CHARITABLE GIFT ANNUITY - KEY TERMS & PROCEDURES
What you need to know to manage a Charitable Gift Annuity…
The following list of Key Terms and Procedures is offered for quick reference and to keep all members of the organization informed regarding regulation, process, procedure and terminology:
AFR (Applicable Federal Rate) or CMFR (Charitable Midterm Federal Rate) and tax consequences: Advise donor of need to also attach statement to their Tax Return if the AFR they choose to use in the charitable deduction calculation for the gift annuity is from or two months prior to the gift month, rather than the month of the gift. Also, advise them that failure to attach that statement, will disallow the use of the AFR rate and for any month other than the current month of the gift. The higher the AFR rate, the larger the charitable deduction.
Annuity Rates: Be sure that your Board and staff understands that the Suggested Maximum Annuity Rates of the Committee on Gift Annuities are based on the assumption that the charity will, on average, net only 50% of the gift, and that the Gift Annuity Fund need only earn a total return of 5.5% a year on average (See Exhibit 1).
Gift Annuity Fund. Checking Account: Establish a separate checking account just for your Charitable Gift. The checking account, the mutual funds and other investments constitute your Segregated Gift Annuity Fund. Obtain check writing privileges for each Money Market Mutual Fund, so you can write check(s) for the amounts needed to cover the annuity payments for the month. Deposit the checks into the Gift Annuity checking account to cover the annuity checks issued that month. Deposit the interest and dividend income checks from the invested assets in the checking account.
Contractual Payments: Unlike separately invested charitable remainder annuity trusts or unitrusts, where the trust ceases once all the trust's principal assets have been expanded, a gift annuity agreement is a contract, not dependent on the income earned by investment of the gift. All annuity payments must continue as long as the charity itself has any assets. Bankruptcy is the only legal way a charity can get out of its contractual obligation to make the annuity payments on the agreements it has issued.
Federal vs. State Data: The Contribution Deduction and the Investment-in-the-Contract are the federal calculation equivalents of the state calculations of the Gift Portion and the Reserve Portion of the gift. The state calculation for the Reserve Portion for any annuity gift is always LARGER than the federally computed Investment-in-the-Contract. The federal calculations for the Contribution deductions are more liberal (larger) than the state computations for the Gift Portion, even though the same actuarial table (1983 "a" Table) is used in both computations, the formulas and interest rates are used different.
Form 709 filing : To ensure proper filing, advise the donor to attach a photo copy of agreement and tax computation sheets to Gift Tax Return and attach a copy of the Form 709 and its attachments to his/her 1040 Federal Income Tax Return in the first year donor reports the gift. This identifies the donor as a "full disclosure" taxpayer and makes their tax return less likely to be audited, solely due to their reporting a large charitable deduction for the annuity gift.
Fixed income Obligation Maturity: As each new gift is received or matures, determine how much should be invested in the money market funds and how much in longer term fixed income obligations. To avoid having to sell a bond, bill or note before it matures, review the maturity dates of the investments in your gift annuity fund every time you have proceeds to invest and you need to make a new investment decision.
Gift File Records: Be sure you have a copy of the tax calculations of each annuity gift, not only in the Donor and annuitant file as a backup source of tax and payment data for each gift. Maintain a separate file which contains a copy of each set of tax calculations for donors/annuitant in your Fund. Maintaining that separate file will save time and avoid problems when you have to find the donor file for each and every gift.
Gift Tax Return: Provide the donor with the tax information about the annuity gift as well as the need to file a federal Gift Tax Return (Form 709) as an informational return. Inform the donor of that the charitable deduction amount is a reportable but not a taxable gift.
Investing Reserve Portion: Use a "buy and hold' approach to investing the Reserve Portion of your Annuity Fund in Treasury Bills, Notes and Bonds. The maturity dates of the fixed income obligations should be chosen with some sensitivity to the life expectancy of the annuitant(s), the need to have some asset in the Fund mature every few months, and a portion of the Fund (say 15 - 20%) invested in Federal Government Money Market funds (a maximum of 5% of the Reserve of Fund in any one mutual fund). Arrange for each mutual fund to have its income reinvested back into itself.
State insurance statutes Include all required wording in any gift annuity agreement where charity is domiciled in, and/or annuitant lives in any of the regulated states (i.e.: CA, NY, OR, WA and 18 other states) that requires additional specialized wording, such as: agreement number, the actuarial age of the annuitant(s), reasonably commensurate value, and state mandated disclosure language, etc. See our web site at www.pgresources.com for details.
ACGA membership: Your organization should join the Conference on Gift Annuities. As a supporter of the American Council on Gift Annuities, you or your organization will have access to information on the Gift Annuity, Deferred Payment Gift Annuity and Pooled Income Fund. In addition you get access to the latest information on gift annuity rates and access to printed proceedings of the most recent Conference as well as the ability to network with other Conference members who might help you resolve any gift annuity or planned giving problem you may have.
By developing a tailored process to effectively handle your Gift Annuities’, your organization will realize a steady and sustainable income to meet your organization’s strategic goals.
Questions? Send a note to James@pgresources.com. We enjoy hearing from you!