Sharpe Advisor Resources
Charitable Gift Annuities

The following information and references to other resources may be beneficial to you and those who assist you in your estate and financial planning.

Contractual nature of the gift annuity agreement: The charitable gift annuity is a contract between the donor and the issuing organization. It is not a trust arrangement. The organization promises to pay a fixed annuity amount; the consideration for this promise is the donor’s transfer of property (usually cash or publicly traded securities) to the organization. The promise to pay the annuity is a general obligation and, in this sense, is backed by all the unencumbered assets of the organization issuing the gift annuity.

Split-interest gifts from qualified charitable distributions now allowed: Donors age 70½ and older may fund immediate pay gift annuities with distributions from IRAs. This year, the one-time election may not exceed $53,000. The donor and/or spouse are the only permissible annuity recipients, and the gift annuity cannot include any other contributions. The donor is considered to have no investment in the contract, making the annual distributions fully taxable. The amount used to fund the gift annuity can satisfy all or a portion of a donor’s required minimum distribution.

General Tax Information

Charitable gifts of cash may be deducted in one year up to 60% of a donor’s adjusted gross income (AGI). The limit is 30% of AGI for gifts of long-term appreciated property unless a special election is made and the value of the donated property is reduced by the amount of the appreciation element. In that case, the donation will be subject to a higher AGI limit. See Internal Revenue Code (IRC) section 170(b)(1)(C)(iii).

Gift amounts in excess of these limits may be deducted in as many as five succeeding tax years. See IRC section 170(d)(1)(A).

Other Tax Considerations

How the donor’s charitable deduction is determined: When an individual creates a gift annuity, he or she is considered to have made a charitable gift equal to the difference between the amount transferred to fund the gift annuity and the present value of the annuity payments.

The present value of the payments is determined using the same IRS tables generally used to calculate the present value of any other type of annuity. This is typically done through the use of any number of commercially available software programs.

Tax-free portion of annuity payments: A certain portion of gift annuity payments is received tax-free because it represents a return of the donor’s investment in the contract (as that term is used in IRC section 72).

The investment in the contract is equal to the initial present value of the annuity payments. The donor (assuming the donor is the annuitant) recovers their investment in the contract ratably over their life expectancy under Income Tax Regulation section 1.72-9. If someone other than the donor is the annuitant, the investment in the contract is recovered ratably over that person’s life expectancy.

The tax-free portion of annuity payments is typically between 50% and 90% of the payment if the gift annuity is funded with cash. Once the annuitant exceeds their actuarial life expectancy, the annuity payments become fully taxable.

Final year tax deduction when the donor dies before life expectancy: For gift annuities entered into since 1986, if the annuitant dies before recovering tax-free the full investment in the contract, a tax deduction is allowed on the annuitant’s final income tax return equal in amount to the unrecovered portion of the investment in the contract.

Note that this is not a charitable deduction but rather a deduction allowed under IRC section 72, which deals with annuities in general.

Capital gains tax consequences of funding a gift annuity with appreciated property: When appreciated property is used to establish a gift annuity, the donor realizes a gain under the bargain sale rules of Reg. section 1.1011-2.

If certain conditions set forth in this regulation are met, the donor can spread the realized gain ratably over his or her life expectancy rather than having to immediately report the full amount of the gain. This can be especially advantageous when capital gain income is taxed at lower rates than the tax rate on ordinary income, often at a 0% rate.

These conditions are that (l) the annuity be payable either to the donor alone or to the donor and a designated survivor annuitant and (2) the annuity be non-assignable. (Note: Gift annuity agreements routinely provide that the annuity is non-assignable.)

In some situations, usually involving older donors/annuitants, the capital gain otherwise reportable each year exceeds the tax-free part of the annuity payment. Example (8) under Reg. section 1.1011-2(c) appears to provide that in this situation, the gain reportable each year is limited in amount to the tax-free portion of the annual annuity payment.

Deferred Payment Gift Annuities

Some organizations offer another option known as the deferred payment gift annuity. A deferred payment gift annuity is an annuity under which payments commence more than one year after the annuity is established.

There are several basic differences from a tax standpoint between a deferred payment gift annuity and an immediate payment gift annuity.

1. Donor’s tax deduction: The donor’s charitable deduction can be significantly larger in the case of a deferred gift annuity than for an immediate payment gift annuity funded with the same amount. This is because the present value of the annuity is smaller in the case of a deferred gift annuity, which means, among other things, that if the annuity is established with appreciated property, the gain realized by the donor will be relatively small.

2. Reporting of gain: It appears from Reg.1.1011-2(c), Example (8), that if an individual uses appreciated property to establish a deferred gift annuity for themselves (or for a survivor annuitant as well), that individual may defer reporting the gain realized under the bargain sale rules until the annuity payments commence.

3. Tax-free return of investment: As discussed above in connection with immediate payment gift annuities, the tax-free portion of each annuity payment is determined by dividing the present value of the annuity by the donor’s life expectancy (assuming the donor is the annuitant). In the case of a deferred payment gift annuity, this determination is essentially made as of the time the annuity payments commence, using the life expectancy factors then in effect. It is not possible, therefore, to know exactly how much of each annuity payment will be excluded from taxation in the case of a deferred gift annuity until that time.

4. Deferring payment: IRS Private Letter Ruling 9743054 allowed the individual’s deferred gift annuity contract to contain an option to defer receiving payments until a later date and receive higher payments at that time.

Estate and Gift Taxes

In establishing a charitable gift annuity, an individual may face several estate and gift tax considerations.

The gift to the issuing organization qualifies for the annual gift exclusion. To the extent that it exceeds this exclusion, it qualifies for the gift tax charitable deduction.

If the donor names an annuitant other than themselves, the donor is deemed to make a gift to that person equal in amount to the initial present value of that person’s annuity.

In the case of a joint and survivor annuity, to the extent the other person’s annuity does not qualify for the annual gift exclusion, it does qualify for the gift tax marital deduction under IRC section 2523 if the other person is the donor’s spouse.

If an individual establishes a gift annuity that is to make payments first to themselves and then to another person for life, the donor may reserve the power, exercisable only by will, to revoke the other person’s annuity and, in this way, prevent there being a completed gift to the other person for federal gift tax purposes.

If the donor subsequently predeceases the other person, the then-present value of the other person’s annuity will be included in the donor’s gross estate under IRC section 2038 (as it would under IRC section 2039 if the donor did not retain the power to revoke). The survivorship annuity, however, will qualify for the estate tax marital deduction if the survivor annuitant is the donor’s spouse.

The following table reflects the American Council on Gift Annuity’s single life gift annuity rates and is used by most charities. Additional ACGA rate tables are available here.

Gift Annuity Rates — Single Life

For illustrative purposes only. Rates are subject to change. We recommend that you discuss your plans with your professional advisors or contact us.

This information is solely educational, namely, to provide general gift, estate, financial planning and related information. It is not intended as legal, accounting or other professional advice, and you should not rely on it as such. For assistance in planning charitable gifts with tax and other implications, the services of appropriate and qualified advisors should be obtained. Consult an attorney for advice if your plans require revision of a will or other legal document. Consult a tax and/or accounting specialist for advice regarding tax- and accounting-related matters.