What is a Gift Annuity?
A charitable gift annuity is a contract (not a "trust"), under which a 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.
A person who receives payments is called an "annuitant" or "beneficiary". 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.
Charities that offer charitable gift annuities should be aware many states regulate the issuance of gift annuities. Usually regulation is under a state’s Insurance (or Securities) Laws. Charities may be required to comply not only with regulations in the state in which the charity does business, but also in the state of residence of the donor.
Most states that regulate charitable gift annuities require the charity to supply the state with the charity’s published gift annuity rate chart of the maximum annuity rates the charity offers, listed by "actuarial age" (age to nearest birthday on the gift date).
If the charity uses the currently suggested gift annuity rates published by the American Council on Gift Annuities (ACGA), regulating states 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. If a charity is involved with a regulating state, and chooses to offer gift annuity rates that are higher than those suggested by ACGA, the regulating state may require the charity to employ an actuary to prove that the assumptions used in setting its annuity rates 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 ACGA.
The gift annuity rates suggested by ACGA assume the entire gift will be invested and only 1% (100 basis points) of the remaining fund balance will be expended annually for expenses. While the charity may spend a portion of the contribution immediately, it must maintain sufficient reserves (as determined by state laws) to meet annuity obligations and satisfy regulatory requirements of each state in which the charity issues gift annuities.
The ACGA suggested rates assume that the entire gift is invested and held in reserve until the termination of the contract, at the death of the sole or surviving annuitant. The remaining portion of the contribution at that time is called the "residuum". The ACGA suggested rates also assume that the residuum will be at least 50% of the initial gift amount, if the annuitant(s) live only to their life expectancy, which is a requirement of many of the state gift annuity laws.
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).
Various Types of Gift Annuities
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 type of agreement it wishes to offer to the residents of that state before it issues any such agreements.
Versions of Agreements
Generally, there are three "versions" of each "type" of agreement. The "versions" are ...
1) A "single life" agreement (annuity paid to only one person for their lifetime),
2) A "two lives in succession" agreement (annuity paid to person "A" and then if person "B" survives person "A", pay person "B"), and
3) A "joint and survivor" agreement (pay annuity paid to two persons simultaneously with both names on the annuity payment check, and at the demise of the first annuitant, the survivor is paid the full annuity amount) This is used for married couples who file joint tax returns and/or who live in community property states.
And, the Types of Agreements are ...
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 a 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 choose 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, 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.
This page last updated July 29, 2009
