling
The Emergency Economic Stabilization Act of 2008 has been extended until the end of 2009. If you are 70½ or older, you can use your IRA funds to make charitable gifts without it counting as a tax distribution.
The Charitable Remainder Annuity Trust
The annuity trust shares many common features with the unitrust, the principal difference being the manner of calculating the payment to the beneficiary. Whereas the unitrust provides for a payout that may vary, the annuity trust provides for a fixed payout. This amount must equal a sum certain of not less than 5 percent of the initial, fair-market value of the gift in trust. Another difference is that an annuity trust cannot permit additional contributions.
A deduction for the present value of the charitable remainder interest and avoidance of capital-gain tax on the transfer of appreciated, long-term, capital-gain property are among the benefits available to the grantor of the annuity trust. The fixed-payout feature of the annuity trust may make it particularly suitable to meet the financial needs of an older beneficiary.
For example, Mr. Fletcher supplements his 84-year-old mother's annual income with $8,000 of his own after-tax earnings. Given his 35% tax bracket, he must earn more than $12,300 to net the $8,000 he gives his mother.
Instead of continuing these payments with after-tax dollars, he transfers $125,000 of securities to an annuity trust and directs that the trustee pay his mother a sum certain of $10,000 a year for life. Even if she must pay a modest amount of tax, her cash flow will increase.
Mr. Fletcher also increases his spendable income. While he gives up the dividends earned by the securities (currently $1,500 per year), he retains the larger amount he had been paying to his mother each year. Moreover, he realizes a charitable deduction of $73,723 that saves $25,803 in income tax, and he avoids the capital-gain tax on the appreciation of the securities.
The present value of his mother's annuity interest of $51,277 ($125,000 less $73,723) is considered a gift by Mr. Fletcher. Any potential gift tax could be offset by the annual gift-tax exclusion and Mr. Fletcher's lifetime gift-tax exemption equivalent.
Income-producing securities and cash are most suitable for funding an annuity trust.
