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7 Little-Known Gift Annuity Applications
A gift annuity (CGA) is a popular planned giving tool. They have been around for over 100 years. They are easy to understand, simple to set up and do not have the higher administrative costs associated with other charitable giving techniques.
Most people think that the income from a gift annuity is for the life of the donor or for the joint life of the donor and spouse. However, there are at least seven other ways to use a CGA. Let’s take a look at the two traditional apps and then summarize the other seven options. Perhaps these will plant a seed for use in your situation that will also benefit your church.
Just your life
This is the most common and easiest way to structure a gift annuity. You contribute cash or an appreciated asset to your church in exchange for lifetime income. At your death, the church keeps your contribution for its own use.
For as long as you and your spouse live
You can also set up a gift annuity to pay while you or your spouse lives. This is the joint and survivor CGA option.
Here are the 7 techniques you might not know…
1. As long as you and another person live
The other pensioner does not have to be your spouse. For example, a woman might set up a gift annuity for herself and her sister.
2. For the life of someone other than you
Also, the gift annuity doesn’t have to be for you. You could have a disabled child who requires special care and set up a CGA to fund that care for the rest of their life.
3. Any of the above, but payments will be deferred for a number of years
Most gift annuities are paid monthly, quarterly, semi-annually or annually. Payments usually start within the first year. However, it is possible to postpone the start of payments for several years.
For example, a person who is 55 could set up a charitable annuity with the idea that payments will begin at age 65 to supplement their retirement income. Deferred charitable annuities have the advantages of a higher payout and a larger charitable deduction.
4. Finance the education of a child or grandchild
Another example of a gift-deferred annuity is to fund the education of a child or grandchild. Now set up a gift annuity for your five-year-old grandson and when he’s 18 and goes to college, the CGA can be triggered to pay over the next four to five years. There is some risk as the child is not required to use the funds for college. You could be financing their Corvette Z06.
5. The “Reinsured” Gift Annuity.
In my opinion, this technique should be used more often because it provides immediate cash for the church.
Instead of keeping the contribution to a gift annuity, then investing and paying the promised payout, the church buys an immediate commercial annuity from an insurance company. The insurance company is instructed to send the payments (ie quarterly) to the church and a check is cut to the donor.
The cost of the immediate annuity will vary and depends on several factors, such as the age of the donor and the prevailing interest rate in the economy. However, the cost of the immediate annuity is less than the amount received from the donor. This difference is available to the church immediately.
6. Exchange of a Unitrust charitable remainder for a gift annuity
If you are the income beneficiary of a charitable residence unitrust (CRUT), you can exchange this interest for a gift annuity. This move can satisfy many goals.
This gives you another charitable income tax deduction for the new CGA. The advantage of charity is that it frees up money immediately that may be needed for a building campaign.
7. Creating a gift-on-death annuity with an IRA
All or part of your IRA can be converted to a gift annuity upon your death. This would be a way to establish a secure and consistent income for your surviving spouse while living with the funds ultimately going to the church you both want him to go to anyway.
Your estate would get a charitable deduction for the charitable portion of the charitable annuity. However, IRA income would continue to be income in respect of a decedent and subject to ordinary income taxes.
These explanations of the various uses of a gift annuity represent only the tip of the iceberg. If one or more apply to your situation, you should consult a qualified tax professional. Each technique has positive and negative income and gift tax results.
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