How to beat a lousy stock market

THE STOCK MARKET is lousy. So are interest rates. What to do? How and where do you invest your dollars to get a decent, yet safe, rate of return? Many of our clients have gone to commercial annuities, CDs or U.S. Treasuries. Safe, but no cigar in terms of a decent rate of return. How do you get both? The answer is a charitable gifts annuity. Lets take a look at two examples of common fact situations

THE STOCK MARKET is lousy. So are interest rates. What to do? How and where do you invest your dollars to get a decent, yet safe, rate of return?

Many of our clients have gone to commercial annuities, CDs or U.S. Treasuries. Safe, but no cigar in terms of a decent rate of return. How do you get both? The answer is a charitable gifts annuity. Let’s take a look at two examples of common fact situations that show how a CGA might help you.

Example No. 1. Joe, age 68, has $100,000 (in round numbers) to invest (or already invested) in a CD. Joe is in a 27% income tax bracket. He needs the income to maintain his lifestyle.

The following schedule compares a CD to a CGA for Joe.

Not only does Joe increase his after-tax income from $1,824 per year to $6,240, but he also gets an income tax deduction of $27,540.

Example No. 2. Mary, age 50, has $100,000, but she does not want the income now (because she is in the highest income tax bracket). She would like to defer the income to some uncertain future date when she retires. So, Mary invests in a Flexible Deferred Charitable Gift Annuity. The chart to the right shows the income Mary would receive based on the age she finally selects to start collecting her annuity.

There are two added bonuses, courtesy of the tax law: 1) 20% of the income is tax free, and 2) Mary receives an immediate income tax deduction of $40,892.

A few more things you should know.

Any kind of property that is easy to value can be used to start your CGA. Appreciated property, such as real estate or stocks, works well. So do bonds, CDs and commercial annuities.

Early withdrawal penalties can be provided for if you are stuck in a low-rate CD or commercial annuity.

Even if you don’t have a charitable bone in your body, you and your family can make an economic profit by using a CGA. But if you are charitably inclined, a charitable gift annuity puts you on the road to tax heaven.

I have made arrangements with a national charitable foundation to do free illustrations for readers of this column. Just fax a list of the assets (at current fair market value) that might work best for you, along with your age (and your spouse’s age, if married) to 847/674-5299. If you have a question, call me at 847/674-5295. Ask for Irv.

Leveraged gifts

Want to win the estate tax game? Think leveraged gifts.

Gifts to your family during life represent a major tax-planning strategy. Gifts can move income within the family unit, remove income from your estate and provide money for the education of future generations. In the discussion that follows, all gifts are made by Joe (who is married to Mary) to his children or grandchildren.

Gifts can help divide family income and take advantage of the zero or low-income tax bracket of one or more family members. This strategy accomplishes two sure savings: 1) on income tax - transfers income (produced by the asset gifted) from Joe’s high bracket to the low bracket of the children and/or grandchildren, and 2) on estate tax - the asset is removed from Joe’s estate.

The tax law offers significant tax-free gifting opportunities: 1) the $22,000 ($11,000 for Joe and $11,000 for Mary) annual exclusion per recipient, and 2) gift splitting with Mary, which removes half the gift from Joe’s estate and also from Mary’s estate.

I’m about to use boxcar dollar figures to illustrate the power of leveraged gifts. If you have children or grandchildren, you’ll like what you are about to read.

Joe and Mary, both 60, would like to enrich their six grandchildren. Instead of making $22,000 gifts each year to each grandchild, here is what they do. Joe and Mary create a wealth creation trust (an irrevocable life insurance trust that receives insurance death benefits free of income tax and estate tax). They find out that they can purchase a $1 million second-to-die policy (pays after the second death of Joe and Mary) for a premium cost of only $12,709 per year, with premiums stopping after 15 years.

So, Joe and Mary make a gift of $12,709 each year to each of the six grandchildren via a wealth creation trust to pay an annual premium for six separate $1 million second-to-die policies for a 15-year period.

What’s the result? This strategy removes $76,254 ($12,709 x 6) from their estate each year. After Joe and Mary are gone, the grandchildren will have $6 million ($1 million each) tax-free at a maximum lifetime out-of-pocket cost to Joe and Mary of only $1,143,810 ($76,254 x 15) - almost a $5 million tax-free profit.

How much do you think Joe must earn to leave his grandchildren or children $6 million? Would you believe about $22.2 million? If Joe earns $22.2 million, after income taxes and 55% estate taxes there’s about $6 million left.

Play with the numbers depending on how many children or grandchildren you might want to enrich, the amount of dollars wanted for each and, or course, your age (or ages, if second-to-die insurance is your choice). If you need help, call me at 847/674-5295.

Irving Blackman is a partner in Blackman Kallick Bartelstein, 300 S. Riverside Plaza, Chicago, Ill. 60606; tel. 312/207-1040, or via e-mail at [email protected].