Seven Ways You Didn't Know You Can Use a Gift Annuity
Introduction
A very popular planned giving tool is the gift annuity. These devices have been in use for more than a century. Their simplicity is one reason for their popularity. And they are less expensive to set up and administer than many other charitable gift planning approaches.
The popular conception is that income from a gift annuity is available only for the donor's lifetime or for the lifetime of the donor and his or her spouse. But there are a number of additional ways one can use a gift annuity. After summarizing the most common uses, I'll outline several other lesser-known ways to use a gift annuity, including making your church a beneficiary.
Donor's Lifetime Only
This is the most common use of this tool. A contribution of cash or some appreciated asset is made to the church. In exchange, the church pays you an annual income. Upon your death the church keeps the original contribution for its own use.
Donor's and Spouse's Lifetime
In this case, there is a joint and survivor option. The organization pays out an income for as long as either the donor or the spouse lives.
The seven lesser-known ways to use this planned giving tool are:
1. With a Survivor or Joint Option for You and Another Person.
The second person can be anyone you stipulate. This approach is perfect for two siblings.
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. Any of the Above, But 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. For a Child or Grandchild's Education
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. Re-insured Option 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 the annuity, the church buys a "commercial immediate annuity" from an insurance company. The insurance company then sends payments to the church and the church sends a check to the donor.
The benefit of this option to the church is that the cost of the immediate annuity will be less than the amount needed to pay the income due to the donor. The church is then able to use the difference in the amounts immediately. It should be noted that factors including donor age and prevailing interest rate will determine the cost of the "immediate annuity."
6. Exchange a Charitable Remainder Unitrust for a Gift Annuity
Income received from a charitable remainder unitrust (CRUT) can be exchanged for a gift annuity. This results in several advantages:
There will be an additional income tax deduction for a charitable contribution for the donor. For the church, the benefit is that it frees funds for immediate use.
7. Use Funds From an IRA to Create a Gift Annuity at Death
Upon your death, all or part of the funds in an IRA account can be used to create a gift annuity. The result is a safe and constant lifetime income for a surviving spouse. At the spouse's death, the amount used to fund the gift annuity then belongs to the church.
Further, the donor's estate would qualify for a charitable contribution tax deduction for that part of the gift annuity. But the IRA would be subject to income taxes at the standard rate.
Summary
This overview represents only a surface summary of the benefits of a gift annuity. If you think one or more of these options appropriate for your needs, consult a qualified tax professional. It is important to understand all positive and negative implications for your income and tax liability.
A very popular planned giving tool is the gift annuity. These devices have been in use for more than a century. Their simplicity is one reason for their popularity. And they are less expensive to set up and administer than many other charitable gift planning approaches.
The popular conception is that income from a gift annuity is available only for the donor's lifetime or for the lifetime of the donor and his or her spouse. But there are a number of additional ways one can use a gift annuity. After summarizing the most common uses, I'll outline several other lesser-known ways to use a gift annuity, including making your church a beneficiary.
Donor's Lifetime Only
This is the most common use of this tool. A contribution of cash or some appreciated asset is made to the church. In exchange, the church pays you an annual income. Upon your death the church keeps the original contribution for its own use.
Donor's and Spouse's Lifetime
In this case, there is a joint and survivor option. The organization pays out an income for as long as either the donor or the spouse lives.
The seven lesser-known ways to use this planned giving tool are:
1. With a Survivor or Joint Option for You and Another Person.
The second person can be anyone you stipulate. This approach is perfect for two siblings.
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. Any of the Above, But 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. For a Child or Grandchild's Education
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. Re-insured Option 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 the annuity, the church buys a "commercial immediate annuity" from an insurance company. The insurance company then sends payments to the church and the church sends a check to the donor.
The benefit of this option to the church is that the cost of the immediate annuity will be less than the amount needed to pay the income due to the donor. The church is then able to use the difference in the amounts immediately. It should be noted that factors including donor age and prevailing interest rate will determine the cost of the "immediate annuity."
6. Exchange a Charitable Remainder Unitrust for a Gift Annuity
Income received from a charitable remainder unitrust (CRUT) can be exchanged for a gift annuity. This results in several advantages:
There will be an additional income tax deduction for a charitable contribution for the donor. For the church, the benefit is that it frees funds for immediate use.
7. Use Funds From an IRA to Create a Gift Annuity at Death
Upon your death, all or part of the funds in an IRA account can be used to create a gift annuity. The result is a safe and constant lifetime income for a surviving spouse. At the spouse's death, the amount used to fund the gift annuity then belongs to the church.
Further, the donor's estate would qualify for a charitable contribution tax deduction for that part of the gift annuity. But the IRA would be subject to income taxes at the standard rate.
Summary
This overview represents only a surface summary of the benefits of a gift annuity. If you think one or more of these options appropriate for your needs, consult a qualified tax professional. It is important to understand all positive and negative implications for your income and tax liability.
About the Author:
About the author: Robert D. Cavanaugh, CLU is a 39-year financial and estate planning veteran. He publishes The Smart Giver, an educational program which teaches techniques to increase income, reduce taxes while simultaneously helping the church. A number of the planning techniques involve the use of a gift annuity. More information about the charitable annuity can be found at his blog.