In establishing a testamentary charitable gift annuity that qualifies for the federal estate tax charitable deduction, all the variables must be discernible at the date of the donor’s passing.
These variables could be described either in (1) the beneficiary designation document itself such as the will or trust or (2) a stand-alone agreement on file with the charity. Three of the variables are easily determinable, namely, the amount as well as commencement and frequency of payments.
The payout rate should reference the maximum rates of either (1) the American Council on Gift Annuities (ACGA) or (2) those offered by the sponsoring charity. In this era of perpetually and historically low Section 7520 interest rates, the language should require reduction of the annuity payout to such rate satisfying the greater than 10% remainder interest to avoid unrelated debt-financed income under Section 514(c)(5) of the Code.
The other challenge is estimating the age of the annuitant at the time of death of the donor. For funders providing income for their children, there is the risk the proposed annuitant(s) will be younger than the minimum required age mandated by the charity’s gift acceptance policy. A contingent issuer of the charitable gift annuity can address this risk should the other charity decline.
The last risk is how to cope with the variance between the fair market value of the asset at death and date of funding. This is an issue not only with appreciated assets like stock and land but also an IRA. Remember the date of death valuation is needed for the estate tax charitable deduction. For an estate not subject to the federal estate tax, it would be permissible to use the date of funding value.
While much study of the charitable remainder trust (CRT) to achieve stretch taxation of a non-spousal beneficiary is merited, remember the testamentary gift annuity may be more appropriate for reasons I noted in this and my previous two blog posts on this subject Although there are traps for the unwary for those exposed to the federal estate tax, they can be managed.
By Professor Christopher P. Woehrle
Read Part 1 and Part 2 of this series.
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