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PLANNED GIVING AND CHARITABLE GIFTS


A Laddered Charitable Gift Annuity (CGA) as part of your Retirement Portfolio - Increasing your income AND getting a tax deduction.

Laddering bonds or CDs is a common concept in the financial management world. “Laddering” is a great way to keep a constant revolving flow of income to the investor which fluctuates according to the rollover period. This fluctuation can be a good thing because the interest rates in the ladder adjust according to the current market rates. For example if interest rates begin to climb, the maturing securities in the portfolio would be renewed at the newer current rate. On the other hand, if current market rates begin to decline, the maturing securities would most likely be renewed at a lower rate because of the market trend. The most important thing to remember about this fluctuation is that it is generally a positive thing because you will be hedged against inflation since your portfolio would reflect the current market adjustment. Another advantage of this investment strategy is that the principal is intact and readily available in case of emergency. The problem is that the returns tend to be very low, there is no growth of the principal and once the principal is invaded there would be a significant loss in income and principal.

One solution may be to add a laddered set of charitable gift annuities to your investment portfolio. The advantage is that the income stream tends to be much higher than other fixed income vehicles and the income will last for the investor’s life. Furthermore by adding a charitable gift annuity on a periodic basis (i.e. once every 5 years), the investor will realize even greater returns since the investment return is based on the age of the investor.

Most importantly, the investor gets a tax deduction AND helps a non-profit that they believe in (and perhaps may be able to get a naming opportunity or some other kind of recognition during their lifetime).

There are a number of considerations that must be taken into account in reviewing this opportunity. It must be clear that the principal amount invested into the annuity is no longer accessible to the investor and upon the investor’s death there is no residual value to pass on to the heirs although careful planning will remedy this issue. By using a portion of the new and improved income stream to purchase life insurance, the investor can actually significantly increase what he/she can pass to their heirs in terms of size and tax treatment. Also a portion on the income can be used to purchase long term care insurance which would help subsidize future healthcare costs.

I would not recommend investing an excessive amount of the investor’s liquidity into the laddered approach. While the returns are very attractive, a comfortable reserve should be set aside into a liquid investment to cover major unexpected costs. I would also not recommend ANY kind of annuity to a person in poor health or who may likely have failing health i.e. high blood pressure, diabetic, family history.

This is an ideal strategy for a person who is very good health and wants to increase their income. This person may very well be able to make more money than what they paid for the annuity. Furthermore by outliving the life expectancy tables (that insurance companies use), a person can see an even more attractive returns on their investment.
In closing, a ladder of charitable gift annuities can be used to both enhance the investor’s life AND the non-profit. It’s a win-win situation.

Michael Lorilla JD, MBA
Michael is the Director of Gift Planning at University of California, Santa Cruz. He has worked as a regional Trust Manager and General Securities Principal and has taught several different courses in the undergraduate and graduate business schools of CSUS and GGU.
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