Many people make annual cash donations to their church or other favorite charities. This practice is sometimes called payment of tithes.
We have developed a Pre-paid Gifting plan known as Pre-paid Tithing™ that achieves the equivalent of a triple tax deduction plus a life annuity. A Pre-paid Tithing plan can be established to support your church in perpetuity. The following example illustrates this planning technique.
Step 1: An individual or family establishes a family foundation account with The American Foundation™.
Step 2: Real estate, stock or any other highly appreciated assets valued at $100,000 are transferred into the family foundation account.
Step 3: The asset is sold and the proceeds invested – in our example we are using an annual return of 8%.
Step 4: Each year the family foundation account distributes 5% to selected charities (donor’s church, etc.). In the above example, the assumed investment return is 8%, but only 5% is being paid out to charities each year, which allows the account to grow by 3% annually. This would provide an ever increasing amount above the original $5,000 (5% of $100,000) that would be distributed to charities each year.
The donor achieves the equivalent of a triple deduction, plus a life annuity:
1. The donor receives a full $100,000 charitable gift income tax deduction, up to 30% of AGI (50% if a cash contribution) in each year. Any unused deduction can be carried forward for five additional years.
2. Because the foundation is tax-exempt, there is no capital gains tax when the property or stock is sold. This is equivalent to an additional full tax deduction.
3. The property or asset is removed from the donor’s estate, which is equivalent to a 100% estate tax deduction.
4. Assuming that the donor in this case is normally making cash donations to his or her church or charity, the result of this new foundation account would be increased annual cash flow to the donor by the amount that he/she is no longer contributing personally to charity.
The family foundation account makes these same donations — resulting in an increase in personal cash-flow for life, which is the definition of an annuity.
This plan works equally well with cash or assets that are not appreciated.