CALL TO SCHEDULE A CONSULTATION 914-251-1115 914-251-1115

Charitable Gift Annuities

A charitable gift annuity is exactly what its name implies. It has the benefits of a charitable gift and functions much like any other annuity. The person who will receive the annuity benefit payments transfers assets to a valid 501(c)(3) charity and receives a charitable tax deduction on a portion of the transfer in the year that the transfer is made. The charity pays the annuitant(s) a periodic income immediately or may defer the payment until a date or age certain. The payments can be made for life or a fixed time period. The income paid to the beneficiary is a fixed percentage of the original amount that was gifted to the charity. The payment amount depends on a number of factors including the age of the annuitant(s), the annuity rate, and the time when the payments are made from the charitable gift annuity. When the annuitant (or the last of two annuitants) dies, any remaining annuity assets will be used to support the charity or charitable program that was designated when the charitable gift annuity was established.

As indicated above, a charitable deduction can be taken in the year of transfer. Additionally, part of the annuity payments may be exempt from certain income taxes.

Capital gains taxes may be also reduced if appreciated assets are used to make the gift. The annuity payment will reflect the value of the gift at the time of the transfer. While a portion of the annuity payment will be taxed as capital gains, the tax rate may be lower. Additionally, the taxes may be paid out over the course of the donor’s life expectancy.

The rates of return vary depending upon the charitable organization and the number of annuitants. The maximum rates of return are established by reputable organizations such as the American Council on Gift Annuities and the National Committee on Gift Annuities. The Internal Revenue Service acknowledges these rates of return. Indeed, there is a risk that the transfer will be classified as a gift if the rates of return are above the rates established by these organizations. Both organizations have developed gift annuity tables that are based on actuarial life expectancies for annuitants of varying ages. As an annuitant increases in age, the maximum annuity payment increases commensurately. Annuitants may have the option to take a lower rate than the established rate or defer payments until late in life to receive a greater tax deduction.

Those considering a charitable gift annuity are advised to research the stability of the charity and its history with charitable gift annuities. Once the annuity contract has been executed, the charity is free to do with the assets what it wishes. If the charity does not fulfill its obligation, the annuitant becomes a creditor of the charity. Additionally, a charity with limited resources may be unable to fulfill its obligation if the annuitant exceeds the projected life expectancy. Some charities now offer to reinsure charitable gift annuities by purchasing an annuity from a commercial insurer.

Charitable gift annuities have been the subject of antitrust actions. Annuitants and their representatives argued that charities conspired to fix their rates of return on charitable gift annuities in violation of Section One of the Sherman Act. As a result of the litigation and heavy lobbying by charitable organizations and institutions, Congress bestowed antitrust immunity upon charitable gift annuities. However, the option of establishing a charitable gift annuity is not available in all states.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.