Real Estate-Funded Gift Annuities | Sharpe Group blog
Posted June 16th, 2020

Real Estate-Funded Gift Annuities

Some individuals who own real estate like the idea of swapping the real estate for a gift annuity. Especially if they’ve grown tired of managing the property and see the gift annuity as a good way of replacing the income the property provides.

This can be a good deal for the donor. And a bad deal for the charity. Why a bad deal? Because the charity assumes a lot of risk.

The chief risk is that when the charity sells, it won’t realize nearly what it expected to realize.

The donor may be OK with the charity agreeing to base the annuity payment on the amount it receives from selling the property.

There’s a problem with this idea, however. The problem stems from the fact that a gift annuity arrangement is a contract, and a contract is not formed until there is a meeting of the minds. If the annuity payment is to be based on the amount the charity receives from selling, there is no meeting of the minds until after the sale occurs.

This means that for tax purposes the donor hasn’t made a completed transfer to the charity until there’s a sale, which exposes the donor, on audit, to any gain realized on the sale.

If a charity is willing to assume the risk, is willing to agree up-front to a specific annuity payment regardless of how much it gets from selling, there are a couple of ways to diminish the risk:

One is to issue a deferred payment gift annuity, deferred for, say, one or two years. This buys the charity time.

Another is for the charity to get its own assessment of the property’s real value and then to discount this value, say, by 10- or 20%. This provides a value cushion.

Personally, I wouldn’t agree to issue the annuity except in extraordinary circumstances … such as an ideal property in a strong and rising real estate market and a great donor. Even then, I’d strongly prefer a flip unitrust to a gift annuity.

By Jon Tidd

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