Charitable gift annuity

Introduction
A charitable gift annuity is an instrument designed to allow an individual to make a gift to a favorite charity and still receive an income from the gifted capital. An individual transfers cash or property to a charitable organization in exchange for the charity's promise to make fixed annuity payments to one or a maximum two life annuitants. Unlike other split-interest gifting vehicles, which are funded from an individual trust or pooled segregated fund, a gift annuity is considered a general obligation of the issuing charity. Many states require issuing organizations to be licensed and to maintain investment reserves. There are currently more than 4000 charitable organizations offering charitable gift annuities. Most charities use payout rates established by the American Council of Gift Annuities.

The average age of the income beneficiary receiving payments is 78 years of age. A donor can contribute cash or appreciated assets for an immediate gift annuity payment, or make contributions for a deferred payment at a future date. [ See Gift Annuity Best Practices]. The annuitant is often the donor, but this does not necessarily have to be the case. A donor may establish an immediate gift annuity for an aged parent, or a grandparent may establish a deferred gift annuity for a young child. Payout rates are lower for younger beneficiaries; higher for older beneficiaries.

How Income Payouts Are Determined
The income streams from a charitable gift annuity are determined by the size of the donation, the number of income beneficiaries and their ages, the choice of payout option, and the payout rate, as established by the ACGA Suggested Charitable Gift Annuity Rate.


 * Gift annuities offer the following payout options:
 * Single Life
 * Joint Life
 * Successive


 * The latest ACGA Suggested Charitable Gift Annuity Rate is computed by the following input factors:
 * The residuum realized by the charity upon termination of an annuity is 50 percent.
 * Life expectancies are based on the Annuity 2000 Mortality Tables for female lives with a two-year setback in ages. The rates also incorporate projections for increasing life expectancies.
 * Annual expenses for investment and administration are one percent of the fair market value of gift annuity reserves.
 * The total annual return on gift annuity reserves is 5.75% percent (down from 6.25%). This projection is based on an asset allocation plan consisting of 40% equities, 55% fixed income, and 5% cash.
 * The rates for the youngest and oldest ages are somewhat lower than the rates that would follow from the first four assumptions.

[Source: along with greater details - Assumptions Underlying the Suggested ACGA Gift Annuity Rates]

source -- Suggested ACGA Gift Annuity Rates

Types of Gift Annuities
Gift Annuities are offered in both Immediate and Deferred Payout plans.

With an Immediate Gift Annuity one donates cash or appreciated assets to a charity in return for an immediate lifetime income stream of payments. These payments can be on a monthly, quarterly, semi-annual, or annual basis. The most common payment period is quarterly payments. The payment occurs on the last day of the period. The initial payment is usually prorated. A Deferred Gift Annuity allows a donor to contribute to a chosen charity and select a future payment date (at least one year from the contribution date. As with an Immediate Gift Annuity, income payments can be received on a monthly, quarterly, semi-annual, or annual basis. Quarterly payments are the most common payment period. This Gift Annuity is a Deferred Gift Annuity established by a parent or grandparent for a young child, with the payment date deferred to the child's eighteenth birthday. The child can then elect lifetime payments, or more, commonly, take a commuted value over four or five years. This type of Gift Annuity is not allowed by the state of New York With a Flexible Gift Annuity, an annuitant does not have to select a set future start date for receiving payments, but rather selects an initial target date for initiating payments, usually at retirement. The charity will supply a range of payment rates surrounding the target date. Payout rates are linked to age, so later life payout rates are higher than earlier ones. (See ACGA Suggested Charitable Gift Annuity Rates for details).
 * Immediate Gift Annuity
 * Deferred Gift Annuity
 * Tuition (College) Annuity
 * Flexible (Deferred Payment) Gift Annuity

Tax Attributes
Individuals who donate to a gift annuity can claim a charitable deduction for the gift, reduced by the present value of the expected income payments (as determined by IRS life expectancy tables). Taxation of income payments will depend on how the donation is funded. If the gift annuity is funded with cash, part of the payments will be taxed as ordinary income and part will be tax-free. If funded with appreciated securities or real estate owned more than one year, and the donor is receiving the annuity payments, part of the payments will be taxed as ordinary income, part as capital gain, and part may be tax-free. If the gift annuity is the beneficiary of a Retirement Plan (IRA) the income payments are taxable to the annuity beneficiary. The estate receives a charitable deduction for the contribution, adjusted for the present value of the payments that the beneficiary will receive (according to IRS life expectancy tables.)
 * Cash Donations
 * Appreciated Asset Donations
 * Retirement Plan Donations

Sample Quotes
Many charities will provide on-line calculators that will provide the income and tax output for a given immediate or deferred donation.

Single Life Immediate Gift Annuity
The following sample quote, for a single life immediate gift annuity consisting of a gift of appreciated stock market assets, illustrates the tax attributes of the gift. Actual results will, of course, vary as payment rates change. Changes can also occur if mortality life expectancies change.

University of Virginia	Thursday, September 04, 2008 Deduction Calculations Summary of Benefits

Gift Annuity ASSUMPTIONS
 * Beneficiary Age(s):	65
 * Gift Amount:	$50,000.00
 * Cost Basis:	$25,000.00
 * Gift Date:	9/4/2008
 * Payment Rate:	5.7 %
 * Payment Schedule: Quarterly

________________________________________

BENEFITS
 * Charitable Deduction:	$17,273.00
 * Annual Payment:	       $2,850.00
 * Tax Free Portion:	$822.22
 * Capital Gain Income:	$822.23
 * Ordinary Income : 	$1,205.55

After 19.9 years, the entire annuity becomes ordinary income. Total reportable capital gain of $16,363.50 must be reported over 19.9 years. Partial payments for the year of gift will depend on the timing of your gift. IRS Discount Rate is 4.2 %

Single Life Deferred Gift Annuity
The following sample quote, for a single life deferred gift annuity for a fifty year old donor, deferring the payout until age 66, and consisting of a gift of appreciated stock market assets, illustrates the tax attributes of the gift.

University of Virginia	Monday, September 08, 2008 Deduction Calculations Summary of Benefits

Deferred Gift Annuity ASSUMPTIONS
 * Beneficiary Birth Date(s)	1/1/1958
 * Gift Amount	$20,000.00
 * Cost Basis	$10,000.00
 * Gift Date	9/8/2008
 * Date of First Payment	2/1/2024
 * Payment Rate	11.7 %
 * Payment Schedule	Quarterly

________________________________________

BENEFITS
 * Charitable Deduction	$8,031.40
 * Annual Payment	$2,340.00
 * Tax Free Portion	$313.56
 * Capital Gain Income	$313.56
 * Ordinary Income	$1,712.88

After 19.1 years, the entire annuity becomes ordinary income. Total reportable capital gain of $5,984.30 must be reported over 19.1 years If you reside in New York or New Jersey, the annuity amount may be less than the amount shown above. IRS Discount Rate is 4.2 %

How Charities Invest Charitable Gift Annuity Donations
The income payments a gift annuity annuitant receives are an obligation of the charity. The charity must therefore soundly invest the donated funds in order to meet its obligations to donor annuitants, as well as successfully maintain the 50% residual charity donation. Any failure to meet these funding requirements can force the charity to tap its general fund to make up shortfalls, or under the worst scenario, default on its promised payouts.

A charity assumes the following risks in offering gift annuities:
 * Rate Risk: The charity may offer overly generous payout rates;
 * Mortality Risk: The charity's gift annuity cohort of annuitants might live longer than expected life expectancy;
 * Investment Risk: The investment markets may not provide sufficient returns to fund the gift annuity's obligations.
 * Asset Risk: A charitable gift annuity must sell the appreciated assets a donor gifts to the charity. The asset may fall in price before the charity can sell it.
 * Policy Risk: The charity's selection of minimum age and minimum donations for accepting gifts can affect the risk profile of the gift annuity investment pool.

The risks can be offset to some degree by adopting prudent management and investment policies, and through prudent use of "reinsurance", the purchase of commercial immediate annuities to partially transfer mortality risk to an insurer. All purchased annuities belong to the charity.

Consideration of these risks are treated with great detail in Frank Minton's article Maximizing the Benefits from Your Gift Annuity Program.

Gift Annuity investment policy is addressed in Investing Charitable Gift Annuity Assets

Reinsurance issues are examined in:
 * Reinsurance of Gift Annuities - A Primer Robert F. Sharpe, Jr.
 * Charitable Gift Annuity Reinsurance: The Top Ten Frequently Asked Questions Bryan K. Clontz

How Gift Annuities Compare to Immediate Annuities
The 50% charitable residual in a gift annuity means that a charitable gift annuity's payout rate will be lower than the payout rate of a concurrent commercial insurance immediate annuity. See Understanding the "Gift" in "Annuities Robert F. Sharpe, Jr.

The primary motivation for using a charitable gift annuity is therefore the charitable intent.

Links

 * American Council of Gift Annuities
 * Suggested Charitable Gift Annuity Rates, Effective July 1, 2008 through June 30, 2009.


 * Planned Giving Design Center
 * Charitable Federal Midterm Rate Archive


 * The Sharpe Group: Give and Take

Articles

 * Charitable Gift Annuity
 * Maximizing the Benefits from Your Gift Annuity Program
 * Charitable Gift Annuity Reinsurance: The Top Ten Frequently Asked Questions
 * Investing Charitable Gift Annuity Assets