Charitable Gift Annuity
A Gift Annuity (also referred to as a "charitable Gift Annuity"
or "CGA") is a contract (not a "trust"), under which a charity, in
return for a transfer of cash, marketable securities or other
assets, agrees to pay a fixed amount of money (payment) to one or
two individuals, for their lifetime, not a term of years, except in
the instance of the "College (Tuition) Annuity" described below.
A person who receives payments is called an "annuitant" or
"beneficiary". The fixed payments (called the "annuity") are fixed
and unchanged for the term of the contract. The annuity payments are
NOT called "income", for a portion of the payments are considered to
be a partial tax-free return of the donor's gift, which are spread
"ratably" (in equal payments) over the life expectancy of the
annuitant(s).
The contributed property (the gift), given irrevocably, becomes a
part of the charity's assets, and the payments are a general
obligation of the charity. The annuity is backed by the charity's
entire assets, not just by the property contributed. Unlike a trust,
annuity payments continue for the life/lives of the annuitant(s),
and not ONLY as long as assets remain in the Gift Annuity Fund.
The states involved with any Gift Annuity Fund or Gift Annuity
Program are the situs State of the charity (where the records of the
Fund are maintained and the contracts (annuity agreements) are
signed ... AND ... the residence state(s) of the donor(s) at the
time the gift is given and the agreement is signed. Some states (ie:
California, for instance), take the position that the residence
state of the annuitant is the state which governs the terms of the
agreement.
Most states that regulate charitable gift annuities, require the
charity to supply the state with a published gift annuity rate chart
of the maximum annuity rate the charity offers each annuitant,
listed by "actuarial age" (age to nearest birthday) on the gift
date.
Any of the regulating states, will require the charity to publish
a gift annuity rate chart for the residents of that state, and
require the charity to offer the rates, shown by each actuarial age
on that chart to any donor. Then, the charity could suggest that if
the donor is willing to accept a lower rate, they would get a larger
charitable deduction for their same gift.
If the charity uses the currently suggested "uniform gift annuity
rates" of the American Council on Gift Annuities (ACGA), each
regulating state will NOT require the charity to prove through the
use of an actuary, that their annuity rate chart is within that
state's regulatory law, which usually requires the charity to prove
that the rates it offers at each annuitant's age, will generate a
gift remainder, on average, of at least 50% of the value of the
original gift. The "uniform gift annuity rates" suggested by the
ACGA, assumes the ENTIRE gift will be invested and only 1% (100
basis points) of the remaining fund balance will be expended
annually for expenses.
If a charity is involved with a regulating state, and chooses to
offer gift annuity rates that are higher than those suggested by
ACGA (even if higher at only one age), the regulating state will
take the position that the charity is not using the ACGA rates, and
may require the charity to employ an actuary to "prove" that the
assumptions used in setting its annuity rates (for that state) are
within that state's regulatory laws. This would include using the
actual earnings rate of the charity's Gift Annuity Fund and not the
conservative assumptions used by the ACGA.
While the charity MAY spend a portion of the contribution
immediately, it MUST maintain sufficient "reserves" (as determined
by state laws) to meet annuity obligations AND satisfy regulatory
requirements of each state in which the charity issues Gift
Annuities. States regulate the issuance by a charity of CGAs,
usually under their Insurance (or Securities) Laws (codes and
regulations). See the assumptions noted above on gift remainders and
the assumptions used in setting a charity's gift annuity rates.
The ACGA assumes that the entire gift (contribution)is invested
(increased by earnings and decreased by annuity payments and
expenses) and held in reserve until the termination of the contract,
at the demise of the sole or surviving annuitant. The remaining
portion of the contribution at that time is called the "residuum".
The ACGA periodically suggests maximum gift annuity rates, which are
approved by the regulating states, which is based on the investment
of the entire gift, and that the residuum will be at least 50% of
the initial gift amount, if the annuitant(s) live only to their life
expectancy, which is a requirement of many of the state gift annuity
laws.
The charity should establish a means to track the ongoing value
of each gift within its gift annuity fund, so that it can withdraw
the correct "residuum" amount (based on the "market value", not
"book value" of each gift's residuum balance).
Various Types of Gift Annuities
There are different types of charitable gift annuities, and not
all states permit the use of each type. Within the regulating
states, the charity usually must submit a sample of each different
"version" of each "type" of agreement it wishes to offer to the
residents of that state before it issues that agreement.
Versions of Agreements
Generally, there are three "versions" of each "type" of
agreement. The "versions" are ...
1) A "single life" agreement (pay only one person for their
lifetime),
2) A "two lives in succession" agreement (pay person "A" and then
if person "B" survives person "A", pay person "B"), and
3) A "joint and survivor" agreement (pay two persons
simultaneously with both names on the annuity payment check, each
getting half of the payment, and at the demise of the first to die,
pay the survivor the full annuity amount) This is used for married
couples who file joint tax returns and/or who live in community
property states.
And, the Types of Agreements are ...
Immediate Gift Annuity
With an Immediate Gift Annuity, the annuitant(s) start(s)
receiving payments at the end (or the beginning) of the payment
period immediately following the contribution. Payments can be
made monthly, quarterly, semi-annually or annually. The most
common arrangement is quarterly payments at the end of the
quarter. The end of a period is not the first day of a month, but
the last day of a month or period, or the anniversary date of the
gift. The first payment is customarily prorated from the date of
the contribution to the end of the first period, and thus is
smaller than the subsequent payments, but it is possible to
stipulate that the first payment be for the full amount. All of
these factors have some effect on the amount of the charitable
deduction.
The annual annuity is determined by multiplying the amount
contributed (measured as the fair market value on the gift date,
NOT the net proceeds of sale if CGA is funded with securities) by
the annuity rate.
Deferred Gift Annuity
With a Deferred Payment Gift Annuity (DPGA), the annuitant(s)
start(s) receiving payments at a future time, the date chosen by
the donor, which must be MORE than one year after the date of the
contribution. As with Immediate Gift Annuities, payments can be
made monthly, quarterly, semi-annually or annually.
Tuition (College) Annuity
A Tuition Annuity (aka "College Annuity") is a single-life
deferred payment gift annuity created usually by a parent or
grandparent for a young child, with the donor deferring the
payments until age 18, or when the child is expected to enter
college. The child (annuitant) then has the option of accepting
the annuity payments for his/her lifetime, or, if elected before
the payments start, the child can elect to receive much larger
payments (known as the "commuted value"); for a term of four or
five years, as spelled out in the annuity agreement, at which time
the payments end. Generally the option is for 4 or 5 annual
payments.
Note: The State of New York does NOT permit this type of
annuity, for their state law defines a gift annuity as being fixed
payments made over the lifetime(s) of the annuitant(s).
Source: American Council of Gift Annuities
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