Portrait
of A Plan
Relieve Stock Market Stress Through
Charitable Giving
 Many investors went into
2001 hoping that the slowdown of 2000 was just a temporary plateau on the road to even
higher ground. As the market struggled to find signs of positive momentum, more and more
investors wrestled with competing desires to protect their gain on one hand and to avoid
any taxable gain on the other.
As with many investors, the stock market has produced a fair amount of stress for Pete
and Janet T in 2001. They have seen substantial gain stagnate-or even worse,
deteriorate-in this unsettling market.
They would like to sell some holdings with uncertain prospects, but they are reluctant to
incur the 20% tax on their long-term capital gain.
Pete and Janet have been planning a significant gift to Mines and decide that using their
stock to fund the gift would be a good way to escape their "locked in" position.
As such, they elect to give us stock worth $50, 000, which saves them $19,550 in their
39.1% tax bracket.
Even though they paid just $10, 000 for the stock five years ago, they owe no tax on their
$40, 000 paper gain-a tax that would have been $8, 000 had they sold the stock.
Give Your Way to Higher Income
As the stock market continued to flounder, the Federal Reserve
Board attempted to jump-start the economy with a series of interest-rate cuts. For
consumers, these cuts are welcomed relief; but for those who depend on returns from
income-producing investments, the cuts provide a real challenge.
Marv K, 78, is quite comfortable in retirement. He has a well-balanced portfolio with both
equity and income investments-particularly a fairly significant amount in certificates of
deposit (CDs).
Since the equity investments pay little or no dividends, he does rely on the income from
the CDs for much of his cash-flow needs.
Marv has some CDs coming due before the end of the year and is distressed to learn that
his interest rate on reinvestment will drop from the current 6.25% to 4.25%.
Marv has been planning on making a significant gift to Mines at some point-perhaps through
his will. After talking about his concerns with a member of our staff, Marv decides to
contribute $20, 000 from his maturing CDs to Mines in exchange for a charitable gift
annuity.
Based on his age, the gift annuity will pay him 8.4% ($1,680) each year for the rest of
his life-$830 more than the $850 ($20,000 x 4.25%) the CD would have paid.
But the results are even better than they first appear. $1,035 of Marv's annual
income from the gift annuity will be treated as a tax-free return of principal for the
balance of his life expectancy, making his annual income worth far more than similar fully
taxable income.
The gift entitles him to an income-tax deduction of$9,136, saving him $2,786 (in his 30.5%
bracket). The gift annuity provides significantly more annual cash flow than a CD would
(see chart below).
BONUS: The deduction generated by Marv's gift produces tax savings equal to 30.5%
of the deduction in 2001. When he receives taxable payments in the future, they will be
taxed at lower rates-as low as 28% in 2006 and beyond.
|
