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Posted May 16th, 2017

Let’s Take a Look at Gift Annuities, Part 2

Read part one here.

Donors and others often believe charitable gift annuities are like commercial annuities, but the two are different. A commercial annuity is a product that can only be purchased with cash. A charitable gift annuity, on the other hand as discussed last time, is a contractual arrangement that may be funded with various assets, depending on state law.

If a gift annuity is funded with an appreciated asset, the donor is deemed to have sold the asset to the issuing charity and realizes gain under the bargain sale rules. If the donor is the only annuitant, the gain gets spread over the donor’s “life expectancy.” The same is true if the annuity is payable [a] to the donor for life and then to a second person for life, or [b] jointly to the donor and a second person while both are living and then to the survivor for life.

If the gift annuity is funded with an appreciated asset and the annuity is payable to someone other than the donor, the donor recognizes the realized gain up-front—there is no gain spreading. This is true even if the annuity recipient is the donor’s spouse. This is why when dealing with a married individual who says he or she wants to establish a gift annuity it’s critically important to determine who holds legal title to the asset that will be used to fund the annuity.

If the individual holding legal title isn’t the prospective annuity recipient, the asset should be given to the annuity recipient, and he or she should establish the annuity. Such a gift qualifies for the unlimited gift tax marital deduction, except if the prospective annuity recipient is not a U.S. citizen, which is a whole other story.

Who said gift annuities are simple? Gift annuities can be dreadfully complex from a legal standpoint.

Speaking of complexity, let’s consider how state law applies to gift annuities. This is a big topic, so let’s just consider the threshold question, which state’s law applies to the gift annuity? Even this question has a complex answer, so let’s take a concrete example. New York Charity issues a gift annuity to California resident. It turns out both California and New York law apply to the gift annuity. New York’s position is that to the extant the laws of the two states differ as to the annuity, the issuing organization must follow the stricter law.

We’ll delve deeper into gift annuities next time.

by Jon Tidd

To learn more about gift annuities in gift planning, attend one of our popular gift planning seminars. Click here for more information. Sharpe Group also has a booklet and brochure to help you educate your donors on how gift annuities can work for them. Click here to request samples of these publications. 

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