Can a commercial annuity be swapped tax-free for a charitable gift annuity? Some donors and advisers think so, but the answer is no. The question arises because there’s a tax-free “1035 exchange,” which allows one commercial annuity to be swapped tax-free for another commercial annuity. But a 1035 exchange isn’t possible for a gift annuity because a gift annuity is completely different from a commercial annuity. The two aren’t “like-kind.”
Can a gift annuity be established for a term of years? No. A gift annuity must be payable for either one life or two lives (to avoid intolerable tax problems). But in a 1984 private letter ruling, the IRS essentially gave the green light to gift annuity that was payable for 10 years or life, whichever was shorter (Letter Ruling 8429075). Note, however, that one may not rely on another’s private letter ruling.
If Charity in State A issues a gift annuity to Donor residing in State B, can State B impose its charitable gift annuity regulatory laws on the transaction? Clearly yes if Charity has a “presence” in or is “doing business” in State B. For example, if Charity is sending written gift annuity promotional material into State B, it is subject to State B’s gift annuity regulatory laws. The issue here is one of Constitutional law; and there are a number of U.S. Supreme Court decisions that support the ability of State B to impose its laws on Charity in the example presented.
There is no end to gift annuity questions. Next time, we’ll look at some real-world examples of gift annuities that went wrong and why they went wrong.
by Jon Tidd