Charitable Gift Annuities TIAA-CREF June 14, 2007 Presented by: Frank Minton, President Planned Giving Services A division of PG Calc Incorporated
Gift Annuity Rates • Recommended by the American Council on Gift Annuities (ACGA) since 1927 • ACGA has decided to extend current rates for another year, effective at least through June 30, 2008
Assumptions Underlying Gift Annuity Rates
The residuum will be 50 percent. Life expectancies based on Annuity 2000 Tables, assuming all annuitants are female and are 2.0 years younger than their actual ages. Charity’s investment/administration expenses total 100 basis points. Total return on gift annuity reserves (immediate gift annuities) is 6.25 percent, or 5.25 percent net of expenses.
Effect of the Increase in the Credited Interest Rate on Deferred Gift Annuities
Gift prior to 7/1/06 Gift on or after 7/1/06
Annual Payment
Charitable Deduction
$6,250 $6,450
$25,660 $24,881
Comparison of a $50,000 CD and a Contribution of $50,000 for a Gift Annuity Donor Age 75, CMFR of 5.8% CD Gift Annuity Investment Interest Income tax
$50,000 2,500 825
(assuming a 33% combined federal and state tax rate)
Net spendable
$1,675
Contribution Annual Payment Income tax Net after-tax cash flow Charitable deduction Tax savings Interest on invested tax savings After tax interest on invested tax savings Net spendable
$50,000 3,550 465 3,085 23,442 7,736 387 259 $3,344
Comparison of a Commercial Annuity and a Gift Annuity Female Donor Age 75, CMFR of 5.8%
Commercial Annuity Amount of premium/contribution Annual annuity payment Charitable deduction Tax savings (assuming a 33% combined federal and state tax rate) Investment of tax savings at 5% Total annual benefit
Gift Annuity
$100,000 $10,100 0
$100,000 $7,100 46,884
0 0
15,472 774
$10,100
$7,874
Reasons to Follow the ACGA Rates
No need to hire actuary
Minimize financial risk
Acceptance by state officials
Focus on gift
Proposed Regulation Regarding Ratable Reporting of Gain Donor, date of birth 12/29/1932, CMFR of 5.8% Current Rule Ratable Reporting of Taxable Gain Amount contributed Charitable deduction Gain taxable the Year of the gift Taxation of annual payment during each full year of life expectancy: Ordinary income Capital gain Tax-free
$100,000 46,541
If Proposed Regulation Applied to Gift Annuities No Ratable Reporting $100,000 46,541
3,262.32
42,767.20
2,822.10 3,262.32 815.58 $6,900.00
2,822.10 -04,077.90 $6,900.00
States by Regulatory Categories 2007 Reserve, Annual Reporting, or Detailed Application Exempt—Notification
Exempt—No Notification Silent
Update on State Regulations Changes made in state regulations between May, 2005 and January, 2007.
Arkansas Investing per prudent investor standard now an option (eff. 8/31/05)
Update on State Regulations (continued…)
California Mutual funds allowed without approval of DOI (eff. 9/22/05); changes in agreement content (eff. 1/1/06)
Update on State Regulations (continued…)
Oregon Significant deregulation, removing initial filing and annual reporting requirements (eff. 1/1/06)
Newly Enacted Legislation West Virginia • Continuous operation for at least 3 years • $300,000 in unrestricted cash, cash equivalents, or publicly traded securities • Disclosure language in agreement • Notification to the insurance commissioner (by 9/30/06 or when first issue annuity in state)
Current Summary of State Regulations At present time: 11 states require a segregated reserve fund, annual reporting, and/or a detailed application; 17 states exempt gift annuities from regulation but require a notification to the state of an intent to issue gift annuities; 18 states exempt gift annuities from regulation and do not require notification to the state; 5 states and D.C. either do not address gift annuities or have determined that they are not subject to insurance regulation.
Advanced Planning Opportunities:
Inter Vivos Gift Annuity Funded with IRA Assets IRA Taxable distribution
CHARITY for Gift Annuity Deduction offsetting part of distribution
payments
Testamentary Gift Annuity Funded with IRA Assets Donor
IRA Assets
Estate Tax Deduction
Gift Annuity IRA Assets not taxed when gift annuity is funded
Annuitant Selected by Donor
Gift Annuity Funded with a Life Insurance Policy Transfer of Policy Face Value: $100,000; Cash Value: $40,000; Adjusted Cost Basis: $22,000; Annuity Payments for life $2,760; Assumes December, 2006 CMFR of 5.8%
Transfer of Policy: Income tax deduction Taxation of payments during life expectancy: Ordinary income Tax-free Taxable ordinary gain
$10,239 1,129 897 734
Surrender of Policy and Contribution of Proceeds: Income tax deduction Taxation of payments during life expectancy: Ordinary income Tax-free Taxable ordinary gain in year of gift
$18,616 1,129 1,631 $18,000
Gift Annuity Funded with a Commercial Deferred Variable Annuity Ms. K, age 79, transferred a commercial deferred variable annuity for which she paid $25,000 and which at the time of transfer had a cash value of $40,000. Assumes December, 2006 CMFR of 5.8%. Total annual payment (paid quarterly) $3,120 Taxed as follows: Taxation of payments during each full year of life expectancy: Ordinary income 1,104 Tax-free return of capital 2,016 Income tax charitable deduction Taxable gain Excess deduction after offsetting taxable gain Tax savings (assuming a 28% tax rate)
$20,048 $15,000 $5,048 1,413
Gift Annuity Funded with Real Estate DONOR
Property
Charitable deduction
Guaranteed Payments
CHARITY
Beneficiary (Also called “Annuitant”)
Gift Annuity to Benefit Someone Other Than the Donor Mr. F Stock valued at $100,000
Charitable deduction of $52,432
Gift Annuity
$8,500 per year Mr. F’s mother
The Flexible Deferred Annuity Contribution Made Now Annuitant Decides Later When to Start Payments Elective Start Date 6/30/2013 6/30/2014 6/30/2015 6/30/2016 6/30/2017 6/30/2018 6/30/2019 6/30/2020 6/30/2021 6/30/2022 6/30/2023 6/30/2024 6/30/2025 6/30/2026 6/30/2027 6/30/2028
Age at Start Date 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72
Capital Gain $942.48 $974.16 $1,009.20 $1,041.04 $1,081.92 $1,123.20 $1,170.40 $1,213.05 $1,264.80 $1,314.05 $1,374.56 $1,434.88 $1,503.36 $1,577.76 $1,650.20 $1,734.48
Tax-free Portion $1,413.72 $1,461.24 $1,513.80 $1,561.56 $1,622.88 $1,684.80 $1,788.60 $1,819.55 $1,897.20 $1,971.05 $2,061.84 $2,152.32 $2,255.04 $2,366.64 $2,475.30 $2,601.72
Ordinary Income $5,343.80 $5,764.60 $6,177.00 $6,497.40 $7,095.20 $7,592.00 $8074.00 $8,767.40 $9,238.00 $10,014.90 $10,763.60 $11,612.80 $12,441.60 $13,355.60 $14,374.50 $15,463.80
Total Annuity $7,700.00 $8,200.00 $8,700.00 $9,100.00 $9,800.00 $10,400.00 $11,000.00 $11,800.00 $12,400.00 $13,300.00 $14,200.00 $15,200.00 $16,200.00 $17,300.00 $18,500.00 $19,800.00
The College Annuity
Some Questions That Arise in Practice Question 1: Is a Deduction Allowed When the Sole or Last Annuitant Dies Prior to the End of Life Expectancy?
DEATH PRIOR TO END OF LIFE EXPECTANCY 20 Years Life Expectancy 10 Years
Deduction for unreturned capital
Question 2: Can an Annuitant Assign His or Her Annuity Interest to the Charity?
Example: A few years ago A contributed $100,000 cash for a gift annuity. At the present time the present value of the annuity payments is $60,000, the unreturned capital is $45,000, and the gain (interest) is $15,000.
Is the deduction $60,000, $45,000, or $15,000?
Question 3: Is it Possible to Execute a Single Gift Annuity Agreement When Contributions for the Annuity are Received on Different Dates?
ANNUITY WITH DIFFERENT CONTRIBUTION DATES
Donor Contributions on 8/1
8/3
8/5
Charity for Gift Annuity
Payments
Donor/Annuitant
What if the contribution dates were 8/1, 9/10, and 10/15?
Question 4: Is it Possible to Change the Frequency of Gift Annuity Payments, and Would Doing so Affect the Amount of the Payments?
CHANGING FREQUENCY OF ANNUITY PAYMENTS
Payment 3/31 6/30 9/30 12/31 Schedule ___________|____________|____________|_____________|
Changed to 1/31 2/28 3/31 4/30 5/31 6/30 7/31 8/31 9/30 10/31 11/30 12/31
____|____|____|____|____|____|____|____|____|____|____|____|
Effect on total annual annuity?
Question 5: Is it Possible to Exchange the Income Interest of a Charitable Remainder Trust or Pooled Income Fund for a Gift Annuity?
Yes, this is possible and it might make sense if: 1.
2.
3. 4.
A NIMCRUT is paying out a small amount of net income, A CRT has a high payout rate and capital is being eroded, A CRAT is in danger of running dry; or The charity would like to terminate a dormant pooled income fund.
Strategies to Minimize Risk and Increase Cost Effectiveness Adopt the following sensible policies: Establish a minimum age of annuitants for immediate gift annuities between 60 and 65. Minimum payment-beginning age for deferred gift annuities - 60. Minimum contribution of $10,000. Liquid assets readily convertible to cash; illiquid assets handled on a case-by-case basis.
Strategies to Minimize Risk and Increase Cost Effectiveness (continued…) Increase Reserves Prudently Use the following risk-control techniques:
An asset allocation that strikes the proper balance between risk and potential return. Diversification within each asset class. Selection of investments based on expected cash flow needs.
Strategies to Minimize Risk and Increase Cost Effectiveness (continued…) Adopt a Prudent Policy Regarding Expenditure of Gift Annuity Funds for Charitable Purposes A charity should adopt one of these spending policies:
Wait until annuity terminates, then use residuum for charitable purposes (if using fund accounting). May use funds from reserve fund if annuities are unrestricted. Transfer the proper amount to reserve fund if spending the contribution immediately. Operate reserve fund like pooled income fund if unitizing gift annuities.
Strategies to Minimize Risk and Increase Cost Effectiveness (continued…) Develop a Strategy for Dealing With Problem Annuities
Applicable when some annuities are for designated purposes.
Conduct an Audit of Your Gift Annuity Program
