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Charitable Gift Annuities

Charitable Gift Annuities. Presented by Cathy R. Sheffield for the Fort Worth Metro Chapter AFP July 8, 2013. Today’s Goal. Remove the Fear of Implementing a Program What are CGAs Types of CGAs Benefits/Risks to Donors & Charities Setting Up a Program Requirements Administration

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Charitable Gift Annuities

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  1. Charitable Gift Annuities Presented by Cathy R. Sheffield for the Fort Worth Metro Chapter AFP July 8, 2013

  2. Today’s Goal • Remove the Fear of Implementing a Program • What are CGAs • Types of CGAs • Benefits/Risks to Donors & Charities • Setting Up a Program • Requirements • Administration • Other logistics

  3. Gift Annuities The American Bible Society is credited for pioneering the first gift annuity program in the United States beginning in 1831 when a merchant in Boston first donated a gift of money to a charity in exchange for a flow of income.* *www.americanbible.org

  4. Charitable Gift Annuities According to the ACGA, 4,000 + organizations and institutions now issue charitable gift annuities.

  5. Charitable Gift Annuities Identify ways donors can make gifts that are completed todaywith retained incomeand/or result in a gift at the end of their lifetime. The goal should be to find the most effective ways to makelarger giftsin today’s environment.

  6. Charitable Gift Annuities Hybrid: part charitable gift and part annuity AKA: split interest gift

  7. Charitable Gift Annuities A gift annuity is a contract(not a trust) under which a charity, in return for a transferof cash, marketable securities, or another asset, agrees to pay a fixed amountof money(payment) to one or more individuals, for their lifetimes.

  8. Terminology • Annuitant – Individual(s) to whom the annuity is paid • Annuity –Fixed stream of income payable in annual or more frequent installments over the life/lives of the annuitants

  9. Charitable Gift Annuities The annuity payments are not considered “income”, for a portion of the payments are considered to be a partial tax-free return of the donor’s gift

  10. Charitable Gift Annuities • Irrevocable gift becomes part of the charity’s assets • Payments are a general obligation of the charity • Annuity is backed by charity’s entire assets, not just property contributed • Annuity payments continue for the life/lives of the annuitants - not ONLY for as long as the asset remains in the Gift Annuity Fund ! !

  11. Charitable Gift Annuities • While the charity may spend a portion of the contribution immediately, it must maintain sufficient reserves to meet annuity obligations and satisfy regulatory requirements of each state in which the charity issues gift annuities • Charity should track the ongoing value of each gift within its gift annuity fund, so it can withdraw the correct residuum amount (market value not the book value of the residuum balance)

  12. Charitable Gift Annuities Common Types • Immediate Gift Annuity • Deferred Gift Annuity • Flexible Gift Annuity

  13. Charitable Gift Annuities Immediate Gift Annuity • Payments begin immediately • Payments are monthly, quarterly, semi-annually or annually

  14. Charitable Gift Annuities Deferred Gift Annuity • Payments begin in the future, the date chosen by the donor, which must be MORE than one year after the date of the contribution • Payments can be made monthly, quarterly, semi-annually or annually

  15. Charitable Gift Annuities Flexible Gift Annuity • DN does not have to choose starting date at the time of the contribution • The older the annuitant when the payments start, the larger the payments • Donor chooses initial “target date” for the payments to start from a range of payouts differing fixed payment amounts and differing starting dates • The charitable deduction is fixed – the annuity rate for each starting date changes (lower if starting date is early – higher if starting date is later)

  16. Charitable Gift Annuities Characteristics and Advantages: • Inexpensive to establish – not complicated • Provides an income stream for life/lives • Immediate income tax charitable deduction based on age, payout rate, earnings assumptions and IRS discount rate • Prospects are generally older and may have less wealth • Attractive in times of lower interest rates and lower inflation rates

  17. Tax Advantages/Consequences

  18. Tax Advantages/Consequences • Charitable deduction - The portion of the transaction that is considered a gift is eligible to be considered a charitable contribution • Income tax savings -Part of the annual amount the annuitant receives is considered a tax-free return of capital, excluding it from gross income until they reach their life expectancy • Estate tax savings -If the donor and their spouse are the only beneficiaries, the value of the annuity may not be taxed in their estates - It may qualify as a marital deduction

  19. Tax Advantages/Consequences • Up to 90% of gifts will be funded with cash or long-term appreciated securities • Federal income tax deduction the donor is eligible to claim falls under the same contribution ceilings as for an outright gift • Cash - deduct up to 50% of AGI, 5-yr carry over period • Long-term appreciated property – deduct up to 30% of AGI, 5-yr carry over period

  20. Tax Advantages/Consequences Charitable gift annuity tax consequence calculations require the following information: A portion of each annuity is included in the recipient’s gross income • Ordinary income • Capital gain • Cost Basis • Date • FMV • Cost basis • Birthdates • IRS discount rate • Payment schedule • Timing of the annuity payments • How capital gains are to be paid • Partial payments

  21. Tax Advantages/Consequences Property Appropriate For Annuities: • Cash (most common asset) • Particularly when CDs come due • Appreciated securities • Avoid immediate capital gain on the conversion • Real estate (charity beware!) • Be mindful that some states prohibit donors from using real property for a gift annuity

  22. Tax Advantages/Consequences The tax implications of a gift annuity change depending on: • Who owns the gift property • Who is the annuitant(s) • If the donor uses appreciated, long-term property what are the capital gain implications? • What is the donor’s gift tax liability, if any? • The sequence of the annuitants

  23. Donor/Annuitant Combinations for Tax Consideration Ownership of property: Donor and spouse Annuitant: Donor Ownership of property: Donor and spouse Annuitant: Donor and spouse – Joint and survivor Ownership of property: Donor and spouse Annuitant: Someone else Ownership of property: Donor and spouse Annuitant: Donor, then non-spouse Ownership of property: Donor and non-spouse Annuitant: Donor and non-spouse, joint and survivor Ownership of property: Donor and non-spouse Annuitant: Donor Ownership of property: Donor and non-spouse Annuitant: Someone else Ownership of property: Donor Annuitant: Donor Ownership of property: Donor Annuitant: Spouse Ownership of property: Donor Annuitant: Donor, then spouse Ownership of property: Donor Annuitant: Spouse, then Donor Ownership of property: Donor Annuitant: non-spouse Ownership of property: Donor Annuitant: Donor, then non- spouse Ownership of property: Donor Annuitant: non-spouse, then donor

  24. American Council on Gift Annuities: www.acga-web.org

  25. American Council on Gift Annuities ACGA for suggested rates: • Gift should result in a significant residuum with risk to charity minimal • Rates should be lower than commercial rates • Rates should be high enough to attract donors • ACGA rates should have credibility so that most charities will continue to follow them

  26. ACGA Rate Assumptions • Charitable residuum will be 50% • Life expectancies are based on the Annuity 2000 Tables • Charities expenses for investing the annuity reserves and administering the annuities are not to exceed 1% • Total return on annuity reserves for immediate gift annuities is 4.25%

  27. ACGA Single Life

  28. ACGA Two Life Rates

  29. The Gift Annuity Contract

  30. The Gift Annuity Contract Contract • Required for all gift annuities • Some states require unique, state mandated disclosure language • Planned giving software provides contract agreement samples (PG Calc, Crescendo, etc) • Consider the primary legal residence (state) where your donor (and/or annuitant) resides

  31. The Gift Annuity Contract Contract • Typically a simple, 1 page document • Prepare 2 original documents for signature • Donor receives a signed original • Charity receives a signed original • Recommend professional advisor and family review

  32. The Gift Annuity Contract Required Donor Information • Name of donor(s) • Legal address of the donor(s) • Name of the annuitant(s) • Legal address of the annuitant(s) • Date of birth of the annuitant(s) • Social Security number for each annuitant • Consider a pre-CGA Application Form

  33. The Gift Annuity Contract Required Donor Information • Sequence of annuity payments • Consecutive: A for life, then B, if B survives A B for life, then A, if A survives B • Concurrent and Consecutive: A and B jointly, then survivor • Cost basis • Holding period for gifts of capital assets • Payment instructions • Gift restrictions • Right to revoke annuity interest

  34. Sample Charitable Gift Annuity Contract Two Life - Immediate Payments Two Life – Donors are the Annuitants This Agreement is made between John Doe and Jane Doe (Donors), 123 Main Street, Fort Worth, Texas 76104 and Charity USA (Charity), 456 Broadway Ave., Fort Worth, Texas 76109. Transfer of Property by DonorCharity certifies that the Donors, as an evidence of their desire to support the work of Charity and to make a charitable gift, on [date of gift] contributed to Charity the property the fair market value of which is $100,000.00. Payment of AnnuityIn consideration of the property transferred by the Donors, Charity shall pay an annual annuity of $6,700.00 from the date of this Agreement and shall pay such amount to the Donors so long as they are living. Payment Dates; First InstallmentThe annuity shall be paid in quarterly installments of $1,675.00. The first installment shall be payable on March 15. Subsequent installments continuing every quarter on the 15th of the month shall be in the amount of $1,675. Birth Date of DonorsThe John Doe’s date of birth is December 27, 1933 and Jane Doe’s date of birth is June 12, 1943.

  35. Irrevocability; Non-assignability; TerminationThis annuity is irrevocable and non-assignable, except that it may be assigned to the charity. The charity’s obligation under this Agreement shall terminate with the regular payment preceding the Donors’ death. Uses and Purposes of GiftUpon charity's satisfaction of its obligation under this Agreement, an amount equal to the residuum of the gift shall be used by Charity for ____________. Entire Agreement; Governing LawThis Agreement, together with Schedule A attached hereto, constitutes the entire agreement of the parties. This Agreement shall be governed by the laws of the state of state. Disclosure Statement Donor has received and read the attached disclosure statement pursuant to The Philanthropy Protection Act of 1995. • This charitable gift annuity is not insurance under the laws of the state of Texas and is not subject to regulation by the Texas Department of Insurance or protected by a guaranty association affiliated with the Department. This Agreement is effective as of [date of gift]. ___________________ ___________________ Donor Charity Representative ___________________ ___________________ Date Date

  36. Charitable Gift Annuity John and Jane Doe and Charity USA Schedule A Check # 2567 - $100,000

  37. State Regulation of CGAs Schedule A

  38. State Regulation of CGAs Texas Regulation Under Chapter 102, Texas Insurance Code, charitable gift annuities are exempt from insurance regulation. To qualify for the exemption, the charity must have been in operation for more than 3 years and must have $100,000 in available unrestricted assets. Charity MUST file notice with TX Dept of Insurance

  39. State Regulation of CGAs Department of Insurance is required to certify: • The nonprofit and tax exempt status • The annuities to be offered are charitable gift annuities • That the annuity agreements will include the required disclosure language

  40. State Regulation of CGAs Texas Regulation A disclosure statement must be included in each gift annuity agreement. Suggested language: This charitable gift annuity is not insurance under the laws of the state of Texas and is not subject to regulation by the Texas Department of Insurance or protected by a guaranty association affiliated with the Department.

  41. State Regulation of CGAs Texas Regulation Failure to comply permits a fine of up to $1,000 for each annuity issued during the time the organization is not in compliance. For more information contact: Mrs. Shaun Craig, Insurance SpecialistLife/Health Division - Life, Annuity & Credit SectionTexas Department of InsuranceMC-106-1EP.O. Box 149104Austin, TX 78714-9104(512) 322-3595 Email: Shaun.Craig@tdi.state.tx.us

  42. Administration

  43. Administration • Manage gift annuities in house. • Work with your business/finance office • You will want administration software • Deliver annuity checks on date due • Reclaim if over paid • Form 1099-R (by Jan. 31 to donor and Feb 28 to the IRS) • Outsource management of gift annuities. • Contract with a financial institution

  44. Marketing Charitable Gift Annuities Target Audience: • Consistent donors • Board members • Major donors • Volunteers • Individuals with appreciated dividend paying assets who like/need income

  45. Charitable Gift Annuities Sample of Online Resources: www.acga-web.org www.pppnet.org www.pgdc.com www.stelter.com www.plannedgivingcompany.com www.crescendosoft.com www.virtualgiving.com www.pgcalc.com

  46. Questions? Feel free to contact me: Cathy.Sheffield@BaylorHealth.edu 817-927-6221

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