7 Little-Known Gift Annuity Applications

Gift annuities are popular planned giving tools. They have been around for over 100 years. They are easy to understand, simple to set up and don’t have the higher administrative costs associated with other charitable giving techniques.

Most people think the income from a gift annuity is for the life of the donor or for the joint lives of the donor and spouse. There are, however, at least seven other ways a gift annuity can be used. Let’s take a 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 cash or an appreciated asset to your church in exchange for a life income. At your death, the church keeps your contribution for its use.

For as Long as You and Your Spouse Live

You can also set a gift annuity up to pay out for as long as either you or your spouse lives. This is the joint and survivor gift annuity option.

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

1.  For 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 her and her sister.

2.  For the Life of Someone Other Than You

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

3.  The Payments are Deferred for a Number of Years

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

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

4.  To Fund Education for a Child or Grandchild

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

5.  The “Re-insured” Gift Annuity

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

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

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

6.  Exchanging a Charitable Remainder Unitrust for a Gift Annuity

If you are the income beneficiary of a charitable remainder unitrust (CRUT), you can exchange this interest for a gift annuity. This move can satisfy many objectives.

This gives you another charitable income tax deduction for the new gift annuity. The advantage to the charity is that is frees up money immediately that may be needed for a building campaign.

7.  Creating a Gift Annuity at Death With an IRA

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

Your estate would get a charitable deduction for the charitable portion of the gift annuity. However, the IRA proceeds would still be income in respect of a decedent and subject to ordinary income taxes just as if you had left the IRA directly to your spouse.

Summary

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

How Your Church Can Raise 6 Figures In 90 Days

I am a participant in a forum composed of planned giving officers, attorneys, CPAs and other professionals working in the charitable giving field.

Recently there was a question, followed by a series of posts, which asked how best to fund a charitable trust designed to pay out income when the amount was $150,000 or less.

You can learn a lot from just what briefly follows. If you are a church leader, I’m going to show you how you can potentially put 6 figures in your bank account in the next 90 days.

First, the discussion and the problems that surfaced…

The initial post outlined a tentative plan to fund a $100,000 to $150,000 gift using a charitable remainder trust (CRT). These trusts pay out a percentage of the trust assets for the life of an individual, or multiple individuals, and then pass the value of the trust to a charity.

The first response was from a CPA who indicated that the cost to file the myriad of forms required was not warranted unless the trust was funded with at least $100,000.

The second suggested using a single premium immediate annuity (SPIA) to fund a charitable gift annuity. Gift annuities are simple to set up, have low administration costs, and are best suited for elderly donors. The donor gets an immediate tax deduction and a guaranteed life income. Since a high percentage (70%+, depending on age) of the payout is excluded from tax, the effective yield can be twice that of a CD. Like a CRT, the gift annuity passes to the charity at the donor’s death.

The discussion that followed on the forum surrounded using the SPIA to “re-insure” the charity’s obligation. The quirk about gift annuities is that they are regulated by each state. If an organization has been in existence for less than 20 years and has assets of less than 2 million specifically designated to back gift annuity agreements, some states require re-insurance.

All this discussion was interesting and informative. However, I thought everyone was missing the boat. In my experience, the main reason for using a SPIA to fund a charitable gift annuity is to provide the charity immediate access to a portion of the gift.

Important!

I have done what I am going to describe next. However, before you put a plan like this in motion in your church, you need to consult with your attorney, have him or her research the charitable gift annuity regulations and reserve requirements for your state.

Let’s take a 75-year-old woman who wants to give $100,000 to her church in exchange for a life income. When she dies, whatever is left over after funding her income will go to the church.

I won’t go into why she may want to do this or the problems she has that this arrangement will solve. Furthermore, we’ll assume that a charitable gift annuity is the solution of choice.

A “normal” gift annuity that is sponsored by your national church would take the $100,000, set aside the required reserve, invest conservatively and pay out the annual rate suggested for her age by the American Council on Gift Annuities of 6.3%. These rates are actuarially calculated to leave about half of the initial gift to the charity at the life expectancy of the donor.

The church will have to wait until this woman dies to receive any benefit. Plus, I would check and see if the money goes to your national church or to your parish.

How can we provide the same income stream and an immediate benefit to your local church? Here are the numbers…

The cost to buy a SPIA on a 75-year-old female that would pay $6,300 a year as of the date of this post is $64,116. For the analyticals out there, this is a life only, no certain period annuity. That means the church can put $35,884 in the bank or endowment fund and use it in any manner desired.

One astute forum participant pointed out that some insurance companies will medically underwrite annuities. If the person has health problems and their assumed life expectancy is reduced as a result, the cost of the annuity is less.

I had a case several years ago where we were trying to fund a $3,000 a month life income on a woman age 88. The best bid for a traditional SPIA was $215,000. However, this lady had health problems. When I went to a carrier that medically underwrote the case, the bid dropped to $130,000, 40% less!

Every situation will be different. If I apply this 40% discount to my original example, the cost to the church to fund $6,300 a year for life via a SPIA drops to $38,470 and allows $61,530 to available for  immediate use.

Now let’s set up a plan at your church to put 6 figures in your bank account in the next 90 days.

First, check with your attorney to make sure this will work in your state.

Next, publicize the project. I would suggest having a specific goal in mind that has an emotional appeal to the congregation.

Let’s assume that this idea only applies to 2% of your membership. After all, it works best for donors over age 70. If you have a 500 member church, that’s just 10 people.

Using the non-medically reviewed SPIA example and cutting the donation in half to $50,000, each charitable gift annuity/SPIA transaction would raise about $18,000.

Ten donors times $18,000 is $180,000. And, hey, all you are looking for is 10 folks with a $50,000 CD with a crummy (and taxable) interest rate that would be interested in doubling their income and helping the church.

I realize this is all very sketchy, but there’s your 6 figures. Moreover, this all can be done in 90 days. I devote an entire lesson to this topic in The Smart Giver.