by Marsha Wayman, Phelps Health Foundation
In recent months you may have been able to obtain a 30-year mortgage rate below 3%, an amazingly good rate. But if you had cash to invest, you would earn 1% or less on a ten-year Treasury note or on a five-year CD; and if you chose to invest for the short term with a 90-day Treasury bill or a one-year CD, the interest you earned would be negligible.
When you were planning for retirement, you may have counted on earning 3% to 5% interest on the fixed-income portion of your portfolio. Now your dilemma is whether to move more money into stocks—which have recently been performing rather well but entail risk—or to play it safe by keeping a significant amount in cash and fixed-income investments and earning little interest.
You may be wondering how best to make intended charitable gifts in this low-interest environment. Here are two possibilities for your consideration:
Convert Some of Your Cash and/or Stocks to a Stream of Income
You do this by transferring some of your cash or stocks to a charitable remainder trust, which pays you income that is likely higher than the interest you are earning on the cash or the dividends you are receiving from the stocks. One type of charitable remainder trust (annuity trust) pays you a fixed amount, which must be at least 5% of the value of the assets you transfer. The other type of trust (unitrust) pays you a percentage, which also must be at least 5% of the value of trust assets as redetermined each year.
Example: Joan, aged 68, owns CDs and Treasury notes paying her about 1% interest, and she owns stocks paying an average dividend of 2%. She transfers $200,000 of these assets to a charitable remainder unitrust that pays her 5% of the value of trust assets determined as of the first of each year. The first year she will receive $10,000, which is considerably more than the interest and dividends she was receiving on the contributed assets. Because the trust is tax-exempt, it can invest to maximize total return without incurring tax on the capital gain. In addition to increased income, Joan receives a charitable deduction of about $98,000—which reduces her income tax. And she provides a charitable gift of trust assets remaining at the end of her life.
Make a Gift and Have Part of It Returned to You
It is also possible to transfer assets to a certain type of trust called a charitable lead annuity trust, have payments made by the trust to a charity for a certain number of years, and then have whatever remains returned to you. In addition to getting back part of your gift, you receive a large up-front income-tax charitable deduction.
Example: David wants to make a $400,000 campaign gift to a charity. He transfers $500,000 to a charitable lead trust and directs that the trust pay the charity $50,000 per year for eight years. In the year of the gift, he receives an income-tax charitable deduction of about $393,000. At the end of eight years, the trust terminates and remaining trust assets are paid to him. If the annual return is 6% during the eight years, the trust balance paid to him would be about $300,000. The trust’s capital gain, dividends, and interest would be taxed to David, but the tax savings should be well in excess of the tax on them—meaning that David realizes significant net tax savings and gets back more than half of the amount transferred. If he had made the gift when interest rates were higher, the charitable deduction would have been much lower.
These are two examples of gifts that make sense in a low-interest environment. We would be pleased to provide an illustration showing how they might work in your situation.
For more information about planned giving, please contact Marsha Rana Wayman, director of philanthropy at the Phelps Health Foundation, at (573) 458-7946 or mwayman@phelpshealth.org.
Marsha Rana Wayman, CFRE serves under the Executive Director of Phelps Health Foundation as the Director of Philanthropy. She directs the Planned Giving Program and Planned Giving Advisory Council and the establishment of the Endowment Fund. Wayman has over 15 years of experience in the nonprofit sector and as a community volunteer. In 2015 she earned the designation as a Certified Fund Raising Executive (CFRE).
A native of Missouri, Wayman is a graduate of Missouri University of Science and Technology with a Bachelor of Science degree in Engineering Management. She was the recipient of the Elizabeth Luna Mourning Award to attend the Association for Health Care Philanthropy (AHP) Institute for Healthcare Philanthropy Madison Institute in July 2019 and currently serves as a volunteer board member for Phelps County Animal Rescue and St. James Chamber of Commerce.
In her free time, Wayman enjoys volunteering for her favorite causes, traveling, snorkeling and spending time outdoors hiking.
