Paying Mom and Dad Back the Charitable Way

Parents helping their children, even grown ones, isn’t unusual, but many of those same parents also provide financial assistance to and emotional support for their own parents.  There are ways to combine gifts to charity with support for elderly family members, with favorable tax results.  Consider a daughter who sends a $500 check to her father every month — $6,000 annually.  If the daughter is in a 28% tax bracket, she has to earn $8,333 in order to pay the tax and have the $6,000 left to send to her dad.  She could, instead, fund a 6% charitable remainder unitrust with $100,000 that will pay her father income for life, and then pay to her following his death.  Assuming she is age 65 and her dad is age 87, the charitable deduction would be about $37,000, saving her more than $10,360 in income tax. She can even use appreciated securities to fund the trust, thereby avoiding the capital gains tax that she would owe if she sold the shares.

Another option is to arrange a charitable gift annuity.  Assuming a one-life gift annuity with monthly payments, the daughter could transfer $75,000 cash in order to generate the $6,000 she is currently giving to her father (8.2% recommended rate for an annuitant age 87).  The daughter would be entitled to a deduction of about $44,000, saving her more than $12,300 in income tax.  She could fund a two-life gift annuity, naming herself as successor beneficiary, but the recommended payout rate would drop to 4.5%, requiring her to contribute more in order to generate $6,000 annually.


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