Charitable Gift Annuity

[Kathleen Reynolds]

#3084

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A Charitable Gift Annuity donor transfers money or other property to a qualified charitable organization in return for the charity’s promise to pay the donor or another fixed and guaranteed payments for life. This transfer is part charitable gift and part purchase of an annuity. For capital gain purposes, the program assumes that the donor is the annuitant.

The Charitable Gift Annuity only uses ‘Life’ to perform its calculations, with options for one or two lives.

Entering Data

• Transfer Date: Enter 1 to 12 to indicate the month for the transfer date and then enter the day and year of the transfer (dd/mm/yyyy). If you enter a two-digit number such as 90, the program will automatically enter it as 1990. See Transition Period Notes.
• §7520 Rate: The program automatically displays three allowable 120% Midterm Applicable Federal Interest Rates (the current month and two preceding months) and places the rate that is most favorable in this input. You can override the program’s value by entering another rate. In which case, the phrase “Invalid §7520 Rate” appears. In some cases, 30% will appear as a rate. Thirty percent is the default value that appears when there is not a current AFR available for the chosen month. Download or manually update your AFR table. Check our web site at https://www.brentmark.com for an updated list of AFR Rates.
• Note: For transactions in May or June of 2009, if you select a §7520 discount rate from March or April as required by regulations, the program will apply mortality Table 90CM and not 2000CM. For transactions in May or June of 1999, if you select a §7520 discount rate from March or April 1999, the program will apply mortality Table 80CNSMT.
• FMV of Property: Enter the initial net fair market value of the property transferred pursuant to the gift annuity agreement.
• Cost Basis: Enter the long-term cost basis of the property on the transfer date. If the value entered is the same as the FMV of the Property, the reports will not include any capital gain treatment.
• Prorate: This data input field is irrelevant for deferred gift annuities. Enter No, if the first payment is not to be prorated when the period between the Transfer Date and the First Payment Date is less than the interval between future payments. In appropriate cases, Yes will result in a proration of the first payment for an immediate annuity when the period is less than the interval between future payments by more than one day.
• Payment Period: Select the payment schedule that should be followed for each year (Annual, Semiannual, Quarterly, and Monthly).
• # of Contributions: Entering a value greater than 1 causes the program to replace the standard report with a Charitable “IRA” report. This report is available only for transfer dates starting May 1, 1989, or later. For calculation purposes, it is assumed that successive contributions equal to the initial one (i.e., the FMV of Property) are also made on the same Transfer Date in following years.
• First Payment Date: Enter the date of the first annuity payment. If you enter zeros or spaces for the date, the program will automatically display the same date that was entered for the Transfer Date data input field.
• Recommended Payout: Answer Yes, and the program will automatically display the American Council on Gift Annuities uniform gift annuity rate (as adjusted by the uniform interest factor for deferred gift annuities) for the Payout data input field. Answer No, if you wish to enter another rate for the Payout data input field. If you live in New York or New Jersey, select Yes: NY/NJ. Click here for more information about how New York and New Jersey rates are different.
• Payout: If the Use Recommended Payout is answered No, enter any value with up to three places after the decimal point.
• Apply 7520 Exhaustion Test? Answer Yes, and the program will calculate the §7520 Exhaustion Test and use the result for the present value of annuity. The program only handles the §7520 Exhaustion Test for immediate gifts.
• Lives: Enter the Enter the number of lives (1 or 2) that will be used to determine the charitable deduction.
• Birth Date(s): Enter the birth date of one of the persons (usually the donor and spouse) whose lives are being used to measure the term of the gift annuity (dd/mm/yyyy). If the annuity is being funded with the donor�s separate property and there are capital gain consequences (Basis is less than the FMV of Property), enter the donor�s birthday first.
• Income Tax the Tax Cut and Jobs Act of 2017 sunsets in 2026. Indicate whether or not you wish to assume that the income tax provisions of that act will sunset.
• Charity Type: Choose 50%, 30%, or 20%. All qualified non-profit organizations will fit within one of these types (IRS Publication 78).
• Capital Gains Rate: Enter the income tax rate that applies to capital gains property.

Results

The program uses various Assumptions and Limitations to perform this particular calculation.

In terms of its calculations, the gift annuity is more complicated than any other split-interest charitable methods. The program calculations were designed based on research that consulted several sources. In particular, see Deferred Giving by Conrad Teitell and publications furnished by the Committee on Gift Annuities: Tax Implications of an Annuity Gift, and Deferred Gift Annuities.

Calculations will vary depending upon whether an annuity is considered to be immediate (the first payment date is one year or less from the transfer date) or deferred (the first payment date is more than one year after the transfer date). The program automatically handles the different calculation methods for immediate and deferred gift annuities.

The Committee on Gift Annuities recommends the use of its uniform gift annuity rates. These recommended rates are revised from time to time by the Committee. The recommended rates are intended to produce, on the average, a gift to the charitable organization of approximately 50% of the amount transferred to the charity. The uniform rates used by the program were adopted by the Conference on Gift Annuities on May 5, 1983 and were reconfirmed by the 19th Conference on Gift Annuities on May 1, 1986. As recommended by the Committee, the recommended rates for immediate annuities are also adjusted by a uniform interest factor for deferred annuities. As adopted by the Committee on Gift Annuities, the program uses a recommended payout rate for deferred gift annuities which is .5% higher than previously for Transfer Dates of 4/6/ 89 through 6/30/92. For Transfer Dates of 7/1/92 and later, the program uses a uniform interest factor for deferred annuities that is 1% higher than the period from 4/6/89 though 6/30/92.

The program performs a 90% test to see whether the annuitant’s investment in the contract equals or exceeds 90% of the principal. Less than 90% passes the test. If the test is failed, the charity will be taxed on income from the transferred property as unrelated business taxable income. The program handles Federal income tax consequences including capital gain treatment and partial payment years. Table V Expected Return Multiples (Reg. § 1.72-9) and appropriate adjustment factors are applied by the program to determine an exclusion ratio. The program, to determine the amount of the annual annuity that is excludable for income tax purposes as well as the amount that is taxable, uses this ratio. The printed report also shows detail for any partial payment that may occur in the year of first payment. If the fair market value of the property transferred exceeds the cost basis, the capital gain consequences are indicated. The printed report shows greater detail including any capital gain when there is a partial payment in the year of the first payment as well as the capital gain for the final reporting year.

The §7520 Treasury Regulations Exhaustion Test calculates a limit in the valuation of annuities created a Charitable Gift Annuity Trust. The Charitable Financial Planner shows the steps used to calculate the value of the exhausted annuity by splitting the annuity into two parts:

• An annuity that lasts up to but does not include the period when the original annuity exhausts.
• A single payment equal to the final partial payment of the original annuity.

The two parts are then added together. The total is the Value for the §7520 Treasury Regulations Exhaustion Test report.

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