Reader Question: I have seen many advertisements for Charitable Gift Annuities, and I have always passed over them, partly as “too good to be true.” My husband received information from an organization and the numbers interested him. The annual payout for someone who is age 70 to 74 is 5.8%. For ages 80 through 84, the payout is 7.2% annually. I’m 74 and my husband is age 83. We need an education; can you help?
Answer: Surprisingly, I don’t run into this very often. With a charitable gift annuity, you make a gift of cash or securities to a charity and the charity promises to pay you a monthly (or quarterly) income for life. There are both advantages and disadvantages to this strategy:
- You receive an income you can’t outlive. Like most annuities, the promise is that you’ll receive payments for as long as you live. Typically you can have the income paid over two lives (presumably, you and your spouse) but the annual payouts will be smaller.
- You receive a partial tax deduction for the gift. You don’t receive a 100% tax deduction because you are receiving ‘something of value’ (monthly payments) in return for your gift. The amount of your deduction will depend on your age (life expectancy) and a discount rate (interest rate) set by the government. The charity should be able to estimate the tax deduction you will receive.
- It can allow you to convert low basis securities or assets that don’t produce income into an income stream without immediate taxation on the sale of those securities.
- The income you receive is not adjusted for inflation.
- At death, there is nothing left for heirs.
- Your income stream is subject to taxes based on the nature of the assets you gifted to the charity. For example, if you gifted highly appreciated securities, a portion of every distribution to you will be treated as capital gains.
- The promise to pay is based on the creditworthiness of the charity.
Ultimately, this strategy is best suited for very healthy people who have a strong desire to give to a particular charity. For example, if you planned to give $100,000 to your alma mater at your death, why not receive a tax deduction now and income stream for the rest of your life?
Reader Question: My deceased husband’s Roth IRA is in a bank with the beneficiary specified as our living trust. We have three children. How will the Required Minimum Distributions (RMDs) work in this situation?
Answer: Having a trust as the beneficiary of a retirement account is fraught with potential pitfalls and should not be considered without careful professional planning. A non-spouse beneficiary of a retirement account basically has two choices regarding taking RMDs:
- Withdraw 100% of the funds no later than December 31st of the fifth year after the year of death of the owner. Withdrawals are taxed in the year withdrawn (no taxes on Roth IRA distributions)..
- Begin taking RMDs no later than December 31st of the year following the year of death of the owner. If the trust beneficiary is three children, for example, then the life expectancy of the oldest child will be used for calculating the annual RMDs. RMDs must be recalculated each year.
If the beneficiary is a trust, it’s possible that #1 above is your only choice. This is where you’ll need the advice of a professional…presumably the person who drafted the trust document or your CPA. Ideally, you would roll over your husband’s Roth IRA to yourself and postpone RMDs during your lifetime. Failure to take a timely RMD is subject to a 50% penalty so mistakes can be very expensive!