Here we look at some gift annuity situations that went awry. Beginning with an important case that involved a flawed gift receipt.

Case # 1: Donor transfers $25,000 to Charity to establish a gift annuity. Charity prepares a gift annuity agreement, which Donor signs, and subsequently begins making annuity payments to Donor. In due course, Charity sends Donor a gift receipt. The receipt states that:

• Donor gave $25,000 to Charity on such-and-such a date for a charitable gift annuity, the charitable deduction for which was so many dollars and cents; and that

• Charity provided no goods or services in consideration of Donor’s gift.

About two years later, IRS in the course of auditing Donor examines the gift annuity transaction and throws out Donor’s claim of a federal income tax charitable deduction for Donor’s gift.

Why? Because Donor didn’t have a satisfactory gift receipt.

Why not? Because Charity’s gift receipt stated Donor received no goods or services in consideration of his gift, which was incorrect. Donor did receive goods or services in the form of the annuity.

Ouch.

Double ouch.

But that’s the way IRS plays the game.

Case #2: This one involves a happier outcome. Donor, on a Friday, sends a certificate for highly appreciated stock together with a stock power to Charity to establish a gift annuity for Donor and his wife. Charity receives the stock on Monday. Donor unfortunately died over the weekend. In Charity’s and Donor’s state, a very particular form of gift annuity agreement is required to be signed by the annuity donor. That couldn’t happen here, so Donor’s attempt to establish a gift annuity failed.

Here’s the happy outcome: Charity returned the stock to Donor’s estate. The stock then passed to Donor’s wife, who took a stepped-up basis in the stock, and Donor’s wife used the stock to set up her own one-life annuity.

A happy ending.

Gift annuities and gift annuity programs can involve all kinds of issues. In the gift annuity arena, close enough isn’t good enough. Gift annuity programs need to be airtight from a tax and regulatory standpoint. For more information, contact a Sharpe Group representative.

by Jon Tidd