Most of us who have attended a university or made a donation to a favorite charity have received an invitation to enter into a charitable gift annuity contract (CGA) to support the organization. But many lawyers who practice in the estate planning field are unfamiliar with the CGAs, despite their popularity with so many charities. Maybe that is because with the CGA there is nothing for the practicing lawyer to draft. Or maybe it is because unlike charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs), you will find no mention of the CGA in the Internal Revenue Code, except for one mention in connection with debt-financed property for unrelated business taxable income purposes. But a CGA can be a valuable tool for clients interested both in maintaining an income stream for themselves or others and helping their favorite charity.
A typical CRAT pays income to one or more noncharitable beneficiaries for a life or lives, with the remainder eventually passing to charity. Similarly, the gift annuity pays a fixed annuity to one or more individuals for life, but there is no trust. Instead, the gift annuity is paid to the annuitant directly by the charity from its general assets and the transaction is treated for charitable deduction purposes as a bargain sale—a part gift, part sale.
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In bargain sales, the donor transfers cash or property to a charity in exchange for consideration worth less than the cash or property transferred. The excess of the fair market value of the transferred property over the consideration received from the charity is deductible as a charitable contribution. If appreciated property is contributed for the annuity, the donor pays tax on the sale portion and can deduct the gift portion. With a gift annuity, the donor transfers cash or property to a charity in exchange for the charity’s unsecured promise to pay a fixed annuity to the donor or another individual for life. The excess of the value contributed over the actuarial value of the annuity received in exchange is deductible as a charitable contribution. If appreciated property is used to purchase the gift annuity, gain is also recognized on the sale portion, but the gain is spread out over the lifetime of the annuitant if the donor is the annuitant.
Although CRATs and CRUTs can’t be administered economically for less than $100,000 or $200,000, CGAs are issued by many charities for as little as $5,000 or $10,000 because there is no trust to administer. CGA donors contemplating a gift annuity should keep in mind that the annuitant is simply an unsecured creditor of the charity, so consideration of the financial health of the charity is important.
Most charities issue gift annuities at age-based maximum rates suggested by the American Council on Gift Annuities (ACGA). This century-old organization sets recommended maximum annuity rates which change from time to time depending on market economic conditions and are structured so that if the charity has a large enough annuity pool to spread the mortality risk, about half of each annuity should on average be left for the charity at the end of the annuitant’s life.
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Benefits of CGAs
What benefits besides the fixed annuity does the CGA donor receive? First, the donor receives an income tax charitable deduction for the excess of the fair market value of the annuity over the amount of cash or property transferred to the charity in exchange for the annuity. The value of the retained annuity is determined by IRS actuarial tables which assume an interest rate (the so-called 7520 rate or Charitable Monthly Federal Rate) which varies from month to month. The second benefit the donor receives is that a portion of the gift is generally income-tax free, just as it would be with a commercial annuity. The portion of each annuity payment which is a nontaxable return of basis is larger when the gift is made with cash than when the gift is made with appreciated property.
Let’s consider a gift annuity purchased by a 75-year-old donor. Assume that the gift is made in January 2024, using the IRS January interest rate of 5.2 percent, and further assume that the payments are made quarterly at the end of each quarter.
In the first example, we have a donor who contributes $100,000 in cash for a gift annuity with her favorite charity. The current ACGA maximum suggested annuity rate for a donor aged 75 is seven percent, so the donor’s annual annuity would be $7,000 per year. According to IRS tables, the annuity is worth $60,737. Subtracting that from $100,000 gives us the charitable deduction of $39,263.
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