Posted September 1st, 2004

Planning Matters

An 80-year old donor informs you that she is considering a gift to your organization through either an 8% gift annuity or an 8% charitable remainder annuity trust (CRAT). Which gift plan is the better option?

Offhand it is likely that you would pick the gift annuity, but there are a number of considerations that should determine your answer—some practical, some legal, some ethical.

Practical considerations

A CRAT, of course, requires a trustee. So the first question is this: Does a suitable potential trustee exist given the amount the donor wants to use to establish the gift plan? For $10,000, probably not. For $50,000 to $100,000, maybe, depending on (for example) whether the donee organization is ready, willing, and able to take on trusteeship of a CRAT of that (or any) size. For amounts in the $100,000 to $250,000 range, a bank or trust company may be a possible trustee, depending on locale and the donor’s or donee’s relationship with such an institution.

The flip side of the question arises if the donor wants to use a large amount of assets (e.g., $1 million) to establish the gift plan. For some charities, this would be too large a bite to swallow in a gift annuity transaction, in which case the CRAT is the only practical plan.

Legal and financial considerations

There are a number of considerations under this heading. Here is a partial list:

  • Is the donee organization registered or otherwise able to do gift annuity business in the state where the donor resides?
  • Given investment and expense considerations, which plan would be more likely to play out better for the donee?
  • Given cost and tax considerations, which plan would be more likely to play out better for the donor? (It is here that one would generally favor the gift annuity.)
  • What kind of asset does the donor want to use to establish the gift plan? For example, if the asset is valuable tangible personal property (e.g., a musical instrument) the donee wants for carrying out its exempt purposes, a gift annuity transaction would satisfy the related use rule; a CRAT wouldn’t.
  • On the other hand, if the donor wants to use tax-exempt bonds, a CRAT (subject to various caveats and cautions) may be the gift plan of choice, although the analysis here can run deep.

The list could go on and on, and it can be a complex matter to decide which gift plan to implement.

Ethical considerations

Deciding which is the better gift plan—the gift annuity or the CRAT—can sometimes put the development officer in an ethically difficult position.

For example, suppose the development officer determines that, on balance, the gift annuity is better for our 80-year-old donor because:

  • the charitable deduction will be the same either way
  • the payments from the gift annuity are projected to be more favorably taxed
  • the cost to the donor of setting up the gift annuity will be far less
  • payments to the donor will be backed by all of the assets of the donee organization in the case of a gift annuity
  • the gift annuity is easier for the donor to understand.

Now suppose the donor’s attorney or financial advisor favors the CRAT out of what the development officer strongly suspects is self-interest. Or suppose the development officer’s CEO would go along with the gift annuity, as he has done in other similar situations, except he feels the donor “looks a little too healthy” and he therefore dislikes the gift annuity (which has already been proposed to the donor) because of the financial risk to the donee organization.

What should the development officer do? That’s the subject of another discussion dealing with ethical problems. Stay tuned.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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