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Monday March 25, 2019

Case of the Week

Dying to Deduct, Part 2

Case:

Abigail Green was a wonderful and spirited 80-year-old woman. Even in her advanced age, she worked in her garden, handled all of her finances and played golf each weekend. In addition to her busy schedule, she also made time to help at a local homeless shelter. She believed that whenever you can lend assistance to your fellow neighbor it is your responsibility to do so. Because of this belief, she gave her time, love and money to the local homeless shelter. Abigail's normal practice was to give $5,000 each year to the homeless shelter. However, she wanted to make a more significant gift this year.

In January of this year, she decided to establish a $100,000 charitable gift annuity for herself and her sister. The payments would go to Abigail for life, then to her sister for life. Abigail liked the high fixed payments, large tax deduction and simplicity of the arrangement. Because Abigail funded the CGA with cash, a large portion of each payment was tax-free. But of course, what she loved most was the eventual gift to the shelter.

Sadly, Abigail suffered a heart attack a few weeks later and died soon after. It was a terrible loss to the community. Now several months have passed and Abigail's family and CPA are winding up Abigail's financial affairs. Her CPA knew he could deduct Abigail's charitable tax deduction on her final income tax return. He also knew if a person who funds a gift annuity dies prematurely, he or she may claim an additional tax deduction for any unrecovered investment (See "Dying to Deduct, Part 1). However, in this case, Abigail's sister is still remaining on the gift annuity contract. Thus, the CPA wonders how this affects the unrecovered investment issue.

Question:

Since Abigail died prematurely, does she get another tax deduction? Does the fact that this is a two-life gift annuity affect the outcome?

Solution:

The income from Abigail's gift annuity, as mentioned above, was partially tax free. This tax-free component is essentially a return of principal or investment, and it lasts for the lifetime of both Abigail and her sister.

Normally, the premature death of an annuitant would trigger an additional income tax deduction on the decedent's final income tax return. See Sec. 72(b)(4). However, in this case, the annuity continues for the life of Abigail's sister. Furthermore, the tax-free payments continue for the life of her sister. Abigail's sister, in essence, will step into Abigail's "shoes" and reap the benefits of tax-free payments.

Consequently, there is no unrecovered investment in the annuity contract at the time of Abigail's death, because Abigail's sister is still "recovering" it. As a result, Abigail is not entitled to an additional income tax deduction on her final income tax return.

Editor's Note: If an additional income tax deduction were applicable, it would not be a charitable income tax deduction, but rather a net operating loss deduction. This deduction can be claimed on Schedule A of Form 1040.

Published March 22, 2019
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Previous Articles

Dying to Deduct, Part 1

Living on the Edge, Part 6

Living on the Edge, Part 5

Living on the Edge, Part 4

Living on the Edge, Part 3

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Shelby Harder, 2018
Dr. Irving Auld and Dorothy
Roher Auld Scholarship

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Juliana E. Olsen-Valdez, 2018
Carroll Family Scholarship

"Lawrence University is a great place for students looking to embrace their multi-interested approach to learning. As a Geology major, I have spent many long hours in laboratories. But, I have also had the opportunity to organize and lead students on outdoor backpacking trips, help build a stronger community for International students, participate in dialogues on campus initiatives, attend dozens of musical events, and study abroad in a field-based geology program, all while taking classes in a variety of academic spheres on campus. Lawrence, as an institution and student body, creates a collective of learners, listeners, and leaders who are continuously evolving their understanding of the world around them. I am fortunate to have the support of the Carroll Family Scholarship, so that I can say I am a part of this exceptional community too!"

Weiqi "Vicky" Liang, 2019
Marian H. Cuff Endowed Scholarship

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Anthony Cardella, 2018
Ansorge Family Scholarship

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Milwaukee-Downer Scholarships and Professorships

Some of the many recipients of Milwaukee-Downer scholarships gather for a photo with Carolyn King Stephens M-D'62 and Marlene Crupi-Widen M-D'55 in January 2014 at the annual scholarship luncheon.

Rosamund Victoria Bille Adler Scholarship
Dr. Charles E. Albright Scholarship
Helen Daniels Bader Scholarship
James G. and Ethel M. Barber Scholarship
Catharine Beecher Endowed Fund for Downer Women
Bessie A. Bell Scholarship
Berk Scholarship
Frederick C. Best Scholarship
Beta Study Club Scholarship
Lynde Bradley Scholarship
Lucia R. Briggs-Alumnae Scholarship
Edith Lange Brooks Scholarship
Anne Barman Caldwell Scholarship
Alice Miller Chester Scholarship
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Milwaukee-Downer Class of 1940 Fund
Milwaukee-Downer Class of 1942 Fund
College Endowment Association Scholarship
Janet Cope Crawford Scholarship
Jessie Mabbott Daniels Scholarship
F. T. Day Scholarship
Rufus Dodge Scholarship
Julia P. Ely and Hannah R. Vedder Memorial Scholarship
General Endowed Scholarship - M-D College
Dr. Alfred W. and Mrs. Ada F. Gray Scholarship
Berenice E. Hess Scholarship Endowment
Lucille Ray Hibbard Scholarship
Belle Austin Jacobs Scholarship
Helen McDermott Jurack and Ronald J. Mason Scholarship
Marjorie S. Logan Scholarship
Nellie Maxwell Scholarship
S. Annabelle & Paul McGuire Scholarship
Memorial Scholarship Fund - Milwaukee-Downer
Milwaukee-Downer Class of 1953 Scholarship
Milwaukee-Downer Class of 1955 Scholarship
Milwaukee-Downer Class of 1956 Scholarship
Milwaukee-Downer Class of 1957 Scholarship
Milwaukee-Downer Class of 1958 and 1959 50th Reunion Scholarship
Milwaukee-Downer Club Scholarship
Milwaukee-Downer/Lawrence College Consolidation 50th Anniversary Scholarship
Francis Evelyn Kelley Morgan Memorial Scholarship
O'Neill-Anderson Family Scholarship Endowment
Elizabeth A. Olson Scholarship
Gilbert Haven Peirce, Sr. and Emma Elizabeth Manor Peirce Milwaukee-Downer Scholarship
Aleida J. Pieters Scholarship
Matilda Siefert Puelicher Scholarship
Elizabeth Ann Richardson Scholarship
William M. Ross Memorial Scholarship
Elizabeth Rossberg Scholarship
Charles Frederic Sammond Scholarship
Mildred L. Schroeder Scholarship
Sivyer Educational Fund for Women
Marion Merrill Smith Scholarship
Dr. Elizabeth A. Steffen Scholarship
W. Mead and Elizabeth McKone Stillman Scholarship
Strzelczyk Family Scholarship
Clare Scherf Sweetman Scholarship
Raymond H. and Jane K. Taylor Scholarship
Jerline E. Walfoort Memorial Scholarship
Barbara E. Wehr Fund
Harmony Weissbach Scholarship
Martha and Frances Wheelock Scholarship
James G. and Ethel M. Barber Professorship of Theatre and Drama
T. A. Chapman Professorship in Music
Alice G. Chapman Professorship in Physics
Alice G. Chapman Librarianship
Milwaukee-Downer College and College Endowment Association Professorship

Angela Small Fry Intia, 2019
Maurine Campbell Scholarship

"Thanks to the Maurine Campbell scholarship, I have been able to attend the amazing school that is Lawrence University. With the help from this scholarship, I have been able to pursue my dream career in chemistry working with the outstanding and extremely helpful faculty here. Even outside of chemistry I take the time for exploration into my interests and want to give back through my work as a resident life advisor, stock room assistant, and student supervisor at Bon Appetit. Everything I have learned here, academically or not has forever molded the person I am today."

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