Planning Pointer
Q&A with Our Donors - Part 2
Published November, 2006
Q: I own a personal residence which is valued at $1.6 million, cost $80,000. I do not want to sell right now so a CRT will not work. Can I gift a ½ interest with a retained-life estate?
A: If you are you asking if you can make a gift of ½ of the remainder interest to charity, the answer is yes. Of course, you can also give an undivided interest in ½ of the home.
Q: What is the best way to surrender/sell an insurance policy in order to create an annuity, and what are the tax implications? This is a whole-life policy and I am 59-years-old.
A: If you surrender the policy, you will receive the cash-surrender value, including any gains, which will be treated as ordinary income. So, if the cash surrender value is $50,000 and net premiums paid $40,000, your deduction for a gift annuity will be based on $40,000, but your annuity rate will be based on $50,000.
If you assign ownership of the policy to our institution and we surrender it, the same results will ensue to you.
Better yet, you or our institution, if assigned to us, should sell the policy to a Life-Settlement company. In most cases, the proceeds of the sale will be in excess of the cash value, sometimes substantially more, depending on surrounding circumstances. Any excess proceeds may be considered ordinary income.
Q: I want to fund a $50,000 6.8% CGA to my sister. The annuity will provide $3,400 annually to her. If I do this:
- Will I be subject to the gift tax?
- Will my sister's annuity payments be partly tax-free as they normally are?
- If I use appreciated stock to fund the annuity, will my capital-gain be reduced as it normally is?
A:
- Yes, the value of your sister's annuity interest is subject to the gift tax against which you can apply your $12,000 annual exclusion and $1,000,000 gift-tax exemption.
- If cash is used, the payments will be part ordinary income and part tax-free return of principal over her life expectancy, all ordinary income thereafter.
- If appreciated securities are used, the reportable capital-gain portion will be fully taxable to you up front.