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.

Everyone knows a gift annuity can be used to generate a regular income for yourself and still leave the principal to your church or other charity. Most people also know gift annuities can be created to provide an interest income for their lifetime and their spouse’s lifetime. Few people know there are at least seven other ways to create and use a gift annuity to generate safe and consistent income. Some of these options may benefit your church. I will outline them below.

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

In this case, there is a joint and survivor option. The organization pays out an income for as long as either the donor or the spouse lives.

Here are the 7 techniques you may not be familiar with

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

The gift annuity is created for someone specified by the donor. This type of gift annuity is frequently used for children with special needs, for example.

3. You, Your Spouse, and/or Another Person, but Deferring Payment for a Number of Years.

These annuities are set up like others with the exception that they do not begin to pay out income for a stated period of time or the occurrence of a predetermined event.

A good example might be when someone at age 55 creates a personal gift annuity that will begin to pay out when he or she reaches age 65 or 70. The funds would supplement other retirement income. The advantages of this type of gift annuity are that (a) you receive a higher income, and (b) you get a larger charitable income tax deduction.

4. To Fund Education 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. Re-insured Option Gift Annuity

In this case, the donor receives income and helps the church immediately. This option probably should be used more frequently.

The church, instead of just holding the original contribution, invests it in a “commercial immediate annuity” from an insurance company. When the insurance company sends payments to the church, the church sends a check to the donor.

The cost of the immediate annuity will vary and is dependent on several factors such as the age of the donor and the prevailing interest rate in the economy. Nevertheless, the cost of the immediate annuity is less than the amount received from the donor. This difference is available to the church immediately.

6. Exchange a Charitable Remainder Unitrust for a Gift Annuity

Income received from a charitable remainder unitrust (CRUT) can be exchanged for a gift annuity. This results in several advantages:

For the donor, there will be an additional income tax deduction for a charitable contribution. This action frees funds for immediate use by the charity, perhaps for a building project.

7. Creating a Gift Annuity at Death With an IRA

Upon your death, all or part of the funds in an IRA account can be used to create a gift annuity. The result is a safe and constant lifetime income for a surviving spouse. At the spouse’s death, the amount used to fund the gift annuity then belongs to the church.

Further, the donor’s estate would qualify for a charitable contribution tax deduction for that part of the gift annuity. But the IRA would be subject to income taxes at the standard rate.

Summary

Although this summary presents information that will be new to most people, it barely scratches the surface of the numerous benefits of gift annuities. Before creating a gift annuity or any other type of planned giving fund, consult with a tax professional. Be sure you understand all of the positive and negative ramifications of the various options available.