Giving to a Charity to Receive an Annuity

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Giving To Charity In Order to Receive An Annuity

The charity we run has been offered some property worth about $250,000 from a generous 66 year old supporter who would like to receive a $1,300 monthly payment in exchange for the property.

We don’t even know how to think about such an offer, can you help?

– A Local Nonprofit

Every nonprofit needs to keep an up-to-date list of the types of assets that they will accept as donations. That list obviously includes cash, but it should also include stocks and other securities.

These types of donations can easily be accepted by setting up a stock liquidation account with a brokerage custodian. This account should have standing orders to sell anything which is transferred into the account. The proceeds should then be transferred to the charity.

Every nonprofit then has to decide if they are willing to handle the sale of more unusual assets, such as automobiles, real estate, and antiques.

How should we think about this offer?

The property may have unrealized capital gains. The donor, were she to sell this property herself, might owe capital gains tax of 15%, 18.8% or even 23.8%.

Were she to give the property to charity outright, both she and the charity would avoid this capital gains tax. Giving an appreciated asset to charity is one of the many way of avoiding capital gains.

But if the donor receives something in exchange for the gift, the accounting becomes much more complex. What she receives has to be valued against what she donates and the donation can’t be just a means to avoid capital gains tax.

In this case, I would recommend not accepting the gift. Here’s why:

Accepting the property means you will accept the burden of preparing the property for sale and then paying the 6% realtor’s fee. It might cost $1,000 to prepare the property and, assuming the property sells for $250,000, you will pay $15,000 (6%) in realtor’s fees. At the end of the process, you will have worked hard to net $234,000.

Now you will have to purchase a $1,300 immediate annuity for your donor.

As a charity, you do not have the insurance licensing to run an annuity. You are not in compliance with the regulations associated with insuring a $1,300 monthly payment for life. As a result, you would have to purchase such an annuity on the open market. (As a reminder, we do not recommend purchasing annuities. They are nearly always a bad idea.)

We got the following price quotes how much it would cost to purchase a $1,300 a month immediate fixed annuity from various companies: $234,000, $246,500, and $242,133.

As you can see, the lowest bid ($234,000) is just the amount you might net after a great deal of work.

What would you recommend our donor do?

We do not recommend annuities.

We would recommend the donor sell the property herself and invest the proceeds in an annuity alternative. We suggest they use an age-appropriate asset allocation and an age-appropriate withdrawal rate to create their own annuity equivalent.

We have written up the details of what that would look like in our article “What Is The Alternative To An Annuity?

And in order to give a gift to you, the charity, we recommend that they make the charity the beneficiary of this investment account when they die.

This gives the charity all the benefits of the donor’s generosity without the high fees and expenses associated with buying an annuity.

Photo used here under Flickr Creative Commons.

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President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.