College gift annuity for grandchild example

Walt and Helen want to help their grandson with his college education. They would also like to provide a gift to support George Fox Evangelical Seminary. Andy, their grandson, is three years old. They decide to fund their gift plan with shares of appreciated publicly traded stock. The value of the stock today is $10,000. Their basis in the stock is $5,000.

Contribution Amount (value of the stock) $10,000.00
Basis in stock $ 5,000.00
Income tax deduction for Walt & Helen $ 1,731.80
Single payment option at age 18 $14,961.76

Installment option at age 18
Four annual payments of $4,207.80 per year
Tax-free portion $2,067.06
Ordinary income $2,140.74
Total installment payments over 4 years $16,831.20

Walt & Helen report capital gain of $4,134.10 in the year of the gift.

For Andy, at age 18, this commuted payment gift annuity may be subject to IRS section 72(q), which imposes a 10% penalty tax on premature distributions from annuity contracts to annuitants under age 59½.

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