Do Charitable
Life-Income Plans Make Financial Sense?
- A Cash Flow Analysis
By Franklin J. Stermole
Professor Emeritus of Mineral Economics
Colorado School of Mines Readers of this article may be
familiar with the concept of charitable life income plans—gift plans that return
income to the donor for life. In return for an initial contribution of cash or appreciated
assets, these plans yield a variety of tax and financial benefits to the donor. The
benefits may include some or all of the following:
• Periodic payments to the donor and/or other individuals. A
portion of these payments may be tax-free or taxed at favorable capital gains rates.
• Reduction or elimination of capital gains taxes (if the plan is
funded with appreciated assets).
• A substantial charitable deduction against income taxes.
• Decreased exposure to estate taxes.
These benefits can be very helpful to charitably inclined individuals who need to
accomplish certain financial goals, such as increasing cash flow from low-yielding assets
or diversifying appreciated, high-risk assets. They also raise an interesting question:
Although life income gifts are not commercial investments, do they make financial sense
when compared to other options? For many individuals, I believe they do.
I first began to analyze this question in 1998, when my wife and I wanted to move some of
our gains from stock investments into a less volatile instrument that would pay a secure
income. We also wanted to put ourselves in a better position to help our children and
grandchildren, our church, and other charitable interests now rather than waiting until we
were both gone. As I became acquainted with a particular kind of life income plan—the
charitable gift annuity—I began to suspect that it might provide a financially
attractive way to accomplish our goals. The gift annuity makes fixed payments for life, so
it provided the security we wanted. It would provide substantially more current income
than our stocks. At the same time, it would allow us to support Mines with a substantial
gift.
Sample Analysis and Options
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