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Taxation of Charitable
Gift Annuities
Russell James, J.D., Ph.D., CFP®Associate ProfessorDirector of Graduate Studies
in Charitable PlanningTexas Tech University
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Charitable Deduction
Ordinary IncomeTax Free
Return of Investment
Capital Gain
Gift Taxes
$5,000
Annuity
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Charitable deduction
is the value of
what you give less the value of what you get
back
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$100,000 Cash─ Value of AnnuityCharitable Deduction
$100,000Cash
Donor gives
$100,000
Charity pays age 55 donor
$5,000 per year for life
$5,000
Annuity
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What is the value of an annuity?
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Find the §7520 rate (http://www.irs.gov/businesses/small/article/0,,id=112482,00.html)
Multiply annual payment by annuity factor in IRS Pub. 1457
(http://www.irs.gov/retirement/article/0,,id=206601,00.html)
Value of annuity
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Find the §7520 rate http://www.irs.gov/businesses/small/article/0,,id=112482,00.html
I can choose current or one of last
two month’s rate
$5,000/year age 55 donor on 9/2/10
July 2.8%Aug 2.6%Sept 2.4%
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Value of fixed
annuity
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Find the §7520 rate2.8%
http://www.irs.gov/businesses/small/article/0,,id=112482,00.html
I want the lowest annuity
valuation [highest
charitable deduction] so I select
July 2.8%
$5,000/year age 55 donor on 9/2/10
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Find the §7520 rate 2.8%
http://www.irs.gov/businesses/small/article/0,,id=112482,00.html
Multiply annual payment by annuity factor in IRS Pub. 1457
$5,000 X 17.2932http://www.irs.gov/retirement/article/0,,id=206601,00.html
Section 1 Table S - Based on Life Table 2000CMInterest at 2.8 Percent
Life LifeAge Annuity Estate Remainder Age Annuity Estate Remainder0 30.7976 0.86233 0.13767 55 17.2932 0.48421 0.515791 30.8780 0.86458 0.13542 56 16.8926 0.47299 0.527012 30.7583 0.86123 0.13877 57 16.4893 0.46170 0.538303 30.6299 0.85764 0.14236 58 16.0842 0.45036 0.549644 30.4953 0.85387 0.14613 59 15.6767 0.43895 0.56105
$5,000/year age 55 donor on 9/2/10
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Find the §7520 rate 2.8%
http://www.irs.gov/businesses/small/article/0,,id=112482,00.html
Multiply annual payment by annuity factor in IRS Pub. 1457
$5,000 X 17.2932http://www.irs.gov/retirement/article/0,,id=206601,00.html
Value of annuity$86,466
If annuity pays more
than annually, add adjustment factor from
Table K
$5,000/year age 55 donor on 9/2/10
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$100,000Cash
Donor gives
$100,000
Charity pays age 55 donor
$5,000 per year for life
$5,000
Annuity
$100,000 Cash─ $86,466 Annuity
$13,534 Deduction
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2011 2012 2013 2014 2015 … Death
…
2010
IRS requires present value of charitable share >10%
If charitable deduction is not >10% of transfer, it
doesn’t qualify
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Find the §7520 rate http://www.irs.gov/businesses/small/article/0,,id=112482,00.html
Multiply annual payment by annuity factor in IRS Pub. 1457
http://www.irs.gov/retirement/article/0,,id=206601,00.html
Value of annuity
For two lives use Table R
Annuity factor is(1-remainder)
§7520 rate
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Charitable deduction
is the value of what you
give less the value of
what you get back
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Charitable Deduction
Ordinary IncomeTax Free
Return of Investment
Capital Gain
Gift Taxes
$5,000
Annuity
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Part of each annuity check just gives you back some of the money you paid
Initial Gift
Annual Payments
Charity $100,0001/1/2010
Donor $5,0001/1/2011
1/1/2012
1/1/2013
+ Return of InvestmentEarnings
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The rest is earnings (taxable)
Initial Gift
Annual Payments
Charity $100,0001/1/2010
Donor $5,0001/1/2011
1/1/2012
1/1/2013
+ Return of InvestmentEarnings
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There is NO tax on getting back your own money
Initial Gift
Annual Payments
Charity $100,0001/1/2010
Donor $5,0001/1/2011
1/1/2012
1/1/2013
+ Return of InvestmentEarnings
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There IS a tax on getting earnings on your money
Initial Gift
Annual Payments
Charity $100,0001/1/2010
Donor $5,0001/1/2011
1/1/2012
1/1/2013
+ Return of InvestmentEarnings
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Suppose you put some
money in the bank
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Each year you withdraw all
of the interest and some of
what you originally put
in
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Do you pay taxes when
you withdraw the money
you originally put in?
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Do you pay taxes when
you withdraw the money
you originally put in?
No.
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That is like getting your own money back that you buried in the ground
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That is like getting your own money back that you buried in the ground
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Do you pay taxes when
you withdraw the money
you originally put in?
No.
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Do you pay taxes on the
interest earned?
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Do you pay taxes on the
interest earned?
Yes.
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Do you pay taxes on the
interest earned?
Yes.That is new money you didn’t have
before
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The idea of taking all of the interest and some of the principal each year is similar to an
annuity
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Each annuity check has some earnings and some return of original investment
earnings
return of original
investment
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How much of each annuity check is return of the money you put in originally?
earnings
return of original
investment
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$ used to buy annuityOriginal life expectancy
earnings
return of original
investment
Annual return of investment=
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2011 2012 2013 2014 2015 Life Expectancy
2010
Tax free return of investment is divided among each expected payment
Original Investment
…
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2011 2012 2013 2014 2015 Life Expectancy
2010
Annuity payments after life
expectancy are 100% taxable
because all original investment has been returned
…
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$100,000Cash
$5,000
Annuity
Donor gives
$100,000
Charity pays age 55 donor
$5,000 per year for life
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Charity pays age 55 donor
$5,000 per year for life
$100,000Cash
$5,000
Annuity
Donor gives
$100,000
$ used for annuityOriginal life expectancy
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Charity pays age 55 donor
$5,000 per year for life
$100,000Cash
$5,000
Annuity
Donor gives
$100,000
*Life expectancies from Reg 1.72-9 [http://goo.gl/kR5k]Adjustment for payment timing Reg. 1.72-5(a)(2)(i) [http://goo.gl/so26]
$86,466 annuity portion cost
21 years*
$ used for annuityOriginal life expectancy
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Charity pays age 55 donor
$5,000 per year for life
$100,000Cash
$5,000
Annuity
Donor gives
$100,000
*Life expectancies from Reg 1.72-9 [http://goo.gl/kR5k]Adjustment for payment timing Reg. 1.72-5(a)(2)(i) [http://goo.gl/so26]
$86,46621
$86,466 annuity portion cost
21 years*
= $4,118
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2011 2012 2013 … 2022 Life Expectancy Death
2010
…
$5,000Ordinary income
$5,000Ordinary income
$4,118Tax freereturn
of invest-ment$882
Ordinary income
$4,118Tax freereturn
of invest-ment$882
Ordinary income
$4,118Tax freereturn
of invest-ment$882
Ordinary income
$4,118Tax freereturn
of invest-ment$882
Ordinary income
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2011 2012 2013 … Death… 2022 Life Expectancy
2010
$4,118Tax freereturn
of invest-ment$882
Ordinary income
If early death, donor’s last tax return deducts original investment not yet given back
$4,118Tax freereturn
of invest-ment$882
Ordinary income
$4,118Tax freereturn
of invest-ment$882
Ordinary income
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Compare a cash charitable gift annuity vs. splitting the gift amount between a
commercial annuity and an immediate gift
vs.$5,000
$5,000
Charity
Donor
Insurance Company
Donor
Charity
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vs.$5,000
$5,000
Charity
Donor
Insurance Company
Donor
Charity
Original Amount – Annuity Price
Deductible Gift
Original Amount – Annuity IRS Value
Deductible Gift
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vs.$5,000
$5,000
Charity
Donor
Insurance Company
Donor
Charity
Where the charity does not or cannot issue gift annuities in the donor’s state,
suggest this option
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Charitable Deduction
Ordinary IncomeTax Free
Return of Investment
Capital Gain
Gift Taxes
$5,000
Annuity
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I paid for it
I sell it forfair market value of
I have a capital gain of
Normal Capital Gain Rules
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I paid for it
I sell it forfair market value of
I have a capital gain of
Normal Capital Gain Rules
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I paid for it
I give it to charity foran annuity worth
It has a fairmarket value of
I have a capital gain of
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% of the property value
used for annuity
% of cost basis allocated to
annuity=
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$800,000 annuity
part80%
$200,000 gift part20%
Step 1: Divide property value
Original cost$500,000Value $1,000,000Gave to charity for $800,000 annuity
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$800,000 annuity
part80%
$800,000 of value to donor
Original cost$500,000Value $1,000,000Gave to charity for $800,000 annuity
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80%annuity part of cost basis$400,000
20%gift part of cost basis
$100,000
Step 2: Divide cost basis
Original cost$500,000Value $1,000,000Gave to charity for $800,000 annuity
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80%annuity part of cost basis$400,000
Annuity part of cost basis
Original cost$500,000Value $1,000,000Gave to charity for $800,000 annuity
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Annuity part
$800,000 value to donor─$400,000 annuity part of
basis
Gain: Annuity value less annuity part of basis
Original cost$500,000Value $1,000,000Gave to charity for $800,000 annuity
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Original cost$500,000Value $1,000,000Gave to charity for $800,000 annuity
Gain: Annuity value less annuity part of basis
Annuity part
$800,000 value to donor─$400,000 annuity part of
basis$400,000 Gain
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If donor purchases annuity for another
person with appreciated
property, tax on capital gain is paid
immediately
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If donor is annuitant (or if jointly purchased annuity for donor and spouse), tax on capital gain is paid over life expectancy
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Part of each
year’s payment is capital
gain
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2011 2012 2013 2014 2015 Life Expectancy
2010
Total capital gain is divided among each expected payment
Capital Gain
…
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2011 2012 2013 2014 2015 Life Expectancy
2010
5 year life expectancy and $10,000 gain $2,000 of each check for 5 years is capital gain
$10,000 Capital Gain
$2,000
$2,000 $2,000
$2,000
$2,000
…
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
Total capital gainOriginal life expectancy
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
Total capital gainOriginal life expectancy
21 years (previous slides)
How much is this?
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
Value of annuity- Basis used for sale partTotal capital gain
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
Value of annuity- Basis used for sale partTotal capital gain
$86,466 (previous slides)
$50,000 basis X($86,466/$100,000)
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
$86,466 (Annuity)- $43,233 (Basis used)Total capital gain
$86,466 (previous slides)
$50,000 basis X($86,466/$100,000)
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
$86,466 (Annuity)- $43,233 (Basis used)$43,233 Capital Gain
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
Total capital gainOriginal life expectancy
21 years (previous slides)
$43,233 Capital Gain
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
$43,23321
21 years (previous slides)
$43,233 Capital Gain
= $2,059
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Five Thousand and no/100
$2,059 is capital
gain
How much is tax free return of investment?
$5,000Donor
Charity
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
Basis used for annuity Original life expectancy
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
Basis used for annuityOriginal life expectancy
$50,000 basis X($86,466/$100,000)
21 years (previous slides)
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
$50,000 basis X($86,466/$100,000)
21 years (previous slides)
$43,23321 = $2,059
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$5,000
Annuity
Donor gives $100,000 stock (cost $50,000)
Charity pays age 55 donor $5,000
per year for life
$2,059Return of
Basis
$882 Ordinary Income$5
,000
Che
ck $2,059Capital Gain
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2011 2012 2013 … 2022 Life Expectancy Death
2010
…
$5,000Ordinary income
$5,000Ordinary income
$822 Ordinary income$2,059Cap Gain$2,059Return of Basis
$822 Ordinary income$2,059Cap Gain$2,059Return of Basis
$822 Ordinary income$2,059Cap Gain$2,059Return of Basis
$822 Ordinary income$2,059Cap Gain$2,059Return of Basis
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2011 2012 2013 … Death… 2022 Life Expectancy
2010
If early death, donor’s last tax return deducts allocated basis not yet given back
$822 Ordinary income$2,059Cap Gain$2,059Return of Basis
$822 Ordinary income$2,059Cap Gain$2,059Return of Basis
$822 Ordinary income$2,059Cap Gain$2,059Return of Basis
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Charitable Deduction
Ordinary IncomeTax Free
Return of Investment
Capital Gain
Gift Taxes
$5,000
Annuity
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If donor names a different annuitant, the donor has made a gift to that person
1/1/20151/1/2014
1/1/20131/1/2012
1/1/20113rd Person 5,000Five Thousand and no/100
Charity
Donor Charity 3rd Person
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This gift (to a non-spouse) may reduce the remaining $1,000,000 gift tax exclusion
1/1/20151/1/2014
1/1/20131/1/2012
1/1/20113rd Person 5,000Five Thousand and no/100
Charity
Donor Charity 3rd Person
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The gift tax value of an immediate annuity can be reduced by the $13,000/year
present interest exclusion for gifts
1/1/20151/1/2014
1/1/20131/1/2012
1/1/20113rd Person 5,000Five Thousand and no/100
Charity
Donor Charity 3rd Person
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Charitable Deduction
Ordinary IncomeTax Free
Return of Investment
Capital Gain
Gift Taxes
$5,000
Annuity
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Taxation of Charitable
Gift Annuities
Pictures from www.istockphoto.com
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Help meHERE
convince my bosses that continuing to build and post these slide sets is not a waste of time. If you work for a nonprofit or advise donors and you reviewed these slides, please let me know by clicking
![Page 86: Taxation of Charitable Gift Annuities · Charity pays age 55 donor $5,000 per year for life. $5,000. Annuity. $100,000 Cash](https://reader036.vdocuments.mx/reader036/viewer/2022071216/6047f5e862f28e711835e527/html5/thumbnails/86.jpg)
If you clicked on the link to let me know you reviewed these slides…
Thank You!
![Page 87: Taxation of Charitable Gift Annuities · Charity pays age 55 donor $5,000 per year for life. $5,000. Annuity. $100,000 Cash](https://reader036.vdocuments.mx/reader036/viewer/2022071216/6047f5e862f28e711835e527/html5/thumbnails/87.jpg)
For the audio lecture accompanying this slide set, go to
EncourageGenerosity.com
![Page 88: Taxation of Charitable Gift Annuities · Charity pays age 55 donor $5,000 per year for life. $5,000. Annuity. $100,000 Cash](https://reader036.vdocuments.mx/reader036/viewer/2022071216/6047f5e862f28e711835e527/html5/thumbnails/88.jpg)
Think you understand it?
Prove it!
Click here to go to EncourageGenerosity.com and take the free quiz on this slide set. (Instantly graded with in depth explanations and a certificate of completion score report.)
![Page 89: Taxation of Charitable Gift Annuities · Charity pays age 55 donor $5,000 per year for life. $5,000. Annuity. $100,000 Cash](https://reader036.vdocuments.mx/reader036/viewer/2022071216/6047f5e862f28e711835e527/html5/thumbnails/89.jpg)
This slide set is from the introductory curriculum for the Graduate Certificate in Charitable Financial Planning at Texas Tech University, home to the nation’s largest graduate program in personal financial planning.
To find out more about the online Graduate Certificate in Charitable Financial Planning go to www.EncourageGenerosity.com
To find out more about the M.S. or Ph.D. in personal financial planning at Texas Tech University, go to www.depts.ttu.edu/pfp/
Graduate Studies in Charitable Financial Planningat Texas Tech University
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About the Author Russell James, J.D., Ph.D., CFP® is an Associate Professor and the Director of Graduate Studies in Charitable Planning in the Division of Personal Financial Planning at Texas Tech University. He graduated, cum laude, from the University of Missouri School of Law where he was a member of the Missouri Law Review. While in law school he received the United Missouri Bank Award for Most Outstanding Work in Gift and Estate Taxation and Planning and the American Jurisprudence Award for Most Outstanding Work in Federal Income Taxation. After graduation, he worked as the Director of Planned Giving for Central Christian College, Moberly, Missouri for six years and also built a successful law practice limited to estate and gift planning. He later served as president of the college for more than five years, where he had direct and supervisory responsibility for all fundraising. Dr. James received his Ph.D. in Consumer & Family Economics from the University of Missouri where his dissertation was on the topic of charitable giving. Dr. James has over 100 publications in print or in press in academic journals, conference proceedings, professional periodicals, and books. He writes regularly for Advancing Philanthropy, the magazine of the Association of Fundraising Professionals. He has presented his research in the U.S. and across the world including as an invited speaker in Ireland, Scotland, England, The Netherlands, Spain, Germany, and South Korea. (click here for complete CV)
Me (about 5 years ago)
At Giving Korea 2010. I didn’t notice until later the projector was shining on my head (inter-cultural height problems).
Lecturing in Germany. 75 extra students showed up. I thought it was for me until I found out there was free beer afterwards.