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CHARITABLE GIFT ANNUITIES
June 2011
There is much written about, and many mailers received from various organizations concerning charitable gift annuities ("GA"). I am often consulted by clients who seek additional information concerning these annuities, the income tax consequences of establishing a CGA and the state regulation of CGAs.
Among the numerous approaches to "planned gifts," the CGA is the simplest to implement. Planned gift instruments generally include sophisticated planning techniques, such as Charitable Remainder Trusts and Charitable Lead Trusts. These two approaches have numerous regulatory requirements of the Internal Revenue Code. The Charitable Remainder Trust is the most popular approach and can take various form. There are two basic categories: the Charitable Remainder Annuity Trust and the Charitable Remainder Unitrust. The Charitable Remainder Annuity Trust is an agreement whereby a specified amount is paid over the lifetime or lifetimes of the beneficiaries. The Charitable Remainder Unitrust is an adjustable payment based upon the value of the Trust each year.
The charitable gift annuity follows the form of the Charitable Remainder Annuity Trust except it is a simple contract. An asset (real estate, stock or cash) is transferred to a charity in exchange for a contractual agreement to pay a specified amount to the annuitant. These rates are generally published and will vary from time to time. In the current marketplace, the charitable gift rates are significantly lower than they were 15 years ago when interest rates were higher. It is important to remember, however, that the interest rate and the annuity payment is fixed at the time the contract is initiated and, except in rare contractual occurrences, will not vary.
Let me explain the annuity, how it works, the benefits and the disadvantages that such an annuity can provide.
First, you must recognize that a charitable gift annuity has several basis elements:
- There is an immediate gift to a designated charity of your choice.
- The interest rate is fixed.
- You receive an annuity payment for life (as well as the life of your spouse if you so choose at the time the CGA is initiated).
- To achieve the payment (whether it be quarterly, semi-annually or annually), you may be receiving a portion of your principal and return to comply with the payment schedule.
- The funds are committed ultimately to a charity or charities of your choice, but it is usually established when the annuity is commenced. Unlike the CRT, you can generally not change the beneficiary.
- The CGA is a legal contract between yourself and the charity of your choice. As a result of this gift, you are entitled to a charitable deduction calculated by tables established by the IRS for the anticipated "remainder interest." The gift is measured by the expectation that you will receive for your predicted lifetime, the payments of an annuity contract. For example, if you are age 80 when you establish a $100,000 CGA, the contract may provide that you are to receive 10.2% annually. This would amount to $10,200 annually (it could be paid in installments throughout the year, but that would be part of the contract). Alternatively, if you are age 65, the rate might be 6.2%. If the funds are invested and earn more than the annual amount that is payable to you, the full amount of the $100,000 plus any additional growth will revert to the charity upon your death (or the death of you and your spouse if it is a joint annuity). If the fund earns less than the agreed rate of interest, then you will continue to receive the agreed amount annually, but a portion of that will be a return to you of your principal. This will affect the income tax consequences to you on the annual receipt of payments. It also means the charity's interest will diminish by the amount of principal withdrawn to satisfy your original contract.
At the time you establish the gift, you will be entitled to an income tax deduction based upon the remainder value determined under the IRS ranks. Thus, if you transfer $100,000 to your charity with a CGA contract, you will receive a charitable deduction. The deduction will not be $100,000 since you retain the right to receive payments annually. Rather, under the IRS tables, the remainder value may be calculated to be $10,000, or 10% of the initial transfer. The actual charitable deduction and rate of interest will depend upon your contract and the rate of interest at that time.
As you receive payments, some portion of the payment will be deemed to be income from the rate of interest to term; some part may be CHARITABLE GIFT ANNUITIEStax free as a return of capital. If you transfer appreciated assets, some portion of each payment to you will be treated as capital gain and taxed accordingly.
Charitable gift annuities are not for everyone, but they are excellent, simple vehicles for those intending to make charitable gifts as part of their estate plan. It provides an excellent return, an income tax deduction and a gift to charity all in one simple transaction. If you are interested, you should speak with the organization of your choice, your financial advisor and attorney.
There will not be another article until September. Enjoy the summer (which may now have arrived!).
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