The 2004 Tobacco Buyout legislation will provide approximately $10.1 billion, including $9.6 billion in income payments to tobacco growers and quota holders, over the next 10 years. Nearly $3.9 billion of that buyout will be paid to some 76,000 North Carolinians.
Many professional advisors will be counseling buyout recipients and presenting a wide variety of options. The bill permits growers and quota owners to assign their payments to a financial institution. Some institutions have indicated an interest in offering a lump sum payment in exchange for the 10-year buyout payments, a decision that should be weighed carefully.
The buyout represents a significant opportunity for planning and diversification- and for many this will be an opportunity of a lifetime. While these funds are tremendously important for growers and quota holders, they do come with tax liabilities that recipients will need to address.
Considering All Of The Opportunities
What Are the Options?
How Does It Work?
We Are Here To Assist
What Can You Do?
For those who have been actively farming, the buyout will provide an opportunity to leave the tobacco business and explore alternative crops, to pay off debts and buy equipment to better compete in the free market, or to leave farming entirely. However, the buyout also provides an opportunity to plan for retirement or enhance and diversify current income.
Income received from the buyout will either be taxed as long-term capital gain or ordinary income, depending on whether the individual is the quota owner, the tobacco producer, or both. Regardless of the type of tax liability, the buyout income will be in excess of current income and will present the potential for significant tax liabilities.
We at North Carolina State University believe it is important to discuss the value of considering charitable options as a part of sound financial, retirement and estate planning. Charitable options can assist recipients of the tobacco buyout funds with favorable tax benefits as well as presenting opportunities for them to make gifts to charitable organizations that have been important in their lives.
North Carolina State University, and especially the Department of Agricultural and Resource Economics in the College of Agriculture and Life Sciences, has played a significant role with agricultural programs throughout its history, including much of the work that has made the tobacco buyout possible. Continuing in this leading role, the College of Agriculture and Life Sciences is making this in-depth website available to the public to provide the most comprehensive source of information on all aspects of the buyout.
There are several options available to assist those receiving funds from the tobacco buyout. They include: opportunities for an outright gift that can provide the greatest charitable income tax deduction; life income gifts that can help diversify income streams and assist with tax planning; and, deferred income options that can assist with retirement planning.
- Outright gifts to support the mission and service of qualified charitable organizations or programs may qualify for a charitable income tax deduction for donors who itemize their deductions. A donor making an outright gift will receive a charitable tax deduction for the full amount of their contribution. Outright gifts can be used for a wide variety of purposes- to provide current support, establish an endowment, or underwrite a capital project based on the donor's wishes and interests.
- Life income gifts, often called deferred gifts, enable individuals to make a significant gift while reserving an income for life and receiving a current charitable income tax deduction. These gifts can be in the form of a charitable gift annuity or charitable remainder trust. These gifts provide a current year income tax deduction for the value of the future gift to a charity while also providing income to the donor and up to one additional income beneficiary for their lifetimes. Life income gifts can play a significant role in financial and tax planning and offer attractive returns.
- Deferred life income gifts like a deferred charitable gift annuity can help individuals by providing immediate tax advantages while deferring income until a later time such as retirement. Because the income payments do not occur immediately, the gift annuity value grows and the income payments are larger. As with the traditional gift annuity or charitable remainder trust, the charitable income tax deduction is used in the year of the gift, often when tax liabilities are larger. In most cases, if the full deduction cannot be used in one year, it will carry over for up to five additional years.
All of these charitable options remove the gift assets from the donor's estate, a concern if the individual's estate might qualify for federal and state estate taxes. They also allow the donor to designate their gifts to programs or services that are aligned with their interests whether they involve current operations, program funds, capital projects or endowments.
Let's take a look at these planning options and how they might work in specific situations.
EXAMPLE 1: Charlie Jones and his wife Anne (both are 61 now) have been tobacco farmers for 30+ years. They hope to farm a few more years, but also look forward to retiring and spending more time with the grandchildren. They have never been able to save much for their retirement years and aren't interested in selling the farm at this point. Over the next 10 years they will receive a total of $700,000 from the tobacco buyout. The additional income will place them in the 28% federal tax bracket. What options do they have to lower their exposure to income taxes and provide a cushion for the years ahead?
Right now the $70,000 they will receive in 2005 will be taxed as follows:
- $49,000 at capital gains rates-15% or $7,350
- $21,000 as ordinary income-28% or $5,880
- Potential federal tax of $13,230 leaving them with $56,770.
POSSIBLE SOULTIONS:
1. Make an outright gift and take a tax deduction for the entire amount of the gift.
2. Use $25,000 to fund an immediate payment charitable gift annuity. This guaranteed fixed payment gift can provide them with the following:
- Immediate income tax deduction of $4,784 to lower their 2005 tax bill by $1,340.
- Guaranteed annual income of $1,375 per year for as long as either of them lives including $707 per year that will be tax-free for the next 28 years.
- $77,000 in income (at a 5.5% rate) from the gift over their projected lives.
- Ability to designate the remainder after their deaths to benefit any area in the College of Agricultural and Life Sciences at NC State University including the 4-H program or even the Extension Program in their county.
- The value of the annuity will not be taxed in either of their estates.
3. Use the $25,000 to set up a deferred charitable gift annuity that will start to provide income to them when they intend to retire at age 65. Their benefits would include:
- A $6,465 income tax deduction that should save them $1,810 in federal taxes in 2005.
- Guaranteed annual income of $1,675 per year starting when they are 65 and including $744 annually that will be tax-free for the next 24 years.
- Over their lifetimes they will receive $85,000 in distributions (at a 6.8% rate).
- The value of the annuity will not be taxable in either of their estates.
- They may designate the remainder of the gift to be used however they would like.
4. Establish a charitable remainder unitrust with $50,000 that will pay them income each year based on 5.75% of the value of the assets in the trust. They can add to the trust at any time and each addition generates another income tax deduction. Their benefits would be:
- Immediate charitable income tax deduction of $12,643 that would save them $3,540 in federal income taxes for 2005
- Annually their income would be based on 5.75% of the assets in the trust on 12/31 of the prior year. If the value of the trust is $50,000 their income would be $2,875. As the value of the trust increases so will their income. The opposite is also trust since the assets are invested in both equities and fixed income securities.
- Over their joint life expectancy they could receive $83,000 +/- in income distributions.
- Of course, the value of the trust is not taxable in either of their estates.
- They may choose to have the remainder after their passing utilized to benefit their area of special interest with one or more charities with one trust document.
EXAMPLE 2: Cheryl Osborne, age 53, is a single professional woman who holds a tobacco quota that she inherited from her late aunt several years ago. Cheryl will be receiving $350,000 over the next 10 years from the tobacco buyout. She does not need any additional income now, but would love to build a nice retirement supplement for the future. She is anticipating retiring in 2016 at 65 and wonders what can be done that will lower her current tax liability and help her building a nest egg for the future with the quota buyout proceeds.
Right now the $35,000 she will receive in 2005 will be taxed as capital gain and she will owe a total of $5,250 in federal taxes on the distribution.
POSSIBLE SOLUTION:
Set up a series of deferred charitable gift annuities that will use each annual payout from the tobacco buyout. The gift will generate a nice current income tax deduction for her, allow the fund to grow tax-free until she starts receiving payments and make a gift in support of the College of Agriculture and Life Sciences at NC State.
Each year Cheryl will donate $25,000 to a deferred charitable gift annuity with the NC Agricultural Foundation, Inc. with payments set to begin in December of 2016 after she turns 65. The following chart summarized her benefits for the five gifts.
| Age when gift made | Rate offered | Income tax deduction | Income tax savings | Projected life income | Income/ year |
|---|---|---|---|---|---|
| 53 | 10.6% | $8,749 | $2,450 | $52,735 | $2,650 |
| 54 | 10/1% | $8,761 | $2,453 | $50,248 | $2,525 |
| 55 | 9.7% | $8,633 | $2,417 | $48,258 | $2,425 |
| 56 | 9.2% | $8,699 | $2,436 | $45,770 | $2,300 |
| 57 | 8.8% | $8,614 | $2,412 | $43,780 | $2,200 |
| 58 | 8.3% | $8,745 | $2,449 | $41,293 | $2,075 |
| 59 | 7.9% | $8,713 | $2,440 | $39,303 | $1,975 |
| 60 | 7.6% | $8,488 | $2,377 | $37,810 | $1,900 |
| 61 | 7.2% | $8,498 | $2,379 | $35,820 | $1,800 |
| 62 | 6.9% | $8,300 | $2,324 | $34,328 | $1,725 |
| TOTALS | $86,200 | $24,137 | $429,345 | $21,575 |
So, by placing $250,000 in the deferred gift annuities, Cheryl will be able to save $24,137 in taxes on her distributions from the tobacco buyout. Plus, over her projected life expectancy she will receive income payments of $429,345 and a portion of those will be tax-free. She will have a guaranteed supplemental retirement income of $21,575 and the knowledge that after her passing there will be a scholarship fund in her aunt's memory. The fund will provide scholarships for NC State students pursing a degree in family and consumer sciences in perpetuity.
These calculations are for illustration purposes only and should not be considered legal, accounting, or other professional advise. Your actual benefits may vary depending on the timing of your gift.
Here are some sample rates for immediate payment and deferred payment gift annuities as well as charitable remainder trusts. Please feel free to call today for a personalized projection of your benefits for a life income gift.
Sample Immediate Payment Charitable Gift Annuity Rates
| SINGLE LIFE | TWO LIVES | |||
|---|---|---|---|---|
| Age | Rate | Ages | Rate | |
| 55 | 5.5% | 57, 58 | 5.2% | |
| 60 | 5.7% | 66,69 | 5.8% | |
| 65 | 6.0% | 74, 76 | 6.3% | |
| 70 | 6.5% | 80, 83 | 7.2% | |
| 80 | 8.0% | 86, 86 | 8.1% | |
| 85 | 9.1% | 89, 92 | 9.1% | |
Sample Deferred Charitable Gift Annuity Rates
| SINGLE LIFE | TWO LIVES | |||||
|---|---|---|---|---|---|---|
| Age | Defer |
Rate | Ages | Defer to Age |
Rate | |
| 45 | 60 | 11.7% | 45,45 | 60 | 11.1% | |
| 50 | 60 | 9.2% | 50,51 | 60 | 8.9% | |
| 55 | 60 | 7.2% | 55,56 | 60 | 6.9% | |
| 55 | 62 | 8.2% | 55,56 | 62 | 7.6% | |
| 55 | 65 | 9.7% | 55,56 | 62 | 8.6% | |
| 60 | 62 | 6.4% | 60,61 | 65 | 7.2% | |
Sample Charitable Remainder Trust Rates
| SINGLE LIFE | TWO LIVES | |||
|---|---|---|---|---|
| Age | Rate | Ages | Rate | |
| 50-55 | 5.0% | 50-55 | 5.0% | |
| 56-60 | 5.5% | 56-60 | 5.5% | |
| 61-65 | 6.0% | 61-65 | 5.75% | |
| 66-70 | 6.25% | 66-70 | 6.0% | |
| 71-79 | 6.5% | 71-79 | 6.25% | |
| 80+ | 7.0% | 80+ | 6.5% | |
Our role at the College of Agriculture and Life Sciences at North Carolina State University is to assist our constituents and friends as they explore the many alternatives resulting from the tobacco buyout. We are here as a resource to assist you by providing a variety of educational materials; planned giving and estate planning seminars; and, meetings with individuals to more fully explain any of these opportunities.
- Request additional information to discuss with your advisors for financial, retirement and estate planning.
- Consider the opportunities to support the work of charitable organizations that have played an important role in your life.
- For further information, call Steve Watt, Director of Gift Planning, College of Agriculture and Life Sciences, at NC State (919) 515-2000, or e-mail, Steve_Watt@ncsu.edu . Or contact, Joan DeBruin, Senior Director of Gift Planning, North Carolina State University, at (919) 515-9076, or e-mail Joan_Debruin@ncsu.edu .
