By Kelly Robinson, Spring 2016 Student Intern
Another type of annuity that is lesser known is the charitable gift annuity. A charitable annuity is set up similarly to that of a fixed annuity, in that it is set up as a contract between the donor (annuitant) and the charitable organization. Like fixed annuities, the charitable annuity is regulated under state insurance laws, and may be subject to the laws of the state in which the charity is located, and the laws of the state in which the donor is located.
The donor transfers the “gift” (cash, property, or other assets) irrevocably to the charity and the charity considers that gift as a part of its assets. The charity then makes the payments to the donor from their assets, with guaranteed payments continuing until the death of the donor (or surviving annuitant). Once the donor dies, the remainder of the funds stays with the charity. While the payout for charitable annuities is not tied to the contributed assets, the payout is typically set up so that a large amount remains with the organization.
Instead of tying the payout rates to something like the stock market, as done in a variable annuity, a charitable annuity will instead will rely upon rates published by the American Council on Gift Annuities (ACGA). The rate is determined by “actuarial age” of the donor, which is the age to the nearest birthday on the gift date. To see the kind of rate you could expect based on your age, you can visit the ACGA rate chart. The charity can also come up with its own gift annuity rate chart, but most states will require the charity to supply the state regulators with that chart. This requires the charities to prove that their rates comport with state regulations by use of an actuary. If the charity uses the ACGA rate chart, mentioned above, the charity will not need to offer such proof.
Charitable annuities are popular ways to raise funds, as it provides the donor with both a charitable donation tax deduction, as well as the guaranteed payments mentioned above. The donor benefits from an immediate (but partial) tax deduction, which is based on both the age of the donor and the number of donees, with a greater deduction applied the older you are. The charity benefits because they are able to spend a portion of the contribution immediately. Their only requirements are comporting with state regulations and ensuring maintenance of sufficient reserves to meet their annuity obligations.
As with all other types of annuities, charitable annuities can be used as a tool to perpetuate fraud. Tomorrow, in our final annuities blog post, we will be exploring the different types of fraud that relate to annuities and what you can to avoid becoming a victim yourself.