I just came back from Florida from a meeting with my friend Nick Gregory who does a lot of interesting work with charitable gift annuities. This is a powerful planning concept that can accomplish important tax planning results while “giving back” to your favorite charity(ies)
A charitable gift annuity is a contract between a taxpayer and a charity. The charity in return for a transfer of cash, marketable securities or other assets, agrees to pay a fixed amount of money to one or two individuals, for their lifetime or period of years.
A person who receives payments is called an “annuitant”. The payments are fixed and unchanged for the term of the contract. A portion of the payments are considered to be a partial tax-free return of the donor’s gift, which are spread in equal payments over the life expectancy of the annuitant(s).
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 assets, not just by the property contributed. Annuity payments continue for the life/lives of the annuitant(s) no matter what the investment experience of the gift annuity fund.Most charities use the currently suggested gift annuity rates published by the American Council on Gift Annuities (ACGA). A smaller charity can reinsure its commitment my purchasing an immediate annuity from a large life insurer. You never have to worry about your local church running out of money to meet its obligations.
The arrangements can provide for immediate payment based on a single life or joint lives and provide for a single transfer or annual transfers. Each payment has two components – (1) Excluded Amount – Tax-free portion based on an exclusion ratio (2) Income Portion – Taxable portion. A transfer of appreciated property in lieu of cash can have a capital gain component.
High income taxpayers are “boxed” in in a lot of ways when it comes to making contributions to pension plans and IRAs. A charitable gift annuity can serve as a supplemental IRA or 401(k) or even defined benefit plan depending upon your contribution considerations. The taxpayer receives a partial deduction and deferred income. You only have three choices – (1) Pay yourself (2) Pay Uncle Sam or (3) Give the money to charity. The gift annuity strategy is a blend of #1 and #3.
I will be writing a much longer article on this subject and the planning uses. Tis the season!