should you accept real estate for a gift annuity? ppt.pdf · charity pays expenses appraised value...
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Should You Accept Real Estate for a Gift Annuity? Carolina Planned Giving 2017 at Kanuga
September 12, 2017
Mark Smith, Relationship Manager
Fred’s Charitable Gift Annuity
1
Donor Annuity Contract
1
2
3
4
$100,000 Cash
Income tax
deduction
Remainder
Payments
for life
Charity
Annuitant
: What Are the Risks?
Risks Specific to an Outright Real Estate Gift
2
Fred’s CGA: What Are the Combined Risks?
3
Donor Annuity Contract
1
2
3
4
Real Estate
Income tax
deduction
Remainder
Payments
for life
Charity
Annuitant
Mitigating the Combined Risks
4
It might be necessary to add cash to the CGA state reserve account
Ask donor to contribute
to cover expenses
Double down on
due diligence
Discount annuity rate
% off
Raise minimum age for
CGA with real estate
AGE
Defer payments
2017 2019
Gift Annuity Funded by Outright Gift of Real Estate Approach #1: Discount Annuity Rate by 20% or 25%
5
Martha is 85 years old
Appraised value of real estate: $1,000,000
Applied discount: 13% or 19%
Annuity contract price: $800,400 or $745,200
Annuity @ ACGA rate: 7.8% = $62,431 or $58,125
Nominal CGA contract rate: 6.2% or 5.8%
Approach #1 Analysis
6
Donor Pays
Expenses
Charity Pays
Expenses
Appraised value $1,000,000 $1,000,000
Less discount (13% or 19%) 130,000 190,000
Final gross sale price 870,000 810,000
Less closing expense of 8% 69,600 64,800
Estimated net proceeds 800,400 745,200
Multiplied by CGA rate 7.8% 7.8%
Target annuity amount 62,431 58,125
Divided by appraised value 1,000,000 1,000,000
Discounted annuity rate 6.2% 5.8%
20% discount to
rate table
25% discount to
rate table
Gift Annuity Funded by Outright Gift of Real Estate Approach #2
7
John is 85 years old
Appraised value of real estate: $1,000,000
Applied discount: 17% = $170,000
Annuity contract price: $830,000
Annuity @ ACGA rate: 7.8% = $64,740
Nominal CGA contract rate: 6.474%
Approach #2 Analysis
8
Q1 Q4 Q5 Q8
Real estate gift 1,000,000 1,000,000 1,000,000 1,000,000
When will the property sell?
Cash Outflows
9
Acceptance Expenses Q1 Q4 Q5 Q8
Due diligence 1,000 1,000 1,000 1,000
Closing 1% 10,000 10,000 10,000 10,000
Carrying Costs Q1 Q4 Q5 Q8
RE tax 1,000 4,000 5,000 8,000
Utilities 500 2,000 2,500 4,000
Insurance 2,206 8,824 11,030 17,648
Annuity payments 16,185 64,740 80,925 129,480
Interest @ 5% 450 1,800 2,250 3,600
Sales Costs Q1 Q4 Q5 Q8
Commission 6% 60,000 60,000 60,000 60,000
Closing 1% 10,000 10,000 10,000 10,000
Summary of Financial Outcome ACGA Rate Is 7.8%
10
Q1 Q4 Q5 Q8
Sales price $1,000,000 $1,000,000 $1,000,000 $1,000,000
Acceptance expenses 11,000 11,000 11,000 11,000
Carrying costs 20,341 81,364 101,705 162,728
Sales costs 70,000 70,000 70,000 70,000
Total costs 101,341 162,364 182,705 243,728
Cash to CGA pool 898,659 837,636 817,295 756,272
CGA contract price 830,000 830,000 830,000 830,000
Surplus/(deficit) 68,659 7,636 (12,705) (73,728)
Effective annuity rate 7.20% 7.73% 7.92% 8.56%
Other Risk Mitigating Strategies
11
Advance marketing of property SALE
“Charitable put” strategy
Buyer
Donor pledges to give property
12
Can you base
the annuity on
the sales proceeds
Gift Annuity Funded with Remainder Interest in Residence or Farm
13
Income to
donor
Charity
issues annuity
Donor/life tenant dies
Charity sells property
Donor gives remainder
interest to charity and
retains life tenancy
CGA
2 3
1 4
5
Annuity Based on the Sale Price
14
References
• Paper by David Wheeler Newman, Charitable Gifts of Real Property
Planned Giving Design Center (see section IV.)
http://www.pgdc.com/pgdc/charitable-gifts-real-property
• CHARITABLE GIFT ANNUITIES: The Complete Resource Manual (Minton)
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