Conventional wisdom holds that it is better to give than to
receive. While this may be true, some givers may find it best to plan
for an option that is a little bit of both.
Charitable giving is
ultimately a matter of helping a cause about which you care deeply. But
your needs or circumstances may restrict the ways in which you can
comfortably give. In these cases, a more creative strategy, such as a
charitable gift annuity or a remainder interest, may allow you to
realize charitable intentions that would be burdensome otherwise.
Charitable Gift Annuities
A
charitable gift annuity (CGA) is an agreement between you the donor and
the charity or tax-exempt institution you choose to receive your gift. A
CGA is a transaction composed of two elements - an outright charitable
gift and the purchase of a fixed annuity contract from the beneficiary.
That is, in exchange for your gift, the charity agrees to pay a fixed
annuity over the course of your life.
CGAs are quite flexible, and
allow you (and the charity) quite a bit of leeway in deciding how to
set them up. You can control what sort of assets you donate, who the
annuitant or co-annuitants are, and when and how frequently payments are
made. And while CGAs are only offered over the annuitant's (or joint
annuitants') lifetime, it is possible to terminate annuity payments
early if you no longer need the annuity income. All of these choices
impact the way the annuity will work, but all of them are equally viable
depending on your personal goals and circumstances.
The amount of
this annuity is calculated so that, at the time of your death, the
charity can expect to realize a net gain from your original
contribution. The rates used for the calculation are often based on
those calculated by the American Council on Gift Annuities (ACGA), an
Indianapolis-based nonprofit organization. Though charities aren't
required to use the ACGA's rates, many do to ensure the likelihood that
the annuity will not exhaust the complete value of a gift before the
annuitant's death. Using the published rates also saves costs and limits
rate competition between institutions. The receiving institution must
acknowledge your contribution with a written statement, which will
include the difference between a good-faith estimate of the
contribution's ultimate value and the annuity (which is fixed, so once
the transaction is complete, its value won't change).
The CGA rate
currently quoted by the ACGA at age 60 is 4.4 percent. The rate
decreases for younger contributors and increases for older contributors.
The rate caps at 9.0 percent for contributors age 90 and older.
Historically,
annuity rates for CGAs cannot compete with those for commercial
annuities because of the charitable component of the contract. Payments
are structured so that about 50 percent of the donation will ultimately
go to the charity, whereas commercial annuities are structured so the
majority of the investment will be returned. That said, the tax
deductions available for CGAs and the fact that a portion of the annuity
from the CGA is a return of principal make the difference in rates less
significant. In a low interest rate environment, the spread between the
commercial rate and the CGA rate will also be less.
Tax reporting
for a CGA is simpler and less expensive than for a charitable trust.
Each payment will include a portion taxed as ordinary income, a portion
taxed as capital gain (if you donated appreciated property), and a
tax-free portion treated as return of principal. The institution will
issue you Form 1099-R annually, detailing the information you or your
accountant will need for your individual return. After the investment is
fully recovered, the full annuity payment becomes ordinary taxable
income.
Not every non-profit organization offers CGAs, but many
do. The major issuers tend to be religious groups and private colleges
or universities. These are popular because donors are unlikely to change
their minds about such institutions, making an irrevocable gift like a
CGA attractive. Most charities that offer CGAs will have some thresholds
determining what gifts they will accept. These rules will usually
include a minimum gift size and what types of property they will or will
not accept. Closely-held stock, for example, is often prohibited
because it is inherently illiquid, making it little help in meeting
annuity obligations.
There are many advantages that can make a CGA
an attractive option for charitable giving. The first is the immediate
charitable income tax deduction. This deduction is generally larger if
you defer receiving payments. In addition, the annuity payments
themselves receive favorable tax treatment, as described above, and if
you donate appreciated assets, you can also control and minimize your
capital gains tax burden. If you or your spouse is the annuitant, you
won't generally trigger any gift or estate tax with the transfer (but
you will generally need to file a gift tax return, though no tax is
due).
In addition, charitable gift annuities are usually cheaper
and less complicated to set up and administer than a charitable
remainder trust or similar vehicles; they are also subject to fewer,
less complicated federal income tax rules. You can also generally give a
smaller amount than is necessary to make a CRT worthwhile, some of
which you'll receive back as an annuity. A CGA also minimizes investment
risk and management expenses, and gives a guaranteed rate of return.
Furthermore,
a CGA gives you the assurance of knowing that, should anything
unexpected happen to cut your life expectancy short, the windfall will
go to an organization you think worthy, rather than to a commercial
insurance company. If you wish to provide some benefit to another heir
with your gift, you can also name him or her the annuitant or,
alternately, you can use the income the CGA generates to purchase a life
insurance policy, naming your heir as the beneficiary. (Note, however,
that these choices may have gift or estate tax implications.)
Before
deciding on a CGA, it is also important to consider the transaction's
potential drawbacks. One major factor is that a gift connected to a CGA
is irrevocable. That means you can't change the charitable institution
you've named as the beneficiary later, should your feelings change for
any reason. It also means that if the institution is small or otherwise
financially unsound, you take the risk that the charity will not be able
to meet its annuity obligations. If the charity defaults, you will be
one of its many creditors, and there is no way to retrieve your original
gift. Careful research is necessary to mitigate this risk, especially
since charities, unlike commercial insurers, are not rated by commercial
ratings agencies.
There are other potential downsides as well.
Unlike a charitable trust, a CGA can only benefit a single charity. Some
states also legally restrict or outright prohibit CGAs, so you should
carefully research the rules of the state in which you reside and the
state in which your charity of choice is based (if different). Finally,
it's important to remember that naming an annuitant who is not you or
your spouse may trigger either estate or gift tax rules, depending on
whether you reserve the right to revoke the annuity interest. If the
annuitant is a skip person, you may also trigger generation-skipping
transfer tax rules. Before committing to a charitable gift annuity, it
makes sense to discuss your plans with your financial adviser or another
knowledgeable professional.
Remainder Interests
In
the context of planned giving, a gift of remainder interest is
connected to a gift of real estate. In this sort of gift, you donate
your property to the charity of your choice, but retain a life interest
in the property. What the institution eventually receives is called the
remainder interest, because it is what remains when the life interests
ends. The technique is sometimes called a "Life Estate Agreement."
During
the life estate period, you are still responsible for paying property
taxes, keeping the premises insured, and maintaining the property's
buildings and grounds. In turn, you retain full rights to use, inhabit
or generally enjoy the donated property, as well as any income the
property generates. The charity has no right to the property, other than
ensuring its remainder interest is protected, for the duration of the
life interest.
What makes this sort of gift more attractive than
simply bequeathing the property to the organization in your will? For
one, a gift of remainder interest bypasses probate, saving the charity
time and expense. The organization already holds the deed to the
property; the deed simply included a stipulation regarding the life
estate. In addition, the property is shielded from any claims creditors
may make against your estate. You may also accelerate the end of your
life interest, if you no longer have the need or wish to retain access
to the property, giving you some measure of control as to when the gift
is completed.
You can realize an additional tax benefit if your
gift is a personal residence, including a second home, or a farm.
Donating certain properties with conservation or historical value
according to Internal Revenue Service rules may also allow you to claim
an income tax deduction. The deduction will be equal to the remainder
interest, rather than the entire value of the property. Unless you
extend the life interest to someone beyond yourself and your spouse, the
gift will not incur gift tax, though as with a CGA, you will generally
need to file a gift tax return even if you are not paying any tax.
Older
donors who have debt-free property might also consider combining a gift
of remainder interest with a CGA. It would work like this: The donor
calculates the present value of the remainder interest in the residence
in question. Then, instead of giving the remainder interest outright or
using the whole property as a gift to anchor a CGA, the donor would
contribute just the remainder interest, while retaining a life interest
in the property. The remainder interest would be the gift against which
the annuity is set up. This would create a smaller annuity than an
outright gift of the whole property, but it would allow the donor to
realize an income tax deduction and receive a steady stream of income
while retaining the rights to live in or use the property.
Whether
you use either technique or a combination of the two, CGAs and
remainder interest gifts allow you to benefit from your gift during your
lifetime, while also ensuring a substantial gift to the organization of
your choice. They are both ways in which your planned giving can let
you have your charitable cake and eat it too.
