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
 

Giving Real Estate Imprinted Publications

Need something quickly or have a tight budget? Sharpe’s stock booklets and brochures are the most cost-effective solution. Read more about imprinted publications to learn how to add your organization’s logo and contact information to the front and/or back of one of our standard publications.

Giving Real Estate

A companion piece to Giving Securities, this booklet emphasizes the many gift opportunities open to those who own highly appreciated real property. Donors in areas with rapidly increasing real estate values or who hold the majority of their wealth in real property will benefit from Giving Real Estate.

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Note About the CARES Act

If you have recently ordered, or have been considering, Sharpe Group’s Giving Real Estate booklet, we are making a complimentary insert available highlighting charitable provisions in the CARES Act to include in mailings to your donors.

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Questions & Answers About Giving Real Estate

Questions & Answers About Giving Real Estate provides answers to some of the most commonly asked questions about giving real estate, including types of real estate one can give, how to continue to live at the property once donated and the advantages of making a real estate gift.

Click here to learn more about ordering this brochure.

 

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