The Charitable Gift Annuity
Volume 3 • Issue 6 • July 2013
is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business planning and charitable planning issues. This is the third in a series of articles on charitable planning strategies. In this month's issue, we will look at the Charitable Gift Annuities. If you are interested in learning more about the ideas discussed in this newsletter, please contact us for a free initial consultation.
In the last two issues of The Counselor, we have discussed two charitable strategies that involved the creation of a trust that benefited the Charity as well as the Donor. This month we will discuss another strategy, the charitable gift annuity (CGA), which provides a gift to charity while creating an income stream for the Donor.
How It Works
Unlike the charitable remainder trust or charitable lead trust, the CGA does not require the creation of a special purpose trust. Rather, a CGA is a contract between the Donor and a Charity. Pursuant to the contract; cash, securities or other assets are transferred to the Charity in exchange for guaranteed income payments to one or two life annuitants. The Donor receives an immediate tax deduction for a portion of the assets given to the Charity to fund the CGA. The CGA payments are fixed for the term of the annuity and are guaranteed by the assets of the Charity. The annuity payments can begin immediately or be delayed for at least one year. The following illustration demonstrates how the CGA works.
Because the payment is guaranteed, a CGA is considered a general obligation of the issuing Charity. The Charity, therefore, acts similar to an insurer in a commercial annuity. Many states require a charity offering CGAs to be licensed and maintain investment reserves. The rate offered by the Charity is often less than commercial rates in order to provide the gift component. Most charities use the rates suggested by the American Council on Gift Annuities.
Who Can Benefit From a CGA?
Those who might benefit from a CGA include:
Individuals desiring to benefit a particular charity.
Individuals who need guaranteed income for life.
Individuals who want to make a "present gift" for estate or income tax planning purposes.
Individuals desiring to sell highly appreciated assets.
Are There Risks?
As with any investment or other strategy, there are always risks. Just like any commercial annuity, a CGA is vulnerable to the financial health of the charity. The original gift to the charity is irrevocable. If a charity is subsequently unable to meet its obligation to fund the guaranteed payment, the Donor may be left without recourse. Unlike insurance companies, it can be difficult to assess the financial stability of the issuing charity. While instances of charities defaulting are rare, caution should be exercised, especially in the current times of financial turmoil.
While care should be taken, the CGA provides another opportunity to engage in philanthropy and, at the same time, recognize a benefit to yourself and your estate. Take the time to consider whether a CGA might be an appropriate tool to use in your estate planning.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.