A charitable gift annuity (CGA) is a contract in which a charity, in return for a transfer of assets, such as say, stocks or farmland, agrees to pay a fixed amount of money to one or two individuals, for their lifetime. A person who receives payments is called an “annuitant” or “beneficiary.”
For the entire term of the contract, the payments are fixed. A portion of the payments are considered to be a partial tax-free return of the donor’s gift, which are spread in equal payments over the life expectancy of the annuitant(s).
Benefits of a CGA
There are at least six key benefits to a CGA:
A CGA provides an immediate income tax charitable deduction to a donor for the gift portion.
A CGA pays a lifetime income to one or two individuals, part of which is (most often) a return of principal and free from income tax.
The income payout from the gift annuity can begin immediately or can be deferred.
The charity’s obligation to pay the annuity is backed by the general assets of charity.
When appreciated property is provided, and the donor is an annuitant, some of the capital gain is spread over donor’s life expectancy, and the rest is never recognized because it is attributed to the gift portion.
A CGA is (relatively) simple to execute.
3 versions of CGA agreements
There are three versions of different CGA agreements depending on to whom the annuity is to be paid to:
A “single life” agreement (annuity paid to only one person for his/her lifetime)
A “two lives in succession” agreement (annuity paid to A, and then if B survives A, paid to B)
A “joint and survivor” agreement (pay annuity paid to two persons simultaneously, and at death of first annuitant, the survivor is paid full annuity amount). This is most commonly used for married couples who file joint tax returns and/or who live in community property states.
Types of CGA agreements
In addition to the three versions there are three main types of CGA agreements that determine when the payments are issued to the annuitants: immediate, deferred, and flexible.
Immediate Gift Annuity
Under an Immediate Gift Annuity, the annuitant(s) start(s) receiving payments at the start/end of the payment period immediately following the contribution. Payments can be made monthly, quarterly, semi-annually, or annually.
Deferred Gift Annuity
Under a Deferred Payment Gift Annuity, the annuitant(s) start(s) 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.
Flexible Annuity
Under a Flexible Gift Annuity (also known as a Deferred Payment Gift Annuity), Donor need not choose the payment starting date at the time of her contribution. The annuitant (who may or may not be the donor) can choose the payment starting date based on her retirement date or other considerations.
Charities That Issue CGAs: The Rules
NOTE: Gift annuities are an exception to the general rule that charities cannot issue commercial insurance contracts. As such, charities which issue gift annuities must comply with several rules, which may be simplified as follows:
The present value of the annuity must be less than 90% of the total value of the property transferred in exchange for the annuity. In other words, the charitable interest must be at least 10%.
The annuity cannot be payable over more than two lives, and the individual(s) must be alive at the time the gift annuity is set up.
The gift annuity agreement cannot specify a guaranteed minimum, nor a maximum, number of annuity payments.
The actual income produced by the property transferred in exchange for the gift annuity cannot affect the amount of the annuity payments.
CGAs and Tax Considerations
Federal income tax charitable deduction
A charitable gift annuity is considered part gift and part sale, as the donor contributes the property in exchange for annuity payments from the charity. The donor who itemizes may take an income tax charitable deduction for the gift portion (i.e., the value of the transferred property less the present value of the annuity).
This income tax charitable deduction is subject to the same limits as an outright gift of cash or property. For example, if cash is transferred for the CGA, the limitation of the deduction is 50% of the donor’s AGI; if long-term capital gain property is transferred, the limitation is generally 30% of AGI.
Any deduction in excess of the applicable percentage limitation may be carried forward for five years.
Taxation of payouts
The annuity payments by the charity under a gift annuity are treated for income tax purposes as follows:
Tax-free return of principal
Long-term capital gain
Ordinary income
Let’s break each of these categories down.
Tax-free return of principal
A portion of each payment received by Donor, or another annuitant, is a tax-free return of principal until the cost of the annuity is fully recovered when the annuitant reaches life expectancy.
The assumed cost of the annuity does not include the gift portion of the transaction. The donor’s cost basis must be allocated between the gift and sale portions in accordance with the respective proportions of the value of the property transferred.
Long-term capital gain
If property held for more than one year is transferred for a gift annuity, a portion of each payment will be taxed as LTCG. This will reduce the income tax-free return of principal portion of the annuity payments.
Capital gain is recognized only on the sale portion of the transaction and with the basis allocation previously described. Under general tax rules, long-term capital gain is recognized in the year the property is sold. However, with a charitable gift annuity, the donor may spread the gain over life expectancy provided the donor is the sole annuitant, or the donor and another individual named as a survivor annuitant.
Ordinary income
After the capital gain and tax-free portions of the annuity payment have been determined, the balance of the payment will be taxed as ordinary income.
Gift and estate taxation
If the donor is the sole annuitant, there are no gift or estate tax issues because both the annuity is her own and the annuity terminates at death.
If the donor names anyone other than herself as an annuitant, gift and estate tax issues may arise.
Regarding gift tax, if the donor names another person as an annuitant, the gift is the value of the annuity. An exception exists for a spouse under the gift tax marital deduction.
Another alternative to avoid gift tax: the donor could retain the right to revoke when the named annuitant has a survivor interest.
Regarding estate tax, if the donor names another person as an annuitant, the remaining value in the annuity is considered part of the donor’s estate. An exception exists for a joint annuity using only the donor’s life as the measuring life. Of course, there is also an estate tax marital deduction available if the surviving annuitant is a spouse.
Low-interest rates = higher tax-free income
The applicable federal rate (AFR) selection decision is more nuanced for gift annuities than for other split-interest gift tools.
A donor who wants to maximize their deduction will select the highest rate available, but this reduces the overall value of the annuity and increases the amount of the charitable gift.
Conversely, a donor who wants to maximize the income tax-free portion of the annuity payments will select the lowest available rate.
Choosing start date of deferred CGA
Under an immediate charitable gift annuity, annuity payments begin no later than one year after the initial contribution.
A deferred gift annuity allows the donor to delay the start date of annuity payments. This delay will both increase the annuity amount when payments begin and result in a larger income tax charitable deduction which is available in the year of the contribution (subject, as always, to AGI limits).
A deferred gift annuity can, therefore, produce current tax savings during high-earning years while creating a supplemental retirement income. Generally, Donor sets a date for the deferred gift annuity to begin. However, the IRS approved a deferred gift annuity which did not specify a fixed starting date for the annuity payments [Ltr. Rul. 9743054].
Testamentary Gift Annuity
If carefully planned, it is possible to arrange a charitable gift annuity through a will. It is, of course, crucial that both the bequest amount and annuity payout are made clear by the terms of the will.
A donor considering a testamentary gift annuity should directly address three important questions:
What if the designated annuitant(s) predecease the testator? Donor may want to specify a contingent annuitant or provide for an outright bequest to Charity.
What if the charity no longer exists at death? Or, what if the charity is either unable or unwilling to accept the gift? The donor may want to name a contingent charitable beneficiary.
What about the payout rate? The donor should leave the charity some degree of flexibility in the payout rate, to assure the 10% minimum charitable interest requirement can be met in the future.
You may have many more questions regarding charitable gift annuities and your personal situation. Feel free to contact me any time to discuss how to maximize your gift. I offer a one-hour free consultation, without any obligation. I can be reached any time at my email, gordon@gordonfischerlawfirm.com, or on my cell, 515-371-6077.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2015/10/neonbrand-315896.jpg16042049Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2019-06-29 12:59:282020-05-18 11:28:46ABCs of CGAs: Basics of Charitable Gift Annuities
The person who creates a trust is called the settlor (sometimes called the donor or grantor). It is the settlor’s intent which is of paramount importance. It is the intent of the settlor that determines whether a trust has been created.
Here’s a great read with a rundown on the basics of what a trust is:
If a settlor transfers property to a recipient with the intent that the recipient hold the property for someone else, then a trust has indeed been created. If the settlor transfers property with the intent that the recipient use the property for her own benefit, then NO trust has been created.
BONUS WORD! Precatory Trust
What if a settlor transfers property to a recipient with just a wish that the recipient use the property for the benefit of someone else, but does not impose any legal obligation? In such a situation, no legal trust is created. Instead, this is called a precatory trust, but is not a trust at all, because the settlor placed no legal responsibilities on the recipient. A precatory trust is, again, not a trust and is not governed by the law of trusts.
Three Easy Hypotheticals
Let’s look at three quick examples to make this clear. Mack gives stock to Julie. Mack intends that the stock be for Julie’s own use. Mack is NOT the settlor of a trust, because no trust has been created.
Grace gives a vacation house to Maddie, intending that Maddie hold the house for the benefit of Zach. Grace is the settlor of a trust. If a settlor transfers property to a recipient with the intent the recipient holds the property for the benefit of someone else, then a trust is created.
Thomas gives a coin collection to Parker, just wishing that Parker would hold the coins for Danna. This is a mere precatory trust, not a trust at all because the settlor is not imposing any legal responsibilities on the recipient.
Questions? Let’s Talk.
When it comes to estate planning, I’m all about breaking down the legalese barriers. This hopefully clarified the definition of settlor, but you may have questions…which is great! Contact me to discuss further the status of your estate plan and decisions regarding your trust. Reach me by email at gordon@gordonfischerlawfirm.com or phone at 515-371-6077.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2017/08/bryan-apen-318974.jpg36485472Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2019-06-27 04:33:162020-05-18 11:28:47(Legal) Word of the Day: Settlor (AKA Donor or Grantor)
Happy Father’s Day to all the dads, grandpas, uncles, and father figures out there! There are many kinds of fathers, from the beer-drinking to the book-reading, from the golf-loving to the car-fixing, to all of the above. And, just like there’s not one kind of way to be a dad, there’s no single type of father that needs an estate plan; everyone needs an estate plan regardless of the size of your tool shed. That’s why today is a great day to talk to your dad about estate planning.
Of course, estate planning can be a difficult subject to broach over grilling or yard work, but it’s an important conversation to have to see where your father is at. And, you can’t go buy an estate plan at the store or have one made for him, but in terms of long-term value, an estate plan is one of the best moves your dad could make.
Your father has likely taught you so much over the years. This could be your opportunity to give back to him and help him out with something for once by sharing information or just offering encouragement to complete the estate planning process. Let’s consider a couple of different scenarios.
If Your Dad Doesn’t Know Much About Estate Planning
That’s okay! This is your chance to share some important basics about what estate planning entails. There are three main points you can pass along and then feel free to direct him to an experienced estate planning attorney who can explain the rest.
Without an estate plan, there are major detriments. You cannot choose who receives your assets, how much and when. If a father has minor children they cannot choose who is the main guardian for the children if something were to happen to both parents/guardians. Without an estate plan, you also cannot choose your executor (the person to carry out the closing of your estate). Furthermore, if you die without an estate plan, all your assets— house, savings, retirement plans, and so on—will pass to your heirs at law as specified under Iowa’s statutes. Also, without an estate plan, the probate process can be even more cumbersome, time-consuming, and difficult on what is likely to already be a stressful time for loved ones.
Beneficiary designations are notoriously forgotten because they can be set once and then, even if things change, people forget to switch the name. Imagine the scenario of Beneficiary designations (sometimes called PODs and TODs) on accounts like savings and checking accounts, life insurance, annuities, 401(k)s, pensions, and IRAs. Make sure that designations are correctly filled out and supplied to the appropriate institution. Of course, remember to keep these beneficiary designations current as well.
If things change in your personal life you may well need to update your estate plan. Some examples are if marital status changes; a new child or grandchild is born; a named beneficiary passes away; you move to a new state or buy property in a different state; or there’s a significant change in financial situation.
Additionally, sometimes changes to laws (like the federal tax code) can impact the structure and most advantageous tools for estate planning. Any estate planner worth their weight should be able to tell you if your current estate plan aligns with any changes to laws.
I recommend to my clients that they review their estate plans once a year to make sure everything still fits with your estate planning goals.
I understand you can’t really “give” your dad an estate plan, but you can help him check this major legal “must” off the life checklist by helping point him the right direction. You can also offer your assistance when it comes to gathering important documents or information for the Estate Plan Questionnaire. Let your dad know that when he’s ready to discuss his planning decisions that you’ll be there to listen, and if necessary, bring your siblings (if any) and other family members to the table so that everyone is on the same page. (Note that all the aforementioned information totally applies to mothers too!)
Questions, concerns, or otherwise from you or your father? Contact me at any time via email or phone (515-371-6077). I also offer a free consultation and make house calls!
https://www.gordonfischerlawfirm.com/wp-content/uploads/2019/06/Screen-Shot-2019-06-16-at-11.32.01-PM.png514766Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2019-06-16 23:34:192020-05-18 11:28:47Happy Father's Day: Give Dad the Gift of Estate Planning
ABCs of CGAs: Basics of Charitable Gift Annuities
Charitable GivingThe Basics
A charitable gift annuity (CGA) is a contract in which a charity, in return for a transfer of assets, such as say, stocks or farmland, agrees to pay a fixed amount of money to one or two individuals, for their lifetime. A person who receives payments is called an “annuitant” or “beneficiary.”
For the entire term of the contract, the payments are fixed. A portion of the payments are considered to be a partial tax-free return of the donor’s gift, which are spread in equal payments over the life expectancy of the annuitant(s).
Benefits of a CGA
There are at least six key benefits to a CGA:
3 versions of CGA agreements
There are three versions of different CGA agreements depending on to whom the annuity is to be paid to:
Types of CGA agreements
In addition to the three versions there are three main types of CGA agreements that determine when the payments are issued to the annuitants: immediate, deferred, and flexible.
Under an Immediate Gift Annuity, the annuitant(s) start(s) receiving payments at the start/end of the payment period immediately following the contribution. Payments can be made monthly, quarterly, semi-annually, or annually.
Under a Deferred Payment Gift Annuity, the annuitant(s) start(s) 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.
Under a Flexible Gift Annuity (also known as a Deferred Payment Gift Annuity), Donor need not choose the payment starting date at the time of her contribution. The annuitant (who may or may not be the donor) can choose the payment starting date based on her retirement date or other considerations.
Charities That Issue CGAs: The Rules
NOTE: Gift annuities are an exception to the general rule that charities cannot issue commercial insurance contracts. As such, charities which issue gift annuities must comply with several rules, which may be simplified as follows:
CGAs and Tax Considerations
Federal income tax charitable deduction
A charitable gift annuity is considered part gift and part sale, as the donor contributes the property in exchange for annuity payments from the charity. The donor who itemizes may take an income tax charitable deduction for the gift portion (i.e., the value of the transferred property less the present value of the annuity).
This income tax charitable deduction is subject to the same limits as an outright gift of cash or property. For example, if cash is transferred for the CGA, the limitation of the deduction is 50% of the donor’s AGI; if long-term capital gain property is transferred, the limitation is generally 30% of AGI.
Any deduction in excess of the applicable percentage limitation may be carried forward for five years.
Taxation of payouts
The annuity payments by the charity under a gift annuity are treated for income tax purposes as follows:
Let’s break each of these categories down.
Tax-free return of principal
A portion of each payment received by Donor, or another annuitant, is a tax-free return of principal until the cost of the annuity is fully recovered when the annuitant reaches life expectancy.
The assumed cost of the annuity does not include the gift portion of the transaction. The donor’s cost basis must be allocated between the gift and sale portions in accordance with the respective proportions of the value of the property transferred.
Long-term capital gain
If property held for more than one year is transferred for a gift annuity, a portion of each payment will be taxed as LTCG. This will reduce the income tax-free return of principal portion of the annuity payments.
Capital gain is recognized only on the sale portion of the transaction and with the basis allocation previously described. Under general tax rules, long-term capital gain is recognized in the year the property is sold. However, with a charitable gift annuity, the donor may spread the gain over life expectancy provided the donor is the sole annuitant, or the donor and another individual named as a survivor annuitant.
Ordinary income
After the capital gain and tax-free portions of the annuity payment have been determined, the balance of the payment will be taxed as ordinary income.
Gift and estate taxation
If the donor is the sole annuitant, there are no gift or estate tax issues because both the annuity is her own and the annuity terminates at death.
If the donor names anyone other than herself as an annuitant, gift and estate tax issues may arise.
Regarding gift tax, if the donor names another person as an annuitant, the gift is the value of the annuity. An exception exists for a spouse under the gift tax marital deduction.
Another alternative to avoid gift tax: the donor could retain the right to revoke when the named annuitant has a survivor interest.
Regarding estate tax, if the donor names another person as an annuitant, the remaining value in the annuity is considered part of the donor’s estate. An exception exists for a joint annuity using only the donor’s life as the measuring life. Of course, there is also an estate tax marital deduction available if the surviving annuitant is a spouse.
Low-interest rates = higher tax-free income
The applicable federal rate (AFR) selection decision is more nuanced for gift annuities than for other split-interest gift tools.
A donor who wants to maximize their deduction will select the highest rate available, but this reduces the overall value of the annuity and increases the amount of the charitable gift.
Conversely, a donor who wants to maximize the income tax-free portion of the annuity payments will select the lowest available rate.
Choosing start date of deferred CGA
Under an immediate charitable gift annuity, annuity payments begin no later than one year after the initial contribution.
A deferred gift annuity allows the donor to delay the start date of annuity payments. This delay will both increase the annuity amount when payments begin and result in a larger income tax charitable deduction which is available in the year of the contribution (subject, as always, to AGI limits).
A deferred gift annuity can, therefore, produce current tax savings during high-earning years while creating a supplemental retirement income. Generally, Donor sets a date for the deferred gift annuity to begin. However, the IRS approved a deferred gift annuity which did not specify a fixed starting date for the annuity payments [Ltr. Rul. 9743054].
Testamentary Gift Annuity
If carefully planned, it is possible to arrange a charitable gift annuity through a will. It is, of course, crucial that both the bequest amount and annuity payout are made clear by the terms of the will.
A donor considering a testamentary gift annuity should directly address three important questions:
You may have many more questions regarding charitable gift annuities and your personal situation. Feel free to contact me any time to discuss how to maximize your gift. I offer a one-hour free consultation, without any obligation. I can be reached any time at my email, gordon@gordonfischerlawfirm.com, or on my cell, 515-371-6077.
(Legal) Word of the Day: Settlor (AKA Donor or Grantor)
Legal Word of the Day, Trusts, Wills, Trusts & EstatesSettlor (or Donor or Grantor)
The person who creates a trust is called the settlor (sometimes called the donor or grantor). It is the settlor’s intent which is of paramount importance. It is the intent of the settlor that determines whether a trust has been created.
Here’s a great read with a rundown on the basics of what a trust is:
Intent Is Everything
If a settlor transfers property to a recipient with the intent that the recipient hold the property for someone else, then a trust has indeed been created. If the settlor transfers property with the intent that the recipient use the property for her own benefit, then NO trust has been created.
BONUS WORD! Precatory Trust
What if a settlor transfers property to a recipient with just a wish that the recipient use the property for the benefit of someone else, but does not impose any legal obligation? In such a situation, no legal trust is created. Instead, this is called a precatory trust, but is not a trust at all, because the settlor placed no legal responsibilities on the recipient. A precatory trust is, again, not a trust and is not governed by the law of trusts.
Three Easy Hypotheticals
Questions? Let’s Talk.
When it comes to estate planning, I’m all about breaking down the legalese barriers. This hopefully clarified the definition of settlor, but you may have questions…which is great! Contact me to discuss further the status of your estate plan and decisions regarding your trust. Reach me by email at gordon@gordonfischerlawfirm.com or phone at 515-371-6077.
Happy Father’s Day: Give Dad the Gift of Estate Planning
Estates & Estate PlanningHappy Father’s Day to all the dads, grandpas, uncles, and father figures out there! There are many kinds of fathers, from the beer-drinking to the book-reading, from the golf-loving to the car-fixing, to all of the above. And, just like there’s not one kind of way to be a dad, there’s no single type of father that needs an estate plan; everyone needs an estate plan regardless of the size of your tool shed. That’s why today is a great day to talk to your dad about estate planning.
Of course, estate planning can be a difficult subject to broach over grilling or yard work, but it’s an important conversation to have to see where your father is at. And, you can’t go buy an estate plan at the store or have one made for him, but in terms of long-term value, an estate plan is one of the best moves your dad could make.
Your father has likely taught you so much over the years. This could be your opportunity to give back to him and help him out with something for once by sharing information or just offering encouragement to complete the estate planning process. Let’s consider a couple of different scenarios.
If Your Dad Doesn’t Know Much About Estate Planning
That’s okay! This is your chance to share some important basics about what estate planning entails. There are three main points you can pass along and then feel free to direct him to an experienced estate planning attorney who can explain the rest.
Getting started with the process is easy. I recommend starting with my free, no-obligation estate plan questionnaire or giving me a call.
If Your Dad Already Has an Estate Plan
Give your dad a high-five because he’s ahead of the curve! Seriously, more than half of Americans do not have essential estate planning documents. However, there may be some points that you dad forgot about or needs to revisit.
Beneficiary Designations
Beneficiary designations are notoriously forgotten because they can be set once and then, even if things change, people forget to switch the name. Imagine the scenario of Beneficiary designations (sometimes called PODs and TODs) on accounts like savings and checking accounts, life insurance, annuities, 401(k)s, pensions, and IRAs. Make sure that designations are correctly filled out and supplied to the appropriate institution. Of course, remember to keep these beneficiary designations current as well.
Revisit Regularly
If things change in your personal life you may well need to update your estate plan. Some examples are if marital status changes; a new child or grandchild is born; a named beneficiary passes away; you move to a new state or buy property in a different state; or there’s a significant change in financial situation.
Additionally, sometimes changes to laws (like the federal tax code) can impact the structure and most advantageous tools for estate planning. Any estate planner worth their weight should be able to tell you if your current estate plan aligns with any changes to laws.
I recommend to my clients that they review their estate plans once a year to make sure everything still fits with your estate planning goals.
Give the Best Gift this Father’s Day
I understand you can’t really “give” your dad an estate plan, but you can help him check this major legal “must” off the life checklist by helping point him the right direction. You can also offer your assistance when it comes to gathering important documents or information for the Estate Plan Questionnaire. Let your dad know that when he’s ready to discuss his planning decisions that you’ll be there to listen, and if necessary, bring your siblings (if any) and other family members to the table so that everyone is on the same page. (Note that all the aforementioned information totally applies to mothers too!)
Questions, concerns, or otherwise from you or your father? Contact me at any time via email or phone (515-371-6077). I also offer a free consultation and make house calls!