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Wednesday, May 1, 2024
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Case Studies |
Meeting Mom's Retirement Home Needs
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Case:
George Johnson's mother is now age 90 and in a retirement home, the monthly cost of which is almost $3,000. His mother is able to provide only $2,000 per month toward the monthly cost through income on her investments and Social Security. Therefore, George must supply almost $1,000 per month. George has a block of stock that he purchased three years ago for $75,000. The fair market value of that block of stock today is $133,334 and the dividend is 3%. George was recently approached by his favorite charity to provide a six-figure gift to their endowment campaign. However, he is quite concerned about the approximate $1,000 per month that he now pays on behalf of his mother's retirement home costs.
Question:
Is there a method of gifting whereby George can use the stock to provide a lifetime income to his mother to supplement her retirement home needs and fulfill the request for a major gift to the charity?
Solution:
In consultation with the Planned Giving Director at the charity, George was informed that a gift annuity funded with the stock would be an ideal vehicle to use to fund his mother's retirement home needs and also make the major gift to the charity's endowment campaign. The gift annuity would be payable to his mother for life and, since she is 90 years old, she would receive a very high payout. The payments would be made to his mother on a monthly basis. Therefore, she would receive approximately $1,000 per month, most of which is tax-free.
Since George is using his stock to fund the gift annuity for his mother, he would receive a current charitable income tax deduction of $83,160. Since he is in the top federal tax bracket , this could result in tax savings to George of $29,106. However, the Planned Giving Officer explained to George that since he is utilizing appreciated property to fund a gift annuity for his mother, he will be required to report a portion of the capital gain on the stock.
If his mother were utilizing her property to fund the gift annuity, this gain would be reportable over her life expectancy. However, since George is funding the annuity, he must report capital gain of $20,070 on his personal tax return. Also, it was explained to George that he would need to file a gift tax return (Form 709). Since his charitable deduction is $83,160, the income interest as calculated is $50,174 ($133,334 gift minus $83,160).
Therefore, George must file a gift tax return reporting a taxable gift of $50,174. This is deemed a present-interest gift. Thus, the annual exclusion is applicable. George would not pay any gift taxes, however, since he has available his lifetime exemption that would be reduced by the net gift.
In conclusion, by funding a gift annuity for his mother with appreciated stock, he was able to take care of his mother's retirement home needs and also fund a major gift to his favorite charity.
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