Mr. Andrews, age 65, is in the 35 and 15 percent federal income tax brackets for ordinary income and long-term capital gains. He has stocks worth $100,000, which he bought for $10,000 and which pay dividends of 2 percent per year. He would like to sell the stocks and diversify his asset base but hesitates because of the federal capital gains tax of $13,500 that would be incurred.
Suppose Stanford's Balanced Pooled Income Fund earns 4 percent (the actual annual return varies; the current rate will be furnished upon request). By making a gift of the stocks to Stanford's balanced pool, Mr. Andrews doubles his annual earnings and achieves his objective of diversifying his asset base. In addition, he receives a charitable income tax deduction of about $50,400 (based on an IRS discount rate of 4.6 percent), saving roughly $17,600 in income tax, and he avoids $13,500 in federal capital gains taxes. His net cost of establishing a $100,000 life income fund, as opposed to selling the stock and reinvesting the net proceeds, is approximately $68,800.