Charitable Gift Annuity
A charitable gift annuity is a contract between a charity and the donor. The donor transfers property to the charity. Based upon the age of the donor or donor couple, the charity promises to make fixed payments for one or two lives.
If the gift annuity is funded with cash, then a substantial portion, perhaps 50% or a similar amount will be tax-free. However, if the gift annuity is funded with appreciated property, then a portion of the tax-free distribution will be pro rated as capital gain. Fortunately, if the gift annuity pays to the donor or donor and spouse, the capital gain allocated to the annuity may be reported over their estimated life expectancy.
Gift Annuity for Real Property
When a business owner retires and hopes to transfer assets to family, the gift annuity bailout can work very effectively. The business owner may transfer operating assets and goodwill outright to children. The real property may then be transferred to a charity for a gift annuity. This provides a secure fixed payment to the business owner and spouse for life that is not dependent upon the success of the children with the business. Furthermore, the business owner receives a charitable deduction and a small amount of tax-free income. After the charity receives the property, it may then resell the property to the children. One especially attractive benefit is that the children now have a new cost basis and may then depreciate the property a second time.
Example 4.10.5A
Bill and Helen White are both age 74 and would like to transfer their business to family members. They are currently operating a very successful restaurant. They give the operating business the equipment and the good will outright to children through an LLC. However, Bill and Helen own the building and real estate personally.
Bill and Helen have depreciated the real properties in straight-line depreciation down to $60,000 of adjusted cost basis. The current fair market value is $500,000. Bill and Helen transfer the real property to their favorite charity for a $500,000 gift annuity. They bypass the gain on part of the appreciation and receive an income tax deduction.
The charity then sells the building to the children, who now may take depreciation deductions on the building.
