Mrs. Brown, age 75, makes a cash gift of $100,000 to Stanford this year in exchange for a gift annuity. She will receive annual payments of $7,100 from Stanford for the rest of her life. She is entitled to a charitable income tax deduction for current income tax purposes of about $43,000 (based on an IRS discount rate of 4.6 percent). Assuming Mrs. Brown is in the 35 percent federal income tax bracket for ordinary income and can use up the entire deduction, she will save about $15,038 in income taxes, making the net cost of her gift approximately $84,962. Of the $7,100 she receives each year, only $2,499 will be taxed at ordinary income rates, and $4,601 will be received tax-free each year over her life expectancy, after which time the full annuity amount will be taxed as ordinary income. For a donor like Mrs. Brown, the $7,100 gift annuity payments are equivalent to a taxable return of 8.7 percent for the first twelve years of the gift annuity.
This one-life charitable gift annuity is not subject to federal estate taxes on Mrs. Brown's death and is not subject to probate or estate administration. Mrs. Brown will receive her lifetime payments without the worry and bother of investment or management issues.