Financial Planner Gift planning newsletter from Cornell University Fall 2010 David 56 and Jane 57 Pyle celebrate the opening of Weill Hall with giving officer Valerie Kuramoto. Magnifying the Impact of Giving When David 56 and Jane 57 Pyle were looking to generate a safe and predictable source of income during their retirement years, they turned to Cornell. Armed with their financial consultant s advice and information from Cornell s Office of Trusts, Estates, and Gift Planning, they established a charitable gift annuity that benefits both them and the university. In these times, you really ought to have safe money to help generate cash to meet basic needs, and a charitable gift annuity helps us do that, says David, a retired engineer for Procter & Gamble. They might have set up an annuity through an insurance company or brokerage firm, but their advisor recommended Cornell s annuities as the safest long-term choice because the university endures, while businesses are subject to greater changes or failure. Besides receiving quarterly payments on their annuity, the Pyles earn a significant charitable tax deduction. Just as important, they are helping Cornell. We give to Cornell because we see so much good coming from it, says Jane, who is retired from school teaching and administration. continues on page 5 www.alumni.cornell.edu/gift_planning/
Overcome Low Interest Rates and a Volatile Market with High-Minded Planning 5 Ways It Pays to Be Charitable As the 21st century opened, both the stock market and the economy soared. The markets were at all-time highs. Consumer and investor confidence was strong. Inflation was low and holding. And, while the rest of the world struggled through recession, the U.S. had seemingly eliminated the bust from the business cycle. But the picture lost its focus. A housing crisis, the price of oil, and high unemployment all contributed to a deep recession. Consumer confidence has taken a beating, investors are once again shaken and wary, and recovery has a long way to go. About the only condition that has remained constant is the relatively low rate of inflation a comfort to consumers, but of concern to investors faced with extraordinarily low interest rates. Where can a person turn today to get the best return for his or her dollar? A growing number are finding answers not at their local banks or brokers offices, but at their favorite charities. Often people are surprised to learn that there are many ways to make a gift to charity and receive a stream of income in the process. You may have been vaguely aware of the possibilities but never examined in detail how such a charitable gift could fit your own longterm financial needs. The current period of low interest rates makes several of these charitable planning strategies more appealing than ever. 1 Receive a Stream of Income for Life with a Gift Annuity The oldest and most popular gift arrangement is the charitable gift annuity, which provides the donor or one or two beneficiaries payments for life, based on a fixed percentage of the amount of the gift. The following chart shows the rates Cornell is currently paying donors at selected ages. The rate in effect when you acquire the annuity never changes. It is guaranteed for life. Sin Yeong An 10 experienced the impact of alumni support as the recipient of two endowed scholarships. 2
$10,000 GIFT ANNUITY Age(s) Rate Income Tax- Free Deduction One Annuitant 65 5.5% $550 $383 $2,382 70 5.8% $580 $422 $3,289 75 6.4% $640 $483 $4,016 80 7.2% $720 $561 $4,728 85 8.1% $810 $663 $5,493 Two Annuitants 65-65 5.1% $510 $352 $1,229 70-70 5.4% $540 $388 $2,050 75-75 5.7% $570 $425 $3,034 80-80 6.3% $630 $488 $3,811 85-85 7.1% $710 $572 $4,573 Calculations are based on quarterly payments and a discount rate of 2.4%. Acceptance of annuity contracts dependent on: 1) Age of annuitant(s) 2) IRS discount rate Viewed in the light of current market conditions, these rates are very appealing. But there are other factors that enhance them even more. You receive a deduction in the year you fund the annuity, and each year for the duration of your life expectancy a portion of each payment you receive is tax-free. These tax benefits effectively increase your yield, as the following example demonstrates. Example: Mary J, 70, contributes $10,000 to Cornell in exchange for a gift annuity that will pay her $580 annually. The gift produces an income-tax deduction of $3,289 that, in her 28% marginal income-tax bracket, saves her $921. Thus, her out-of-pocket cost for the annuity is $9,079, and the $580 annual payment to her is equivalent to a 6.4% return. Because part of the annual payment Mary receives from the annuity is tax-free ($422 of the $580 is not taxed), her return is the equivalent of $744 of taxable income. Measured against her out-of-pocket cost ($9,079), this represents an equivalent, fully taxable yield of 8.2%. Note: You should not select a gift annuity merely for a higher return, since you are irrevocably committing the principal to us. But if you are looking for a way to make a significant gift and generate increased cash flow, gift annuities are very appealing perhaps even more so in current economic conditions. 2 Support an Elderly Parent with Additional Income Roger s mother s modest pension and Social Security are insufficient for her living expenses, and Roger has been making up the difference with a monthly stipend of $650. In his 35% tax bracket, he must earn $1,000 to pay the $650 subsidy. To provide for his mother in a more tax-efficient manner and to support Cornell, with which both he and his mother are affiliated, he decides to contribute stock worth $100,000 for a gift annuity, naming his mother as beneficiary. She receives $675 per month, and her after-tax income is the same as the amount Roger had been giving her. Moreover, this arrangement is emotionally satisfying to her because it is associated with an institution she wants to support. Because he is not a beneficiary, Roger pays taxes on some of the gain in the stock but still realizes net tax savings generated by the charitable deduction. He also makes a taxable gift to his mother but pays no gift tax because of his lifetime exemption. 3 Support Other People You Care About You may also establish a gift annuity to provide assistance for a sibling or for a non-family member such as a friend, or for retirement income to an employee such as a longtime domestic worker or gardener. 4 Supplement Your Future Retirement Income Joan, 50, would like to supplement her expected retirement income, so she contributes stock valued at $50,000 for a deferred gift annuity with payments to begin when she turns 65. She receives a current charitable deduction of $5,237 and can count on payments of $5,250 per year when she turns 65. She also plans to establish additional gift annuities in upcoming years. 3
Equities Can Yield 5 High Returns for You and Cornell Many informed investors are willing to accept today s low interest rates because they realize that the real return is still competitive with levels of recent years. What is disturbing, though, is the possibility of tying money up and seeing the principal stagnate should interest rates go back up. Almost certainly, this type of thinking leads to interest in the stock market. Many people would rather risk the fluctuating prices of equities than risk locking in to low rates. There is a historical reason for this: Over the last 50 years, the stock market, despite its ups and downs, has produced an average return nearly three times that of fixed-income vehicles such as CDs. Charitably minded investors who are willing to accept a degree of risk may want to consider a charitable remainder unitrust invested in a portfolio with an emphasis on equities in addition to an allocation of fixed-income vehicles as an alternative to a low-interest CD. While a $100,000 CD paying 5% offers a secure income each year for its entire term, because of inflation that $100,000 will not have the same purchasing power it has today. With a unitrust, on the other hand, you can fix the payout rate and still have the possibility of growth. Suppose, for example, you select 5%, the same rate you would receive from the CD. Each year you would receive 5% of the value of the trust assets. If that value increases, so does your payment. Of course, if the value decreases, your payment falls proportionately. Assuming that you are willing to structure a trust heavily invested in equities, the historical odds are that the value will grow more quickly than a trust invested in fixed-income instruments, given sufficient time. The 5% return should ultimately be 5% of a larger number. You win by receiving a higher return, and Cornell wins by receiving a larger remainder portion of the trust. As with any investment in equities, there is the risk that the value of the trust could decrease. Over the course of a beneficiary s life, this is likely to happen at some point. On balance, however, this strategy would be likely to achieve more growth. The risk is also balanced by the significant tax deduction generated when the trust is created. A gift of appreciated longterm securities especially those paying a low dividend can be a particularly appropriate way to fund a charitable unitrust. The information contained herein is offered for general informational and educational purposes. The figures cited in the examples and illustrations are accurate at the time of writing and are based on federal law as well as IRS discount rates that change monthly. State law may affect the results illustrated. You should seek the advice of an attorney for applicability to your own situation. Copyright Pentera, Inc. All Rights Reserved. 4
Magnifying the Impact of Giving continued from cover The Pyles have made an impact on Cornell over many years with both personal and matching gifts, designating much of their support to engineering and human ecology. Together they also have established student scholarships, helped build Duffield Hall, and named a lounge in Weill Hall. Because of the university s far-reaching scope, David believes that Cornell magnifies the impact of our gifts. It is on the leading edge in so many fields. In addition to their philanthropy, the Pyles have enjoyed volunteering to serve Cornell through the Cornell University Council and, in recent years, the Cornell Club of Sarasota-Manatee. Now living near Sarasota, Florida, the Pyles are a multigenerational Cornell family. We were blessed to have a great education and a fun time at Cornell, Jane says. I always feel good when I m at Cornell. Next Steps: Are you wondering what your best next step is? Maybe you d like to order our free booklet, Charitable Solutions to Investment Dilemmas, or you d like to speak to us directly. Here are a few options: 1. Visit us online at www.alumni.cornell.edu/gift_planning. 2. Return the reply card. 3. Call us at (800) 481-1865. 4. E-mail us at gift_planning@cornell.edu. 5. Join the Cayuga Society. 5
The Cayuga Society The Cayuga Society now honors more than 4,000 individuals who have established a planned gift for Cornell. Because all planned gifts represent a lifetime commitment to Cornell University, the Cayuga Society has no minimum gift level, and membership is complimentary. Members have the option to receive a memento of appreciation, invitations to special events, and recognition through university and Office of Trusts, Estates, and Gift Planning publications. Most important, your membership is the ultimate expression of confidence in Cornell and an important example for others who might consider establishing a planned gift. Join us in supporting future generations of Cornellians by making a planned gift to Cornell or by letting us know about a planned gift that you have already made. Honoring those who have established a planned gift for Cornell. INSIDE THIS ISSUE FALL 2010 Magnifying the Impact of Giving... 1 Overcome Low Interest Rates and a Volatile Market with High-Minded Planning... 2 1. Receive a Stream of Income for Life with a Gift Annuity... 2 2. Support an Elderly Parent with Additional Income... 3 3. Support Other People You Care About... 3 4. Supplement Your Future Retirement Income... 3 5. Equities Can Yield Higher Returns for You and Cornell... 4 130 East Seneca Street, Suite 400 Ithaca, NY 14850-4353 Nonprofit Org. U.S. Postage PAID Cornell University