Charitable gift annuity.
A charitable gift annuity is received pursuant to a contractual obligation by a charity to make annuity payments to a donor in exchange for the transfer of property to the charity. In comparison to charitable trusts they are less costly and relatively simple to adopt, typically requiring only an application and a one or two page agreement. The donor's tax-deductible gift is measured by the difference between the market value of the gift and the value of the retained life annuity. The annuity can be immediate or deferred and for a single life or the joint lives of two annuitants.
The actual rates used to calculate the annuity payout are typically based upon those published by the American Council of Gift Annuities. The council meets periodically in order to review interest rates and mortality assumptions and update the annuity rates. Although these rates are published in an attempt to avoid "rate bidding wars" between charities, the council has no enforcement authority. However, charities using the rates need not retain their own actuaries and have the assurance that the underlying actuarial assumptions will likely produce an ultimate charitable benefit.
The annuity receives favorable tax treatment. A portion of each payment is received tax-free as a return of principal (but excludable only until the investment has been recovered, thereafter taxed as ordinary income). The remaining portion is taxed as ordinary income. However, if the donor has transferred appreciated property to the charity, the donor has a gain (either capital gain or ordinary income depending on the property) to the extent the fair market value exceeds the donor's adjusted basis. The basis in the property must then be allocated between the charitable gift and the donor's investment in the annuity contract. As a result the return of principal element of each annuity payment is divided into two parts, one representing a return of gain (taxed as capital or ordinary gain) and the other representing a return of basis (excluded from income).
The contractual obligation to the annuitant is solely the charity's and the annuity payments are dependent upon the continuing financial stability of the charity. If desired, the charity can reinsure its obligation to the donor by purchasing a commercial annuity. This relieves the charity of the burden of investing the proceeds to assure that all payments will be made to the annuitant. To the extent that the cost of a commercial annuity is less than the amount realized from the gift the excess funds become immediately available to the charity.
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|Title Annotation:||Terms & Concepts|
|Publication:||Field Guide to Estate, Employee, & Business Planning|
|Date:||Jan 1, 2010|
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