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Charitable vs. Commercial Income
Annuity
"The tax deduction savings of $45,581
for the charitable annuity are less than half of the expected Acme Life
present value advantage in income of $102,500."
Clients John and Julie made contact
with me last month asking for an analysis of the difference between charitable
and commercial income (immediate) annuities. Their interest was for a
joint life income annuity with $500,000 funding. John is 85 and Julie
61. A charitable income annuity is acquired from a qualifying charity.
A commercial income annuity is purchased from an insurance company. To
follow is my commentary to John and Julie regarding the differences.
The charitable annuity provides a tax deduction
of $138,125. This will reduce your taxes until used up. Based on an
effective tax rate of 33% this is a savings or advantage to you of some
$45,581.
The charitable annuity provides joint life income
of $24,500 a year until the second death. $15,500 of this is tax-free
for 23 years. Net income is $21,500.
Acme Life annuity will provide joint life income
of $31,000 a year until the second death. $20,640 of this is tax-free
for 23 years. Net income is about $28,000.
This is an advantage for Acme Life of $6,500
a year. Julie has a life expectancy of 29 years. Discounted at 5% this
$6,500 advantage has a present value of $102,500 over the charitable
annuity income.
The tax deduction savings of $45,581 for the
charitable annuity are less than half of the expected Acme Life present
value advantage in income of $102,500.
Of course the larger question is whether an
income annuity of any kind makes sense for you. Please see my May 2007
AAII Journal column about them for details http://www.peterkatt.com/articles/AAII_may2007.html.
