Deferred Payment Gift Annuity
Summary of Gift Plan
The donor transfers cash or securities in exchange for a charity’s promise to pay a fixed annuity to one or two individuals for life with the first payment occurring at least one year after the date of the gift. Most charities offer deferred payout rates based on recommendations of the American Council on Gift Annuities. Payout rates are higher for deferred annuities than for immediate payment gift annuities: the longer the deferral period, the higher the payout rate.
Income Tax Deduction
The amount transferred to a charity, less the present value of the lifetime annuity retained for one or two persons, is deductible. Charitable deductions are higher for deferred payment annuities than those available for immediate payment gift annuities.
Capital Gains Consequences
Capital gains are partially avoided when appreciated assets are used to fund a deferred payment annuity. Remaining gain can be reported ratably as payments are received over the annuitant’s life expectancy, if the donor is the annuitant.
Federal Taxation
Annuity payments are partly tax-free return of principal, during the annuitant’s life expectancy, and the rest is ordinary income. Some capital gain is reportable where a donor funds a deferred annuity with appreciated securities, but the donor/annuitant may spread such gain ratably over his or her life expectancy.
Transfer Taxes
No transfer tax results from a one-life deferred annuity where payments are made only to the donor. For a two-life annuity, a taxable gift occurs, but gift taxes may be postponed or avoided if the donor keeps the right to revoke the second annuitant’s annuity. The gift would be rendered incomplete for gift tax purposes except for payments actually received. No gift tax would be due, however, if the payments are sheltered by the annual gift tax exclusion, or if the recipient is married to the donor. The value of the survivor’s annuity is included in the donor’s estate, but the marital deduction is available if the survivor is the donor’s spouse.
Tax Returns
A gift tax return is required if another person, including a spouse, is named as an annuitant, and the donor has not kept the right to revoke. The charity reports annual payments to annuitants on Form 1099-R. Gifts of securities require Form 8283.
Best Funding Assets
Cash gifts ensure maximum tax-free payments. Gifts of securities enable donors to convert stocks to annuities while minimizing capital gains taxes. Many charities do not accept gifts of real estate, closely held stock or tangible personal property for charitable gift annuities.
Special Considerations
Deferred gift annuity donors are generally younger than people who arrange immediate payment gift annuities. “Baby Boomers” often see deferred gift annuities as a way to supplement retirement savings while minimizing income taxes during their peak earning years. However, deferred gift annuities may be attractive to any donor who needs a large income tax deduction in a particular year and has the ability to wait several years before receiving the initial annuity payment. Several private IRS rulings have approved “flexible deferred gift annuity” plans whereby donors may choose an initial starting date for payments, but have the option to then continue postponing payments for several more years – resulting eventually in larger payments.
The donor transfers cash or securities in exchange for a charity’s promise to pay a fixed annuity to one or two individuals for life with the first payment occurring at least one year after the date of the gift. Most charities offer deferred payout rates based on recommendations of the American Council on Gift Annuities. Payout rates are higher for deferred annuities than for immediate payment gift annuities: the longer the deferral period, the higher the payout rate.
Income Tax Deduction
The amount transferred to a charity, less the present value of the lifetime annuity retained for one or two persons, is deductible. Charitable deductions are higher for deferred payment annuities than those available for immediate payment gift annuities.
Capital Gains Consequences
Capital gains are partially avoided when appreciated assets are used to fund a deferred payment annuity. Remaining gain can be reported ratably as payments are received over the annuitant’s life expectancy, if the donor is the annuitant.
Federal Taxation
Annuity payments are partly tax-free return of principal, during the annuitant’s life expectancy, and the rest is ordinary income. Some capital gain is reportable where a donor funds a deferred annuity with appreciated securities, but the donor/annuitant may spread such gain ratably over his or her life expectancy.
Transfer Taxes
No transfer tax results from a one-life deferred annuity where payments are made only to the donor. For a two-life annuity, a taxable gift occurs, but gift taxes may be postponed or avoided if the donor keeps the right to revoke the second annuitant’s annuity. The gift would be rendered incomplete for gift tax purposes except for payments actually received. No gift tax would be due, however, if the payments are sheltered by the annual gift tax exclusion, or if the recipient is married to the donor. The value of the survivor’s annuity is included in the donor’s estate, but the marital deduction is available if the survivor is the donor’s spouse.
Tax Returns
A gift tax return is required if another person, including a spouse, is named as an annuitant, and the donor has not kept the right to revoke. The charity reports annual payments to annuitants on Form 1099-R. Gifts of securities require Form 8283.
Best Funding Assets
Cash gifts ensure maximum tax-free payments. Gifts of securities enable donors to convert stocks to annuities while minimizing capital gains taxes. Many charities do not accept gifts of real estate, closely held stock or tangible personal property for charitable gift annuities.
Special Considerations
Deferred gift annuity donors are generally younger than people who arrange immediate payment gift annuities. “Baby Boomers” often see deferred gift annuities as a way to supplement retirement savings while minimizing income taxes during their peak earning years. However, deferred gift annuities may be attractive to any donor who needs a large income tax deduction in a particular year and has the ability to wait several years before receiving the initial annuity payment. Several private IRS rulings have approved “flexible deferred gift annuity” plans whereby donors may choose an initial starting date for payments, but have the option to then continue postponing payments for several more years – resulting eventually in larger payments.
