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The #SweetSixteen is a time of celebration for teams which made the elite group. Similarly, with charitable gift annuities (CGAs), donors can experience the joy of giving to their favorite causes. But, unlike making the Sweet Sixteen, CGAs aren’t hard, they are relatively easy to understand and execute. Also unlike the Sweet Sixteen, CGA donors don’t have to be part of an elite group; all donors, regardless of income, or class, or status, can enjoy the many benefits CGAs offer.

ABCs of CGAs

A CGA is easy to understand, about as easy as a fast break lay-up. A CGA, put simply, is a contract. Specifically, a CGA is a contract in which a charity agrees to pay a fixed amount of money to one or two individuals for their lifetime(s), in return for a transfer of assets (such as, say, cash, stocks, or farmland).

A person who receives payments is called an “annuitant” or “beneficiary.” After the annuitant(s) die(s), or the term of the contract ends, the charity keeps the remainder of the gift.

https://www.gordonfischerlawfirm.com/abcs-of-cgas-charitable-gift-annuities-the-basics/

Sixteen Sweet Benefits of a CGA

Before we go deep into CGAs, I’ve listed 16 key advantages of CGAs.

  1. CGAs are simple to execute.
  2. CGAs are (relatively) easy to understand and explain.
  3. CGAs avoid management responsibilities.
  4. CGAs may be executed during lifetime (called an inter vivos transfer), or by operation of a will (called a testamentary transfer).
  5. CGAs allow a donor to provide a consistent stream of income for others.
  6. CGAs pay lifetime income to one or two individuals, part of which is (most often) a return of principal and free from income tax.
  7. CGAs provide an immediate income tax charitable deduction for the donor for the gift portion.
  8. When appreciated property (such as stock or real estate) is provided to fund a CGA, and the donor is an annuitant, some of the capital gain is spread over the donor’s life expectancy, and the rest is never recognized because it is attributed to the gift portion.
  9. Depending on all the circumstances, CGAs can possibly save a donor taxes on Social Security benefits.
  10. The income payout from CGAs can begin immediately or can be deferred.
  11. The income payout from CGAs is guaranteed.
  12. The income payout from CGAs is fixed (e.g., same amount is paid each payment period).
  13. The charity’s obligation to make the income payout is backed by the general assets of the charity.
  14. For some donors, especially in today’s low-interest environment, CGAs may present an attractive alternative to CDs.
  15. In certain situations, CGAs can supplement retirement income.
  16. CGAs provide the joy of giving to your favorite causes.

basketball court with ball in hoop

Three More Points on the Scoreboard—Three Types of CGA Agreements

1. 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.

2. 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.

3. Flexible Annuity

Under a Flexible Gift Annuity (also known as a Deferred Payment Gift Annuity), the donor need not choose the payment starting date at the time of her contribution. The annuitant (who, remember, may or may not be the donor) can choose the payment starting date based on their retirement date or other considerations.

Jump Ball—Choosing Start Date of Deferred CGA

Under an immediate 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 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 are all charitable donations, to Adjusted Gross Income (AGI) limits).

A deferred gift annuity can produce current tax savings during high-earning years while creating a supplemental retirement income. Generally, the 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 [IRS Ltr. Rul. 9743054].

https://www.gordonfischerlawfirm.com/march-madness-inspired-charitable-gifts-non-cash-assets/

Don’t Foul Out—Charities Issuing CGAs Must Follow Certain Rules

CGAs are an exception to the general rule that charities cannot issue commercial insurance contracts. As such, charities which issue CGAs must comply with several rules. The basics of the rules may be simplified as follows:

  • The present value of the annuity must be less than 90 percent of the total value of the property transferred in exchange for the annuity. In other words, the charitable interest must be at least 10 percent.
  • 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.

Four Point Play—Tax Advantages

In basketball, a four-point play is the rare occasion when a player makes a three-point shot while being fouled. Similarly, it is rare for a charitable gift to offer four potential tax advantages to donors, as the CGA does. The CGA can have a positive effect on the donor’s charitable deductions, income taxes, capital gains taxes, and gift taxes.

slam dunk with a basketball

Federal Income Tax Charitable Deduction

A CGA is considered part gift and part sale, as the donor contributes property in exchange for annuity payments from the charity. The donor who itemizes deductions on her taxes may take an income tax charitable deduction for the gift portion (i.e., the value of the transferred property minus 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 percent of the donor’s AGI. Or, if long-term capital gain property is transferred the limitation is 30 percent of AGI. Any deduction in excess of the applicable percentage limitation may be carried forward for five years.

https://www.gordonfischerlawfirm.com/recordkeeping-required-charitable-deduction/

Taxation of Payouts

The annuity payments by the charity under a CGA are treated for income tax purposes as follows:

  1. Tax-free return of principal
  2. Long-term capital gain
  3. Ordinary income

Let’s break each of these categories down.

Tax-Free Return of Principal

A portion of each payment received by the donor, or other annuitant, is a tax-free return of principal until the cost of the annuity is fully recovered when the annuitant reaches life expectancy. Put another way, a portion of the payments is 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).

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

When a taxpayer sells long-term, appreciated property, such as stocks or real estate, she generally pays capital gains on the appreciation. If long-term, appreciated property funds a CGA, a portion of each payment will be taxed as long-term capital gain. This will reduce the income tax-free return of principal portion of the annuity payments.

Under general tax rules, long-term capital gain is recognized in the year the property is sold. Capital gain is recognized only on the sale portion of the transaction and with the basis allocation previously described. However, with a CGA, the donor may spread the gain over life expectancy, assuming either a sole annuitant, or the donor has another individual named as a survivor annuitant. It’s obviously beneficial for a donor to be able to defer capital gains taxes.

https://www.gordonfischerlawfirm.com/long-term-capital-assets-st-patricks-day/

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 the 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 the 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 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 planned 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.

When the Clock Runs Out—Testamentary CGAs

If carefully planned, it is possible to arrange a CGA through a will. The IRS approved a testamentary gift annuity in Ltr. Rul. 8506089. It is of course crucial that both the bequest amount and annuity payout are made clear by the terms of the will.

A donor should engage an expert estate planning expert to handle the careful drafting needed for a testamentary CGA. A donor, together with his estate plan professional, should address two issues:

  1. What if the designated annuitant(s) predecease(s) the testator? (The testator is the person who makes the will).

The donor may want to specify a contingent annuitant, or provide for an outright bequest to the charity.

2.    What about the payout rate?

The donor could (or should) leave the charity some flexibility in the payout rate, to assure the 10 percent minimum charitable interest requirement can be met in the future.

Winning Point

Donors, and nonprofits, can score big with CGAs and this charitable tool can be a slam dunk for all parties.

https://www.gordonfischerlawfirm.com/march-madness-bracket-endowments/


The mission of Gordon Fischer Law Firm, P.C. is to promote and maximize charitable giving in Iowa. Gordon offers training on complex gifts, like CGAs, for nonprofit boards, staff, and stakeholders. Contact him for a free one-hour consultation. Gordon can always be reached at Gordon@gordonfischerlawfirm.com or at 515-371-6077.

hundred dollar bills wrapped up in ribbon

Phoenix, Arizona may have the Final Four, but Iowa has such generous tax benefits for charitable gifts. In fact, in Iowa, donors can receive four amazing tax benefits for charitable gifts. Your March Madness bracket may be busted already, but these benefits are ones you can bank on.

Appreciated, long-term property

Dollar sign in red outline of house

For donors and potential donors, the ideal asset for charitable donations will depend on a whole range of factors. But, when donating to charity, one type of asset to seriously consider is appreciated, long-term property. Common examples of such property would include publicly traded stock, real estate, and farmland. First a couple terms to be clear on:

  • Appreciated: simply means increased in value.
  • Long-term: property held for more than one year (e.g., 366 days).

Give now, rather than later

The four tax benefits I’ll outline are only available when the charitable gifts are made during lifetime. It’s been said, “You should be giving while you are living, so you’re knowing where it’s going.” Many Iowans have philanthropic intentions to donate to their favorite causes eventually, usually at death through their estate plan, will, and testamentary trust. Why not give now? You can have more say about your charitable gifts while you are still alive, and also feel the joy that comes with helping the causes you care about most. Again, there are also lots of good tax reasons for giving now rather than later. 

Benefits of gifting appreciated, long-term property

Final Four NCAA logo

While not celebrated as much as the Final Four, there are four genuinely exciting tax benefits for charitable gifts of appreciated, long-term property. 

Double federal tax benefit

When you gift appreciated, long-term property to a charity during lifetime, you may receive a double federal tax benefit. First, you can receive an immediate charitable deduction on your federal income tax, which is equal to the fair market value of the property. Second, assuming of course you have owned the property for more than one year, when you donate the property, you avoid the long-term capital gain taxes you would have owed if you sold the property.

US Treasury note on top of IRS forms

Let’s look at a concrete example to make this clearer. Pat owns appreciated, long-term property (again, say, stocks or real estate or farmland) with a fair market value of $100,000. Pat wants to use the property to help favorite causes in the local community. Which would be better for Pat – to sell the property and donate the cash, or give the property directly to favorite charities? Assume that the property was originally purchased at $20,000 (basis), Pat’s income tax rate is 39.6%, and capital gains tax rate is 20%. 

final four table charitable giving

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise to your personal situation on these matters.

Again, a gift of appreciated, long-term property, made during your lifetime, is doubly beneficial. You receive a federal income tax charitable deduction equal to the fair market value of the property. You also avoid the capital gains tax. In Iowa, however, there is even more potential benefit. You may receive a 25% state tax credit for such charitable gifts, lowering the after-tax cost of your gift even further.

25% Endow Iowa Tax Credit

Under the Endow Iowa Tax Credit program, gifts during lifetime can be eligible for a 25% tax credit. There are three requirements to qualify.

  1. The gift must be given to, or receipted by, a qualified Iowa community foundation.
  2. The gift must be made to an Iowa charity.
  3. The gift must be endowed—that is, a permanent gift. Under Endow Iowa, no more than 5% of the gift can be granted each year – the rest is held by, and invested by, Pat’s local community foundation.

Endow Iowa Tax Credit logo

Let’s look again at the case of Pat, who is donating appreciated, long-term property per the table above. If Pat makes an Endow Iowa qualifying gift, the tax savings are very dramatic:

appreciated long-term property table

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise to your personal situation on these matters.

Pat gave a significant and generous gift to charity of $100,000. But using the Endow Iowa Tax Credit, coupled with the federal income tax charitable deduction and capital gains savings, the after-tax cost of the gift of $100,000 is less than $20,000. Plus, because the gift was endowed, it will be invested by Pat’s local community foundation and will presumably grow through its investment. Thus, it will continue benefiting the charities Pat cares about most!

Note again Pat’s huge tax savings. In this scenario, by giving appreciated, long-term property during lifetime, Pat receives $39,600 as a federal charitable deduction, avoids $16,000 of capital gains taxes, and gains a $25,000 state tax credit, for a whopping total tax savings of $80,600.

Gift Tax Considerations

Money with bow on top
Yet another benefit: charitable gifts are exempt form federal gift tax. In fact, charitable contributions made to qualifying charities are not only deductible on itemized tax returns, you may also deduct the value of your charitable donations from any amount of gift taxes you owe.

Areas of Caution

Going back to our example, this is a great deal for Pat and a great deal for Pat’s favorite causes. But, could anything go wrong with this scenario? There are a few areas of caution.

Charitable Deduction Capped

The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of appreciated, long-term property is limited to 30% of your adjusted gross income (AGI). You may, however, carry forward any unused deduction amount for an additional five years.

Endow Iowa Capped

Endow Iowa Tax Credits are also capped both statewide and per individual. Iowa sets aside a pool of money for Endow Iowa Tax Credits and it is first come, first served. In 2014, approximately $6 million in tax credits are available annually through Endow Iowa. So, get your application in now, as tax credits often run out toward the end of the year.

There is also a cap on Endow Iowa tax credit per individual. Tax credits of 25 percent of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million.

IRS Requirements for Non-Cash Gifts

Additionally, to receive a charitable deduction for non-cash gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. You need to engage the right professionals to be sure all requirements are met. A notable exception to the appraisal requirement is appreciated, long-term, publicly traded stock.

Finally, all individuals, families, businesses, and farms are unique and have unique tax issues. This article is presented for informational purposes only, not as tax advice or legal advice. Make a fast break to consult a legal professional for personal advice.


The mission of Gordon Fischer Law Firm, P.C. is to promote and maximize charitable giving in Iowa. He offers training on complex gifts for nonprofit boards, staff, and stakeholders. Contact him for a free one-hour consultation; Gordon can always be reached at mailto:gordon@gordonfischerlawfirm.com or at 515-371-6077.

march madness basketball

Want to help make your favorite charity a winner? Encourage the charity to discuss the potential of charitable gifts of non-cash assets with donors. Donee charities can gain access to what has been called prospective donors’ “treasure chest” of non-cash assets. After all, the vast majority of a potential donor’s net worth will not be in cash, but in non-cash assets such as a home, retirement benefit plan, life insurance, etc.

 

Inspired by the start of NCAA March Madness, and the number of bracketed teams, here are 64 non-cash assets that could be used for charitable gifting.

Please note the alphabetized listing, I’m not recommending one gift over another, since so much depends on the individual circumstances of the donor.

airplane flying

 

  1. Airplanes
  2. Antique Automobiles
  3. Antiques
  4. Artwork
  5. Assets held by C Corporation
  6. Assets held by S Corporation
  7. Autograph Books
  8. Barn Doors
  9. Beach House
  10. Beanie Babies
  11. Boats
  12. Bonds
  13. Books
  14. C Corporation Stock
  15. Coin collections
  16. Comic books collection
  17. Commercial and residential real estate
  18. Condominiums
  19. Credit Card Rebates
  20. Depression-era Glass
  21. Dolls
  22. Enamelware
  23. Equestrian Ribbons
  24. Farmland
  25. Gold Bullion
  26. Grain
  27. Guitars
  28. Hedge Fund Carried Interest
  29. Historic Papers
  30. Installment Notes
  31. Intellectual Property
  32. Life Insurance
  33. Limited Liability Partnerships
  34. Livestock
  35. Marbles
  36. Mineral Rights
  37. MLB Team
  38. Mutual Funds
  39. Oil and Gas Interests
  40. Operating Partnership Units
  41. Paint-by-number Landscapes
  42. Painted Planks
  43. Paintings
  44. Patents
  45. Photographs
  46. Pooled Income Funds
  47. Racehorses
  48. Real estate
  49. Restricted Stock (144 and 145)
  50. Retained Life Estate
  51. Retirement benefits
  52. Royalties
  53. S Corporation Stock
  54. Sculpture
  55. Sculpture Garden
  56. Seat on New York Mercantile Stock Exchange
  57. Seats at Events
  58. Stamp Collection
  59. Stocks
  60. Tangible Personal Property
  61. Taxidermy
  62. Timber Deeds
  63. Vacation Home
  64. Vehicles

 

Vintage blue car

Pretty exhaustive list right? Like stamps and dolls, there are so many assets that you likely never even considered could be a charitable gift. And, that’s where I come in and can assist! If you’re a donor or donee nonprofit do not ever hesitate to contact me. I can always be reached at gordon@gordonfischerlawfirm.com and 515-371-6077.