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Life Income Gift

As with other types of giving, all of the giving strategies noted below can help reduce estate tax and costs associated with probate.

(Percentages quoted change frequently. Individual and current proposals can be prepared on request)

A life income gift allows a donor to receive income while making a significant gift to the College. Benefits of this kind of planned gift include:
  • Option for income payment for your life and the life of your spouse (or any other individual)
  • Potential increase in income
  • Income tax deduction
  • Potential investment diversification
  • Probable elimination of capital gains tax on appreciated property
  • Reduced estate taxes and probate costs
  • Satisfaction in supporting the College during your lifetime
  • Knowledge of how your gift will be used

The following are types of life income gifts:

Charitable Gift Annuity

The gift annuity, the simplest life income plan, is a contract between the donor and the College. A gift annuity offers a fixed dollar payment for life. The fixed payment rate is guaranteed regardless of economic conditions. A portion of this payment is tax-free, the remainder is ordinary income. Following the donor's lifetime, the money remaining in the contract goes toward a predetermined purpose. Annuities can be funded with cash, securities, and certificates of deposit proceeds. If the annuity is funded with appreciated securities, part of this payment is treated as capital gain income. The donor receives an immediate income tax deduction based on the amount of the gift, the number of income beneficiaries (can be one or two annuitants), and the rate of income received. Rates are available upon request from the Office of College Advancement.

Example:
Charitable Gift Annuity calculations:
Assumptions:
Beneficiary Age(s) 65
Gift Amount $10,000
Gift Date 7/19/11
Payment rate 5.3%
Payment Schedule Quarterly End
Benefits:
Charitable Deduction $3,063.20
Annual Payment $530.00
Tax free portion $348.74
Ordinary income $181.26
After 19.9 years, the entire annuity becomes ordinary income.
Donor Benefits of a Charitable Gift Annuity
  • Increased retirement income
  • Fixed annual income, partially tax-free
  • Reduced capital gains tax
  • Immediate charitable income tax deduction for donors who itemize deductions

Deferred Payment Gift Annuity

Like the charitable gift annuity, the deferred payment plan also offers a contractual guarantee of life income. In this case, the donor only starts receiving income at a predetermined time in the future, often on, or shortly after, retirement at age 65.

Example

Let's assume the donor, a hard-working professional, is at the point of exceeding his Qualified Retirement Plan, has maximized his/her 403B Plan, and is looking for a better way to further supplement his/her retirement security. The donor wishes to retire in 25 years at age 65. By putting $25,000 now into a deferred payment gift annuity, the donor would receive the following benefits:

  • $6,700 per year for life, or 26.8% cash flow, starting at age 65
  • $15,441 charitable income tax deduction, usable for up to 50% of donor adjusted gross income
  • $482.40 of each yearly payment would be tax-free for the first 19.9 years
  • The remainder of the annuity would go to the donor's predetermined purpose at the College after the donor's lifetime.
Current rates and detailed calculations are available upon request.

Donor Benefits of Deferred Payment Gift Annuity
  • Fixed Annual income, partially tax-free
  • Reduced capital gains tax
  • Immediate charitable income tax deduction for donors who itemize deductions

Pooled Income Fund

Participating in our pooled income fund is easy and requires a smaller investment than some other life income gift plans. The primary investment goal is to produce a relatively high return for the donor. Payments to the donor are taxed as ordinary income.

Gifts to the pool may be in the form of cash, securities (especially if appreciated), and certificate of deposit proceeds. Gifts to the fund are invested and pooled with gifts from other investors. Donors receive a proportionate share of the fund's net income each year. The income is based on the fair market value of the gift to the fund. The income tax charitable deduction is based on the gift value, the ages of the beneficiaries, and the highest annual rate of return of the fund during the previous three years.

Donor Benefits of a Pooled Income Fund Gift
  • Partial charitable income tax deduction for donors who itemize deductions
  • Income earned on stock and other assets
  • No Capital gains tax

Charitable Remainder Unitrust

Income to donor, then to Rhode Island College

A Charitable Remainder Unitrust is an individual trust paying a donor and/or a secondary beneficiary a fixed percentage of the annual value of the gift principal. A Unitrust may run for the lives of the beneficiaries or for a shorter number of years, at the donor's choosing. Additional contributions may be made after the Unitrust has been initially funded. It is paid out quarterly, semi-annually, or annually, as the donor prefers. The rate of return is a negotiated figure predetermined by the College and the donor: the lower the payment, the higher the charitable deduction. By law, the rate must be at least 5%.

A minimum gift of $100,000 in cash, securities, and/or real estate is required to create and fund a Charitable Remainder Unitrust.When appreciated stock is used, capital gains tax is completely avoided, an excellent hedge against inflation. Unitrust income is taxable depending upon the Trust's investments. However, unlike the pooled fund, a Unitrust may be created with or invested in tax-exempt securities that will, in turn, provide tax-free income to the donor.

Charitable Remainder Annuity Trust

Income to donor, then to Rhode Island College

The Charitable Remainder Annuity Trust is the same type of gift vehicle as the Charitable Remainder Unitrust, except that the income payment is a fixed annual dollar amount as stated in the agreement when the gift is established. The payout runs for the lives of the beneficiaries or for a shorter number of years, as determined by the donor. Unlike the Unitrust, no additional funding can occur once the Annuity Trust has been established.

Because the income payment does not vary, the Annuity Trust is attractive to donors seeking secure and stable income. In addition, an Annuity Trust will generate a larger charitable income tax deduction than a Unitrust in the same amount. The minimum contribution to establish and fund an Annuity Trust is $100,000.

Charitable Lead Trust

Income to Rhode Island College, then principal to family

A Charitable Lead Trust allows you to pass assets to your children or grandchildren without incurring large gift and estate taxes. The trust is created for a designated period of time during which payments are provided to the College. At the end of that trust period, the principal is redistributed to the beneficiary.

The income received by the College generates a sizable charitable deduction for the donor for gift and estate tax purposes. The donor designates the size of the trust, its duration, and the amount that the College will receive. If the trust assets increase in value during the term of the trust, this appreciation is passed along to the beneficiary tax free.

A Charitable Lead Trust is an effective option for individuals in the highest income, gift, and estate tax bracket. Owners of stock in closely-held companies may find this arrangement particularly effective in redistributing stock ownership.

Page last updated: February 15, 2013