Nature & Nurture | Giving News
Low Interest Rates Got You Down? Turn
Lemons into Lemonade
by Philip H. Buchanan
Some of us have been a bit glum of late as
we review our retirement or investment statements. Tax-free
investment opportunities have been especially limited for
several years. Despite this somewhat gloomy phase in the economic
cycle, many Duke donors are seizing the opportunity to increase
their income, reduce their taxes and leave a legacy for the
Nicholas School.There are a few gift planning opportunities
that are actually more attractive when interest rates are
low.
(1) If you have CDs or other fixed income investments
that are paying a low rate of interest, you may want to consider
a charitable gift annuity. This is simply a contract between
a donor and Duke University under which the donor agrees to
make a charitable gift in exchange for (a) a current tax deduction
for part of the gift’s value and (b) a fixed payment for life.
After the donor passes away, the remainder of the gift annuity
will be used for purposes the donor has chosen at Duke University
(e.g. scholarships for Nicholas School students). If you fund
a gift annuity with cash, part of your payout will be tax-free
for several years. If you fund a gift annuity with appreciated
securities, you avoid tax on a substantial portion of the
capital gains you have in the security. Duke’s minimum for
gift annuities is $10,000 and there is no maximum. A gift
annuity may also have its payout deferred for one or more
years, in which case the donor receives a larger current income
tax deduction and qualifies for a higher payout in the future
(e.g. at the donor’s retirement).
Example 1— John Hoge
is an 82-yearold Duke graduate who decides to donate $200,000
in cash to Duke for a gift annuity. The cash had been in a
money market account that was paying 1 percent. At his age,
Hoge can take an 8 percent ($16,000/year) guaranteed payout,
of which $11,184 is taxfree for the next 8.3 years (the full
payment is taxed thereafter). He also will receive an income
tax deduction of $110,460 that he can spread over as many
as six years. The gift annuity remainder will go to the John
Hoge Scholarship for the Nicholas School.
Example 2—Dan Barksdale
is a 45-yearold doctor who loves the Ocean Science Teaching
Center. Barksdale wants to retire in 15 years and wants to
reduce his current income tax liability. He decides to donate
$300,000 of appreciated stock to Duke in exchange for a deferred
gift annuity that will begin paying him $30,000/ year for
life, beginning when he retires. By deferring his payout,
he also qualifies for a current tax deduction of $168,249.
Unlike his other retirement accounts, there is no dollar limit
on the amount Barksdale can contribute to a deferred gift
annuity. He directs his gift remainder to the Dr. Daniel Barksdale
Endowment for the OSTC.
(2) Low interest rates also favor gifts of retained
life estates in homes or farms. A donor keeps the right to
use and enjoy the real estate during his or her lifetime,
but irrevocably donates the property to Duke at his or her
death. In return, the donor receives a current income tax
deduction. The benefit of low interest rates is that the donor’s
lifetime interest is considered less valuable, which means
that the charitable interest left to Duke has a higher value.
Given current high real estate values, this type of gift can
produce higher income tax deductions while allowing the donor
to continue using the property for the rest of his or her
life.
Example 3—Howard Turnberry is
70 years old and owns a farm he inherited when his father
died in 1981. Turnberry rents the land to a local farmer and
enjoys occasional hunting visits, which he would like to continue
during his lifetime. He creates a deed giving himself lifetime
ownership of the property, with Duke as the beneficiary at
his death. If the land is valued at $200,000, Turnberry will
receive an immediate tax deduction of $102,068. He directs
his gift to the Turnberry Family Scholarship.
(3) Donors who face the possibility of significant
estate taxes (as high as 48 percent in 2004) may want to consider
a charitable lead trust. One type of charitable lead trust
can provide a payout to Duke for a number of years, after
which the trust assets are turned over to children or other
heirs. A lead trust also can reduce or eliminate (“zero out”)
the gift or estate taxes which would otherwise apply to a
gift of these assets to the donor’s loved ones. The lower
the applicable interest rate, the lower the required payout
to Duke necessary to eliminate taxes, and the more left over
for the donor’s heirs.
Example 4—Walter Singh is a
successful businessman who would like to provide a future
gift for his grandchildren, currently 3 and 5 years of age.
He creates a charitable lead trust with $2,000,000 of stock
that is down in value, but that he believes will recover in
the near future. The lead trust will provide an annual payout
to Duke of 6.5 percent for 30 years. The value of this gift
to his grandchildren will be $8,640 and there will be no gift
or estate taxes due. All trust growth over 6.5 percent will
benefit his grandchildren. Singh directs his lead trust payments
to the Dean’s Priority Fund for the Nicholas School.
If you have questions or would like to consider any “tax
wise” charitable gift to support Duke University, please contact
the Nicholas School’s Susan Berndt at 9119-6113-80119, susan.berndt@duke.edu,
or Phil Buchanan in Duke’s Office of Gift Planning at 9119-6811-0467,
phil.buchanan@duke.edu.
Phillip H. Buchanan, J.D., is director of
gift planning at Duke University.
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