 |
|
|
|
|
|
 |
|
|
· Types of Annuity Agreements
· Administation
Charitable Gift Annuity
A Charitable Gift Annuity is a lifetime contract between donor(s) and a charity. The donor gifts a specific amount to the charity and, in exchange, receives a set dollar amount, called annuity payments, throughout his/her lifetime. The payments can begin now or be deferred until a future date, such as during retirement. By funding a gift annuity, the donor can claim a current-year charitable income-tax deduction based on the actuarial value of the charity's interest in the gift to the charitable gift annuity. Upon the donor's death, the remaining principal may be used to fund an out-right gift to the charity of the donor's choice, a Donor Advised Fund, or Designated Fund.
Following are some of the potential benefits of a charitable gift annuity:
- High Current Income Based on Donor's Age (i.e., 7.5% for a 70 year-old, 10.5% for an 85 year-old)
- No Immediate Capital Gains Tax on Appreciated Property
- Current Income Tax Deduction for Gift (generally ranges from 30-50% of the initial gift)
- Immediately Reduces the Estate for Tax Purposes
- Tax-Favored Income Payments (generally includes some tax-free income, some capital gain income and some ordinary income)
- Creates a Significant Future Charitable Gift
The contributed property (the gift), given irrevocably, becomes a part of the charity's assets, and the payments are a general obligation of the charity. The annuity is backed by the charity's entire asset base not just by the property contributed. Unlike a trust, annuity payments continue for the life/lives of the annuitant(s), and not only as long as assets remain in the Gift Annuity Fund.
A person who receives payments is called an "annuitant" or "beneficiary". The fixed payments (called the "annuity") are fixed and unchanged for the term of the contract. The annuity payments are NOT called "income", for a portion of the payments are considered to be a partial tax-free return of the donor's gift, which are spread "ratably" (in equal payments) over the life expectancy of the annuitant(s).
Charitable Gift Annuities are regulated by the states. The states involved with any Gift Annuity Fund or Gift Annuity Program are the situs State of the charity (where the records of the Fund are maintained and the contracts (annuity agreements) are signed ... AND ... the residence state(s) of the donor(s) at the time the gift is given and the agreement is signed. Some states (ie: California, for instance), take the position that the residence state of the annuitant is the state which governs the terms of the agreement.
Types of Gift Annuity Agreements:
There are different types of charitable gift annuities, and not all states permit the use of each type. Within the regulating states, the charity usually must submit a sample of each different "version" of each "type" of agreement it wishes to offer to the residents of that state before it issues that agreement.
Immediate Gift Annuity
With an Immediate Gift Annuity, the annuitant(s) start(s) receiving payments at the end (or the beginning) of the payment period immediately following the contribution. Payments can be made monthly, quarterly, semi-annually or annually. The most common arrangement is quarterly payments at the end of the quarter. The end of a period is not the first day of a month, but the last day of a month or period, or the anniversary date of the gift. The first payment is customarily prorated from the date of the contribution to the end of the first period, and thus is smaller than the subsequent payments, but it is possible to stipulate that the first payment be for the full amount. All of these factors have some effect on the amount of the charitable deduction.
The annual annuity is determined by multiplying the amount contributed (measured as the fair market value on the gift date, NOT the net proceeds of sale if CGA is funded with securities) by the annuity rate.
Deferred Gift Annuity
With a Deferred Payment Gift Annuity (DPGA), the annuitant(s) start(s) receiving payments at a future time, the date chosen by the donor, which must be MORE than one year after the date of the contribution. As with Immediate Gift Annuities, payments can be made monthly, quarterly, semi-annually or annually.
Flexible Annuity
A Flexible (Deferred Payment) Gift Annuity means that the donor does NOT have to choose the payment starting date at the time of the contribution. The annuitant (who may or may not be the donor) may make that choice of the payment starting date based on his/her retirement date or other considerations. The older the annuitant(s) when the payments start, the larger the payments will be.
This concept provides some of the flexibility offered by commercial annuities sold by commercial insurance companies. The donor would choose an initial "target date" for the payments to start. The charity would then offer a range of payouts with differing fixed payment amounts and differing starting dates based on earlier or later years.
Since the charitable deduction remains fixed, the annuity rate for each starting date would have to change. The payments would be lower if the starting date was earlier and higher if the starting date was later. Each annuitant would have to determine on an annual basis whether or not they wish the annuity payments to start that year.
Generally, the commercially available planned giving tax calculation software does a reasonable job in explaining these various types of annuity gift vehicles and some of them will even craft the gift annuity agreement that should meet the regulatory requirements of the states involved with that particular type of annuity gift.
Versions of Agreements
Generally, there are three "versions" of each "type" of agreement.
- A "single life" agreement (pay only one person for their lifetime),
- A "two lives in succession" agreement (pay person "A" and then if person "B" survives person "A", pay person "B"), and
- A "joint and survivor" agreement (pay two persons simultaneously with both names on the annuity payment check, each getting half of the payment, and at the demise of the first to die, pay the survivor the full annuity amount) This is used for married couples who file joint tax returns and/or who live in community property states.
Administering a Gift Annuity
Most states that regulate charitable gift annuities, require the charity to supply the state with a published gift annuity rate chart of the maximum annuity rate the charity offers each annuitant, listed by "actuarial age" (age to nearest birthday) on the gift date. Any of the regulating states, will require the charity to publish a gift annuity rate chart for the residents of that state, and require the charity to offer the rates, shown by each actuarial age on that chart to any donor. Then, the charity could suggest that if the donor is willing to accept a lower rate, they would get a larger charitable deduction for their same gift.
If the charity uses the currently suggested "uniform gift annuity rates" of the American Council on Gift Annuities (ACGA), each regulating state will NOT require the charity to prove through the use of an actuary, that their annuity rate chart is within that state's regulatory law, which usually requires the charity to prove that the rates it offers at each annuitant's age, will generate a gift remainder, on average, of at least 50% of the value of the original gift. The "uniform gift annuity rates" suggested by the ACGA, assumes the ENTIRE gift will be invested and only 3/4 of 1% (75 basis points) of the remaining fund balance will be expended annually for expenses.
If a charity is involved with a regulating state, and chooses to offer gift annuity rates that are higher than those suggested by ACCGA (even if higher at only one age), the regulating state will take the position that the charity is not using the ACGA rates, and may require the charity to employ an actuary to "prove" that the assumptions used in setting its annuity rates (for that state) are within that state's regulatory laws. This would include using the actual earnings rate of the charity's Gift Annuity Fund and not the conservative assumptions used by the ACGA.
While the charity MAY spend a portion of the contribution immediately, it MUST maintain sufficient "reserves" (determined by state laws) to meet annuity obligations AND satisfy each state's regulatory requirements. States regulate the issuance by a charity of CGAs, usually under their Insurance (or Securities) Laws (codes and regulations). See the assumptions noted above on gift remainders and the assumptions used in setting a charity's gift annuity rates.
The ACGA assumes that the entire gift (contribution)is invested (increased by earnings and decreased by annuity payments and expenses) and held in reserve until the termination of the contract, at the demise of the sole or surviving annuitant. The remaining portion of the contribution as that time is called the "residuum".
The charity should establish a means to track the ongoing value of each gift within its gift annuity fund, so that it can withdraw the correct "residuum" amount (based on the "market value", not "book value" of each gift's residuum balance
|
|
|
|
