Wednesday, June 24, 2009

What are "Charitable Gift Annuities"?

As its name suggests, a charitable gift annuity consists of two elements:
  1. an outright charitable gift; and,
  2. the purchase of a fixed income annuity contract. Payments can begin immediately or can be deferred for a period determined by the donor and set forth in annuity contract.

The payment period can be measured by one annuitant's life (who is in most cases is the donor) or by the lives of two joint and survivor annuitants (often a husband and wife). Charitable gift annuities are not issued for a fixed term of years. As will be discussed, however, it is possible to terminate the annuity payments in advance of the life measuring term.

Unlike charitable remainder trusts or pooled income funds, whereby the obligation to make payments is limited solely to the contributed assets or segregated fund, a charitable gift annuity is considered a general obligation of the issuing charitable organization. Charitable gift annuities, therefore, take on much of same characteristics as commercial annuities with the issuing charity acting as the insurer. Many states require issuing organizations to be licensed and to maintain investment reserves.

In order to provide for a gift component, the rates offered by organizations in connection with charitable gift annuities are lower than those available from commercial insurance carriers.
Most organizations offer annuity rates as suggested by The American Council on Gift Annuities -- a qualified 501(c)(3) organization formed in 1927 as the Committee on Gift Annuities for the purpose of providing educational and other services to American charities regarding gift annuities and other forms of planned gifts. The Council deals with all matters pertaining to charitable gift annuities and meets periodically to establish suggested annuity rates that will result in issuing charities realizing a 50% actuarial residuum from the annuity agreements they issue. The rates are based on current mortality studies, prevailing and projected investment returns on invested reserves, and projected administrative costs.

The annuity rate is based on the age and number of annuitants. The most recently published rates apply to gift annuities issued on or after July 1, 2008. Rates begin at 3.3% for single-life annuitants age 0 - 5 and increase to 10.5% for single-life annuitants age 90 and older. Rates for joint-and-survivor life annuities are less to reflect longer combined actuarial life expectancies. Charitable gift annuities are limited to one or two annuitants.

The purpose of using standardized rates is to discourage competitive rate setting among charities and thereby ensure that a significant portion of the transfer will be available for charitable purposes. In 1995, however, a lawsuit was filed by a donor who charged that charities that issued gift annuities had conspired to fix the rates they offered donors and that such practices violated both antitrust and securities laws. Congress, recognizing the primacy of charitable gift annuities as fundraising tools, enacted two laws designed to specifically exempt charitable gift annuities from antitrust laws. As an alternative to using the suggested ACGA rates, some organizations choose to develop their own rates based on their own investment experience, charitable residuum goals, and the investment/reserve requirements under state law.

Determining the Annuity Amount
The annuity rate is stated as a percentage that, when multiplied by the net fair market value of the amount transferred, determines the annual amount payable to the annuitant. The annual amount can then be paid annually, semi-annually, quarterly, monthly or as otherwise set forth in the annuity agreement.
EXAMPLE 1 : Mr. Pleasant, age 70, transfers $100,000 on January 1, 2008 to a charitable organization in exchange for a single life immediate charitable gift annuity. The suggested ACGA annuity rate corresponding to his age is 6.5%. Mr. Pleasant will receive $6,500.00 per year.
EXAMPLE 2: Mr. and Mrs. Jones, both age 70, transfer $100,000 on January 1, 2008 to a charitable organization in exchange of a joint and survivor life immediate payment charitable gift annuity. The annuity rate corresponding their ages is 5.9%. Mr. and Mrs. Jones will receive $5,900.00 per year as long as at least one of them survives.

With a Deferred Payment Gift Annuity (DPGA), the annuitant(s) start receiving payments at a future time, the date chosen by the donor, which must be MORE than one year after the date of the contribution. As with Immediate Gift Annuities, payments can be made monthly, quarterly, semi-annually or annually.

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