7 Little-Known Gift Annuity Applications

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7 Little-Known Gift Annuity Applications

A gift annuity (CGA) is a popular tool for planned giving. They have been around for over 100 years. They are easy to understand, simple to set up and do not have the higher administrative costs associated with other charitable giving techniques.

Most people think that the income from a gift annuity is for the life of the donor or for the joint life of the donor and spouse. However, there are at least seven other ways a CGA can be used. Let’s look at the two traditional applications and then summarize the other seven options. Perhaps these will plant a seed for their use in your situation that will also benefit your church.

Your Life Only

This is the most common and straightforward way a gift annuity is structured. You contribute money as an appreciated asset to your church in exchange for a lifetime income. Upon your death, the church keeps your contribution for its use.

As long as you and your spouse live

You can also set up a gift annuity to pay as long as you or your spouse lives. This is the common and surviving CGA option.

Here are the 7 techniques you may not be familiar with…

1. As long as you and another person live

The other annuitant does not have to be your spouse. For example, a woman could establish a gift annuity for herself and her sister.

2. For the life of someone other than you

Furthermore, the gift annuity does not have to be for you. You can have a disabled child who needs special care and set up a CGA to fund that care for the rest of their life.

3. Each of the above, But the payments are postponed for a number of years

Most gift annuities are paid out monthly, quarterly, semi-annually or annually. Normally the payments start within the first year. However, it is possible to postpone the start of the payments for a number of years.

For example, a person who is 55 years old could set up a charitable annuity with the idea that the payments would start at age 65 to supplement their retirement income. Deferred charitable annuities have the advantages of a higher payout and an increased charitable deduction.

4. To finance Education for a child or grandchild

Another example of a deferred gift annuity is funding the education of a child or grandchild. You have now set up a gift annuity for your five year old grandson and when he is 18 and off to college, the CGA can be paid out over the next four or five years. There is some risk because the boy is not required to use the funds for college. You can finance his Corvette Z06.

5. The “Re-insured” Gift Annuity

In my opinion, this technique should be used more often, because it immediately provides money for the church.

Instead of keeping the contribution to a gift annuity, then investing and paying out the promised payment, the church buys a commercial direct annuity from an insurance company. The insurance company receives the order to send the (i.e. the quarterly) payments to the church and a check is cut to the donor.

The costs of the immediate annuity will vary and depend on several factors, such as the age of the donor and the prevailing interest rate in the economy. However, the cost of the immediate annuity is less than the amount received from the donor. This difference is immediately available to the church.

6. Exchanging a charitable remainder Unitrust for a gift annuity

If you​​​​are the income beneficiary of a charitable remainder unit trust (CRUT), you can exchange this interest for a gift annuity. This move can serve many purposes.

This gives you another charitable income tax deduction for the new CGA. The advantage for the charity is that it is free money immediately that may be needed for a building campaign.

7. Making a gift annuity upon death with an IRA

All, or a portion of, your IRA can be exchanged for a gift annuity upon your death. This would be a way to establish a secure, consistent income for your surviving spouse as long as he/she lives with the funds ultimately going to the church where you both want it to go anyway.

Your estate would receive a charitable deduction for the charitable portion of the charitable annuity. However, the proceeds from the IRA would still be income related to a decedent and subject to ordinary income tax.

Summary

These explanations of the various uses for a gift annuity represent only the tip of the iceberg. If one or more apply to your situation, you should consult a qualified tax professional. Each technique has positive and negative income and gift tax results.

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