Charitable gift annuities as a planning technique.

• Author: Taylor, Richard J.

Charitable gift annuities are often overlooked as a financial planning technique. Although widely used by the charitable community, many financial planners are unaware of the unique benefits gift annuities can provide. For example, if properly structured, a charitable gift annuity can be used to increase a donor's return on underperforming appreciated assets, as a replacement for a reverse mortgage or to provide a college education fund.

A charitable gift annuity is an arrangement in which a taxpayer transfers property to a charitable organization in exchange for the organization's promise to pay an annuity. Generally, the annuity is for the life of the donor and/or the donor's spouse. A gift annuity cannot be structured for a term certain.

The annuity payment period may begin immediately, or it may be deferred until some future date. if a deferred annuity is selected, the annuity payments will be larger than if the annuity begins immediately after the transfer, since the calculation of the annuity payment is based on the time value of money. Because the charity has the use of all the funds for a longer period of time, the arrangement has the effect of generating a tax-deferred increase in the amount that will be paid to the noncharitable beneficiaries.

In most cases, the property exchanged for the annuity is appreciated property that would generate taxable gain if sold outright. However, if the transaction is properly structured, any taxable gain will be deferred over the annuity period. In addition, the donor will be entitled to a current income tax charitable deduction for a portion of the value of the property transferred.

Most charitable organizations establish a maximum annuity rate they will pay to ensure that a significant portion of the transferred property will be available for charitable purposes. This rate is based on rates established and published by the Committee on Gift Annuities, 2401 Cedar Springs, Dallas, Tex. 75201; (214) 720-4774. The rates suggested by the committee generally produce a charitable deduction of 40% to 60% of the value of the property transferred.

For tax purposes, a charitable gift annuity is treated as a bargain sale. A bargain sale is a sale or exchange of property to a charity in which the value of the consideration paid by the charity is less than the property's full fair market value (FMV). Sec. 1011(b) and Regs. Secs. 1.1011-2(a)-(c) and 1.170A-4(b)-(d) provide the framework for the tax treatment...