We frequently receive calls from our clients asking how to determine the date-of-death value for a charitable gift annuity (CGA). The value of a gift annuity upon the death of an annuitant seems to be an area of particular confusion.
Charitable Gift Annuity
In furtherance of its mission, ACGA presents this white paper and recommendations as a resource for sponsoring organizations, allied professionals, and the broader philanthropic community. The paper is intended to provide a basis for the discussion of best practices in managing the financial liability of charitable gift annuity programs for development and finance staff, as well as board members.
On April 17, 2013 Governor Scott Walker signed into Wisconsin law new and much less stringent regulations regarding gift annuities (2013 Wisconsin Act 271). The new regulations became effective the next day. Prior to the change in law, Wisconsin was a highly regulated state when it came to gift annuities.
The exclusion ratio is the portion of the payments made to a gift annuitant that will not be reportable as ordinary income on the annuitant's income tax return.
If the gift annuity was funded with cash, the excluded portion of the annuity will all be tax-free income. If the gift annuity was funded with appreciated property, typically part of the excluded portion will be reportable as tax-free income and part of it as capital gain income.
The American Council on Gift Annuities – ACGA – is a national organization of charities that promotes charitable gift annuities. One of its functions is that it issues tables of suggested maximum annuity rates that member charities should offer to their donors. The rates vary with age: the older the annuitant or annuitants, the higher the suggested maximum annuity rate.
A charitable gift annuity is a simple contract between the donor and the charity.
In exchange for an irrevocable gift of cash, securities, or other assets, the charity agrees to pay one or two annuitants a fixed sum each year for life.
A flexible gift annuity is a simple contract between the donor and the charity. In exchange for a irrevocable gift of cash, securities, or other assets, the charity agrees to pay one or two annuitants a fixed sum each year for life, with payments starting at least one year after the gift. The annuitants may elect to start receiving payments on any one of a range of dates, such as June 30th of any year from 2005 - 2025. These dates and their corresponding payment amounts must be listed in the agreement. The flexibility to choose when payments start is appealing to annuitants who at the time of the gift are not sure when they will want to start receiving income.
A retained life estate plus charitable gift annuity combines two gift arrangements. The arrangements allow a donor to use some of the value of her home or farm to fund a plan that will make payments to her or others for life.
A charity's remainder interest in a planned gift equals the present value of the promise to distribute the remaining principal of the planned gift when it terminates.
In the case of life income gifts, such as a gift annuity or a charitable remainder unitrust, the charity owns the remainder interest in the gift. In the case of a lead trust, individuals named by the donor own the remainder interest in the gift.
Reasonably commensurate value (RCV) is a measure of the present value of a gift annuity's payments at the time the gift annuity is funded. As of this writing, North Dakota, Oregon, Tennessee, and Washington are the only states that require a gift annuity's RCV to appear in the annuity agreement. California also used to impose this requirement, but legislation passed in August 2005 that removed this requirement, effective 1/1/2006.
North Dakota, Oregon, Tennessee, and Washington all accept the Investment in Contract amount as the RCV.