Charitable Gift Annuities

Charitable Gift Annuities

Presented by

Cathy R. Sheffieldfor the

Fort Worth Metro Chapter AFPJuly 8, 2013

Remove the Fear of Implementing a Program What are CGAs Types of CGAs Benefits/Risks to Donors & Charities Setting Up a Program

Requirements Administration Other logistics

Today’s Goal

The American Bible Society is credited for pioneering the first gift annuity program in the

United States beginning in 1831 when a merchant in Boston first donated a gift of

money to a charity in exchange for a flow of income.*

*www.americanbible.org

Gift Annuities


According to the ACGA,

4,000 + organizations and institutions

now issue charitable gift annuities.

Identify ways donors can make gifts that are

completed today with retained income and/or

result in a gift at the end of their lifetime.

The goal should be to find the most effective

ways to make larger gifts in today’s environment.



Hybrid: part charitable gift and part annuity

AKA: split interest gift

A gift annuity is a contract (not a trust) under which a charity, in return for a transfer

of cash, marketable securities, or another asset, agrees to pay a fixed amount of

money (payment) to one or more

individuals, for their lifetimes.


Annuitant – Individual(s) to whom the annuity is paid

Annuity –Fixed stream of income payable in annual or more frequent installments over the life/lives of the annuitants

Terminology

The annuity payments are not considered

“income”, for a portion of the payments are considered to be a partial tax-free

return of the donor’s gift


Irrevocable gift becomes part of the charity’s assets

Payments are a general obligation of the charity

Annuity is backed by charity’s entire assets, not just property contributed

Annuity payments continue for the life/lives of the annuitants - not ONLY for as long as the asset remains in the Gift Annuity Fund ! !


While the charity may spend a portion of the contribution immediately, it must maintain sufficient reserves to meet annuity obligations and satisfy regulatory requirements of each state in which the charity issues gift annuities

Charity should track the ongoing value of each gift within its gift annuity fund, so it can withdraw the correct residuum amount (market value not the book value of the residuum balance)


Common Types

Immediate Gift Annuity

Deferred Gift Annuity

Flexible Gift Annuity


Immediate Gift Annuity

Payments begin immediately

Payments are monthly, quarterly, semi-annually or annually


Deferred Gift Annuity Payments begin in the future, the date chosen

by the donor, which must be MORE than one year after the date of the contribution

Payments can be made monthly, quarterly, semi-annually or annually


Flexible Gift Annuity DN does not have to choose starting date at the

time of the contribution The older the annuitant when the payments start,

the larger the payments Donor chooses initial “target date” for the payments

to start from a range of payouts differing fixed payment amounts and differing starting dates

The charitable deduction is fixed – the annuity rate for each starting date changes (lower if starting date is early – higher if starting date is later)


Characteristics and Advantages: Inexpensive to establish – not complicated Provides an income stream for life/lives Immediate income tax charitable deduction based on

age, payout rate, earnings assumptions and IRS discount rate

Prospects are generally older and may have less wealth Attractive in times of lower interest rates and lower

inflation rates


Tax Advantages/Consequences

Charitable deduction - The portion of the transaction that is considered a gift is eligible to be considered a charitable contribution

Income tax savings - Part of the annual amount the annuitant receives is considered a tax-free return of capital, excluding it from gross income until they reach their life expectancy

Estate tax savings - If the donor and their spouse are the only beneficiaries, the value of the annuity may not be taxed in their estates - It may qualify as a marital deduction


Up to 90% of gifts will be funded with cash or long-term appreciated securities

Federal income tax deduction the donor is eligible to claim falls under the same contribution ceilings as for an outright gift

Cash - deduct up to 50% of AGI, 5-yr carry over period Long-term appreciated property – deduct up to 30% of

AGI, 5-yr carry over period


Charitable gift annuity tax consequence calculations require the following information:

A portion of each annuity is included in the recipient’s gross incomeo Ordinary incomeo Capital gaino Cost Basis


o Dateo FMVo Cost basis o Birthdates o IRS discount rateo Payment schedule

o Timing of the annuity payments

o How capital gains are to be paido Partial payments

Property Appropriate For Annuities: Cash (most common asset)

Particularly when CDs come due

Appreciated securities Avoid immediate capital gain on the conversion

Real estate (charity beware!) Be mindful that some states prohibit donors from using real

property for a gift annuity


The tax implications of a gift annuity change depending on: Who owns the gift property Who is the annuitant(s) If the donor uses appreciated, long-term property what

are the capital gain implications? What is the donor’s gift tax liability, if any? The sequence of the annuitants


Ownership of property: DonorAnnuitant: Donor

Ownership of property: DonorAnnuitant: Spouse

Ownership of property: DonorAnnuitant: Donor, then spouse

Ownership of property: DonorAnnuitant: Spouse, then Donor

Ownership of property: DonorAnnuitant: non-spouse

Ownership of property: DonorAnnuitant: Donor, then non-

spouse

Ownership of property: DonorAnnuitant: non-spouse, then

donor

Ownership of property: Donor and spouseAnnuitant: Donor

Ownership of property: Donor and spouseAnnuitant: Donor and spouse –

Joint and survivor

Ownership of property: Donor and spouseAnnuitant: Someone else

Ownership of property: Donor and spouseAnnuitant: Donor, then non-spouse

Ownership of property: Donor and non-spouseAnnuitant: Donor and non-spouse,

joint and survivor

Ownership of property: Donor and non-spouseAnnuitant: Donor

Ownership of property: Donor and non-spouseAnnuitant: Someone else

Donor/Annuitant Combinations for Tax Consideration

American Council on Gift Annuities:

www.acga-web.org

ACGA for suggested rates: Gift should result in a significant residuum with risk

to charity minimal

Rates should be lower than commercial rates

Rates should be high enough to attract donors

ACGA rates should have credibility so that most

charities will continue to follow them

American Council on Gift Annuities

Charitable residuum will be 50% Life expectancies are based on the Annuity 2000 Tables Charities expenses for investing the annuity reserves

and administering the annuities are not to exceed 1% Total return on annuity reserves for immediate gift

annuities is 4.25%

ACGA Rate Assumptions

Age Annuity Rate

65 4.7

70 5.1

75 5.8

80 6.8

85 7.8

90 9.0

ACGA Single Life

Younger Age Older Age Annuity Rate

65 66-68 4.3

65 73-95+ 4.5

70 75-78 4.8

70 79-95+ 4.9

75 76-77 5.1

75 82-83 5.5

80 85 6.1

ACGA Two Life Rates

The Gift Annuity Contract

ContractRequired for all gift annuitiesSome states require unique, state mandated disclosure

languagePlanned giving software provides contract agreement

samples (PG Calc, Crescendo, etc)Consider the primary legal residence (state) where your

donor (and/or annuitant) resides


ContractTypically a simple, 1 page document

Prepare 2 original documents for signatureDonor receives a signed original

Charity receives a signed original

Recommend professional advisor and family review


Required Donor InformationName of donor(s)Legal address of the donor(s)Name of the annuitant(s)Legal address of the annuitant(s)Date of birth of the annuitant(s)Social Security number for each annuitant

Consider a pre-CGA Application Form


Required Donor InformationSequence of annuity payments

oConsecutive: A for life, then B, if B survives A B for life, then A, if A survives B

oConcurrent and Consecutive: A and B jointly, then survivor

Cost basisHolding period for gifts of capital assets Payment instructionsGift restrictionsRight to revoke annuity interest


Sample Charitable Gift Annuity ContractTwo Life - Immediate Payments

Two Life – Donors are the Annuitants This Agreement is made between John Doe and Jane Doe (Donors), 123 Main Street, Fort Worth, Texas 76104 and Charity USA (Charity), 456 Broadway Ave., Fort Worth, Texas 76109.

Transfer of Property by DonorCharity certifies that the Donors, as an evidence of their desire to support the work of Charity and to make a charitable gift, on [date of gift] contributed to Charity the property the fair market value of which is $100,000.00.

Payment of AnnuityIn consideration of the property transferred by the Donors, Charity shall pay an annual annuity of $6,700.00 from the date of this Agreement and shall pay such amount to the Donors so long as they are living.

Payment Dates; First InstallmentThe annuity shall be paid in quarterly installments of $1,675.00. The first installment shall be payable on March 15. Subsequent installments continuing every quarter on the 15th of the month shall be in the amount of $1,675.

Birth Date of DonorsThe John Doe’s date of birth is December 27, 1933 and Jane Doe’s date of birth is June 12, 1943.

Irrevocability; Non-assignability; TerminationThis annuity is irrevocable and non-assignable, except that it may be assigned to the charity. The charity’s obligation under this Agreement shall terminate with the regular payment preceding the Donors’ death.

Uses and Purposes of GiftUpon charity's satisfaction of its obligation under this Agreement, an amount equal to the residuum of the gift shall be used by Charity for ____________.

Entire Agreement; Governing LawThis Agreement, together with Schedule A attached hereto, constitutes the entire agreement of the parties. This Agreement shall be governed by the laws of the state of state.

Disclosure Statement

Donor has received and read the attached disclosure statement pursuant to The Philanthropy Protection Act of 1995.

This charitable gift annuity is not insurance under the laws of the state of Texas and is not subject to regulation by the Texas Department of Insurance or protected by a guaranty association affiliated with the Department.

This Agreement is effective as of [date of gift].

___________________ ___________________Donor Charity Representative

___________________ ___________________Date Date

Charitable Gift Annuity John and Jane Doe

and Charity USA

Schedule A

Check # 2567 - $100,000

State Regulation of CGAs

Schedule A

Texas RegulationUnder Chapter 102, Texas Insurance Code, charitable gift annuities are exempt from insurance regulation.

To qualify for the exemption, the charity must have been in operation for more than 3 years and must have $100,000 in available unrestricted assets.

Charity MUST file notice with TX Dept of Insurance


Department of Insurance is required to certify:

The nonprofit and tax exempt status The annuities to be offered are charitable gift annuities That the annuity agreements will include the required disclosure language


Texas Regulation

A disclosure statement must be included in each gift annuity agreement.

Suggested language:

This charitable gift annuity is not insurance under the laws of the state of Texas and is not subject to regulation by the Texas Department of Insurance or protected by a guaranty association affiliated with the Department.


Texas RegulationFailure to comply permits a fine of up to $1,000 for each

annuity issued during the time the organization is not in compliance.

For more information contact:Mrs. Shaun Craig, Insurance Specialist

Life/Health Division - Life, Annuity & Credit SectionTexas Department of Insurance

MC-106-1EP.O. Box 149104

Austin, TX 78714-9104(512) 322-3595 Email: [email protected]


mailto:[email protected]

Administration

Administration

Manage gift annuities in house. Work with your business/finance office You will want administration software Deliver annuity checks on date due Reclaim if over paid Form 1099-R (by Jan. 31 to donor and Feb 28 to

the IRS) Outsource management of gift annuities.

Contract with a financial institution

Target Audience: Consistent donors Board members Major donors Volunteers Individuals with appreciated dividend paying

assets who like/need income

Marketing Charitable Gift Annuities

Sample of Online Resources:www.acga-web.org

www.pppnet.org

www.pgdc.com

www.stelter.com

www.plannedgivingcompany.com

www.crescendosoft.com

www.virtualgiving.com

www.pgcalc.com


Questions?

Feel free to contact me:

[email protected]

817-927-6221

mailto:[email protected]

Documents

Charitable Gift Annuities