IS THE CHARITABLE GIFT ANNUITY RIGHT FOR YOU AND YOUR DONORS?

One of the most popular planned gifts with older donors is the Charitable Gift Annuity (CGA). It's popularity stems from the simplicity of the gift arrangement as well as the stability of the payment provided by this type of life-income gift.

Most donors tend to understand how a CGA works due, partly I believe, to its similarity to commercial annuities. Like a commercial annuity, a CGA guarantees the donor a specific annual payment for life, is relatively simple to establish, and distributes any remaining funds in the contract at the donor's death to a beneficiary. Unlike a commercial annuity, however, a CGA provides the donor a charitable gift deduction in the year of the gift and requires that a charity (or charities) receive the remainder funds in the contract at the donor's death.

A CGA has two types of "beneficiaries": (1) the income beneficiary who receives the income stream from the contract; and (2) the remainder beneficiary , the charity (or charities) that will receive whatever funds are left in the contract after the donor's death.

A Charitable Gift Annuity may be immediate (payments begin immediately after the gift) or deferred (payments start at a date in the future determined by the donor). For example, a donor may set up a CGA to make payments to himself for life and to terminate at his death with the remainder being paid to charity. The donor may also set up a testamentary CGA that is deferred until his death, with payments then going to his spouse, another relative, or a friend for the rest of his or her life. There are many options available to the interested donor. However, as these contracts are established, the donor and the charity must be aware of gift tax regulations in order not to trigger a gift tax when someone other than the donor is included as an income beneficiary.

Most charities offering CGAs use the annuity rates suggested by the American Council on Gift Annuities. The rates are set using factors such as mortality experience among annuitants and a conservative estimate of future investment earnings. These rates are generally lower than those offered on commercial annuities because these annuities are partially a gift to the charity. The rates are adjusted periodically by the Council when the underlying factors change, and are intended to result in a gift to the charity of approximately 50% of the original amount funding the annuity. In actual experience, most charities receive more than 50%.

Payments received by the income beneficiary are partially taxable. If the annuity is funded with cash, the taxable portion will be taxed as ordinary income. If funded with appreciated assets, the taxable portion will consist of ordinary income and capital gains. A portion of each payment, referred to as the "investment in contract," is not taxable until the entire investment in contract amount is recovered. The charity issuing the payments must annually file a 1099-R for each annuitant reporting tax information to be provided to the IRS.

It is important to note that not every charity is eligible to offer Charitable Gift Annuities to its donors. The insurance laws of each state regulate how this type of charitable gift may be offered (and each state has different laws, of course). In Texas, state laws provide for "conditional exemption" from regulation, i.e., if a charity follows the rules set up by the state, it will not be subject to the restrictions and regulations imposed on insurance and investment companies. The following criteria must be met in order to qualify:

• The charity must notify the state (Department of Insurance) of its intention to offer Charitable Gift Annuities.
• Specific disclosure language is required by the state and must be included in every gift annuity agreement.
• The charity must have at least $100,000 in available unrestricted assets.
• The charity must have been in continuous operation for at least 3 years.

If a charity determines that it should be offering Charitable Gift Annuities to its donors, it is important that the person responsible for the planned giving program at the charity be fully knowledgeable about how these gifts work and the laws and regulations that govern them. The charity must also be aware that the obligation to make CGA payments is backed by all the assets of the charity. The agreed upon payment is mandatory, and the income generated from the assets transferred to the charity in consideration of receiving this payment is not relevant as it would be with a Charitable Remainder Annuity Trust.

That said, if your organization wants to attract older donors to its planned giving program, the charitable gift annuity can be a very attractive gift option, especially to seniors, and should be considered in light of your organization's overall fundraising capabilities.