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Seven Lesser-Known Ways To Use A Gift Annuity

Introduction

The gift annuity is one of the more popular planned giving instruments. These accounts have been used for over a century by people who appreciate the simplicity and cost-efficiency of this charitable gift option.

Most people think the income from a gift annuity is for the life of the donor or for the joint lives of the donor and spouse. There are, however, at least seven other ways a gift annuity can be used. Let’s take a look at the two traditional applications and then summarize the other seven options. Perhaps these will plant a seed for their use in your situation that will also benefit your church.

Donor’s Lifetime Only

This most common use of a gift annuity pays the donor an income on a contribution of cash or some other appreciated asset to the church or other charity. Upon the donor’s death, the original contribution belongs to the church or charity.

Lifetime of Donor and Spouse

This is a joint and survivor gift annuity option. This pays out an income for as long as either you or your spouse lives.

The seven lesser-known ways to use this planned giving tool are:

1. For as Long as You and Another Person Live

The second person can be anyone you stipulate. This approach is perfect for two siblings.

2. For the Life of Someone Other than You

Furthermore, the gift annuity does not have to be for you. You could have a disabled child who requires special care and set up a gift annuity to fund that care for the rest of their life.

3. Any of the Above, But the Payments are Deferred for a Number of Years

These gift annuity are created like all other types. The exception is that they do not begin to pay out for a specified period of time.

For example, a person who is age 55 could set up a gift annuity with the idea that the payments would begin at age 65 to supplement their retirement income. Deferred gift annuities have the advantages of a higher payout and an increased charitable deduction.

4. As an Education Fund for a Child or Grandchild

A gift annuity can be created for a child or grandchild at birth or a very young age. The fund would begin paying out when the child reaches a specified age, and continue over the next four to eight years. There is, however, no obligation that the child or grandchild use the money for education. You could be funding a Corvette!

5. The “Re-insured” Gift Annuity

For those who want to help their church immediately, this is an option that probably should be used more often.

Instead of holding the contribution to the annuity, the church buys a “commercial immediate annuity” from an insurance company. The insurance company then sends payments to the church and the church sends a check to the donor.

The benefit of this option to the church is that the cost of the immediate annuity will be less than the amount needed to pay the income due to the donor. The church is then able to use the difference in the amounts immediately. It should be noted that factors including donor age and prevailing interest rate will determine the cost of the “immediate annuity.”

6. Exchanging a Charitable Remainder Unitrust for a Gift Annuity

If you are the income beneficiary of a charitable remainder unitrust (CRUT), you can exchange this interest for a gift annuity. This move can satisfy many objectives.

There will be an additional income tax deduction for a charitable contribution for the donor. For the church, the benefit is that it frees funds for immediate use.

7. Use Funds From an IRA to Create a Gift Annuity at Death

All, or a portion of, your IRA can be exchanged for a gift annuity at your death. This would be a way to establish a safe, consistent income for your surviving spouse for as long as he/she lives with the funds ultimately going to the church you both desire it would go to anyway.

In addition, your estate would be eligible for a deduction for a charitable contribution for that part of the gift annuity. The IRA, however, would still be subject to ordinary income taxes.

Summary

These explanations of the various uses for a gift annuity only represent the tip of the iceberg. If one or more apply in your situation, you’ll need to consult a qualified tax professional. Each technique has positive and negative income and gift tax results.

About the author: Robert D. Cavanaugh, CLU is a 39-year financial and estate planning veteran. He is the publisher of The Smart Giver, an educational program focusing on techniques to increase income, reduce taxes while simultaneously helping the church. A number of the planning techniques involve the use of a gift annuity. More information about the charitable annuity can be accessed at his blog.

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