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Thursday, May 2, 2024
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Case Studies |
Meeting the Needs of a Trusted Friend
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Case:
Melinda Carpenter and Katharine Andrews have been trusted friends for the last 25 years. They have traveled together over the years, attend the same church, and share many of the same interests. Both are widows and have no children. Melinda has an estate of approximately $750,000 and receives income of approximately $75,000 per year, which includes a pension from her teacher's retirement fund. Katharine, on the other hand, has an estate of only $100,000, consisting of her home valued at $65,000 and liquid investments of $35,000. She has struggled financially over the years and Melinda has made it a point to give her $1,000 per month, which, along with her Social Security payments, allows her to live comfortably. Melinda has a block of Intel stock that she purchased several years ago for $100,000. The fair market value of that block of stock today is $160,000. Melinda has been considering making a contribution to the local Community Children's Home where she has done volunteer work over the years. However, she wants to make sure that Katharine continues receiving the $1,000 per month now and after Melinda is gone.
Question:
Is there a method of gifting whereby Melinda can use the stock to provide a lifetime income to her friend and also provide a gift for the Children's Home?
Solution:
In consultation with the Director of Gift Planning at the Children's Home, Melinda was informed that a gift annuity funded with the stock would be an ideal vehicle to use to fund Katharine's financial needs and also make the gift she desires to the charity. The gift annuity would be payable to Katharine for her life and, based on her age, she would receive a payout of a little over $1,000 per month. Of the $12,160 that Katharine would receive annually, $2,286 would be taxed as ordinary income and the remainder, i.e., $9,874, would be tax free, a nice benefit for Katharine.
Since Melinda is using her stock to fund the gift annuity for Katharine, she would receive a current charitable income tax deduction of $86,982. However, the Director of Gift Planning explained to Melinda that since she is utilizing appreciated property to fund a gift annuity for Katharine, she would be required to report a portion of the capital gain on the stock. If Katharine was utilizing her property to fund the gift annuity, this gain would be reportable over her life expectancy. However, since Melinda is funding the annuity, she must report capital gain of $27,415 on her personal tax return. This would result in federal capital gains taxes of approximately $4,112.25. Therefore, the tax benefit to Melinda would be income tax savings less the capital gains taxes, resulting in a net tax benefit to Melinda.
Also, it was explained to Melinda that she would need to file a gift tax return (Form 709). Since her charitable deduction is $86,892, the income interest as calculated is $73,108 ($160,000 gift minus $86,892). Therefore, Melinda must file a gift tax return reporting a taxable gift of $73,108. This is deemed a present-interest gift. Therefore, the annual exclusion would be applicable. Melinda, however, would not pay any gift taxes since she has available her full lifetime exemption, which would be reduced by the net gift.
In conclusion, by funding a gift annuity for Katharine with appreciated stock, she was able to take care of her friend's financial needs and also fund a gift to her favorite charity.
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