Charitable Gift Annuity

Mutual funds are easy to purchase, simple to understand, and they allow for continual reinvestment of income over the long run. As planned gift donors review their financial assets and determine which ones to use as the funding for charitable gift annuities, mutual funds present an obvious choice. But gift planners should be aware of some particular aspects of mutual funds that can cause significant complications in the process.  Read about the complexities in mutual funds transactions and tax accounting.

Fundraisers consider a well-functioning gift annuity program the cornerstone of a robust planned gift fundraising effort.  Although bequests and beneficiary designations typically produce most of the realized planned gift revenue, offering gift annuities is usually the mark of a mature planned giving program.  Nonetheless, among those charities that have offered gift annuities, many frequently worry about the continued viability of offering them.

The end we are talking about is the end of calendar year 2016.  Are you ready?  Most charities concentrate on year-end giving in the fourth quarter and for good reason.  A study conducted by the Center on Philanthropy at Indiana University focused on high-net worth donors found that 42.7 percent of those surveyed gave more during the holidays than the rest of the year. Nonetheless, in addition to soliciting and encouraging gifts at the end of the calendar year, it is also a time for planned giving departments to prepare and plan. 

Gift planners are often surprised to see that the state named in the Governing Law paragraph in an annuity agreement is not always the same as the donor’s state of legal residence. Here’s why these states sometimes differ:

During the downturn in the stock market in late 2008, many charities monitored their gift annuity reserve fund balances on a weekly or even daily basis, concerned that there were sufficient reserves to meet the requirements of states with a calendar year reporting period. But the uncertainty brought by the financial turmoil of the “great recession” had at least one positive effect, prompting charities to take a more detailed look at their gift annuity programs, either through an internal review or by hiring an outside consultant. For some, this was the first time a thorough review of the program had been done.

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.

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. Requirements included:

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.