Charitable Gift Annuity Agreements:  Doing well by doing good

Q: What is a charitable gift annuity agreement?

A charitable gift annuity agreement is a legal contract, typed on plain paper and written in plain English, that allows a person or a couple to make a charitable gift of personal significance to the endowment fund of the Preservation Society and receive regular, fixed payments – an annuity -- for one or two lives.

Simply put, a gift annuity is a tax-favored way to make a major charitable gift while at the same time diversifying the sources of retirement income for a lifetime, regardless of residence and regardless of health.

Q: Why is the Preservation Society of Newport County offering gift annuities?

Charitable giving is assuming more importance in caring for the magnificent properties of the Preservation Society that characterize Newport’s architectural and cultural heritage.  A charitable gift annuity is a new option for people interested in supporting the continual need for large-scale historic preservation work of properties with national and even global significance.

We see gift annuities as an exciting choice to allow people the satisfaction of making a significant charitable gift for preservation and at an amount that would not otherwise be possible without the annuity payments and tax advantages in return.

Q: Getting started:  what are the two types of gift annuities?

There are two types of gift annuity agreements that depend upon when payments begin:

An Immediate Payment Gift Annuity  Upon funding the agreement, the annuity payments start to be received, usually within six months.  The minimum age for an immediate payment gift annuity agreement is 65.

A Deferred Income Gift Annuity  Individuals younger than retirement age can fund what is called a deferred payment gift annuity.  The longer the deferral period, the higher is the annuity rate.  The deferral period is usually a specific date in the future (such as a retirement date or for payments “later on” in retirement).  The minimum age to start the annuity stream is 65 years old and can be set for an older age as part of a retirement income strategy.

Another option is a Flexible Deferred Income Gift Annuity that allows the donor to choose the year in which their annuity payments will begin.

Q: What are the annuity rates?

Annuity rates are based upon the person’s age when the gift is received, and the annuity remains constant (fixed) for the lifetime of one or two beneficiaries named in the agreement.

A sampling of annuity rates for one-life immediate payment gift annuity agreements, effective February 1, 2009 (shown in five year increments-please contact us for a specific age):

Annuity rates for two-life agreements are slightly lower due to the longer combined life expectancies.

Here are examples of two-life immediate payment gift annuity rates, effective February 1, 2009 (also shown in five year increments):

Q: Who sets the annuity rates?

The gift annuity rates offered by the Preservation Society are in accordance with the American Council on Gift Annuities, an association of charities organized in 1927 that recommends uniform rates and procedures.  The rates quoted above went into effect on February 1, 2009.

There are about 4,000 charitable organizations in the United States that issue gift annuity agreements, according to the American Council on Gift Annuities.  The uniform annuity rates are periodically reviewed by ACGA actuarial and investment experts so that issuing charities can have confidence in growing their endowments while issuing annuity payments.

The Preservation Society of Newport County is a sponsor of the American Council on Gift Annuities and we encourage you to visit the ACGA web site for more information (and look for the Preservation Society listing under “Rhode Island”):  http://www.acga-web.org/

Q: How are gift annuities funded?

Either cash or publicly-traded appreciated securities can be used to fund a gift annuity agreement.  In order to best realize the benefits of a gift annuity for the individual and for the Preservation Society, the minimum gift amount to fund an annuity agreement is $10,000.

The range of gifts commonly accepted to fund a gift annuity in the United States are five-figure ($10,000+) and six-figure ($100,000+) amounts.  Gift annuity agreements have been funded in Rhode Island at amounts greater than $500,000.  The Preservation Society strongly recommends that your professional advisor be consulted before making any major charitable gift.

Q: Can appreciated stock be used to fund a gift annuity?

This is an excellent choice and best if the stock has been held (owned) for more than 366 days.  Low basis and low dividend stocks are ideal to give as the annuity payments may be greater than the dividend plus there are the tax advantages.  There is favorable treatment of a portion of the appreciated capital gain because it is evenly spread over the donor’s life expectancy.  Read on for more detail.

Q: How are capital gains treated if appreciated stock is used to fund a gift annuity?

There is a double tax benefit.  First, there is the charitable deduction that can be claimed in the year the agreement is funded.  A portion of the appreciated gain is included in the overall deduction amount.  Second, the appreciated gain that survives is equally apportioned over the remaining years of the donors’ life expectancy resulting in favorable treatment of capital gains taxation.  If the stock had been sold outright rather than given, the appreciation would have been subject to the capital gains tax all at once.

Q: Can a gift annuity be funded by a company gift or a donor advised fund?

IRS guidelines prohibit gift annuities to be funded by a company check or a third-party donor advised fund.  Neither can a gift annuity be funded with excess assets held in an Individual Retirement Account (IRA), although there is a proposed tax law change to allow this in the future. If that change should occur, we will announce it and update this web site.

Q: How are the payments made?

The annuity payment is made by check and on the date or dates specified in the agreement.  Frequency of payments can be semi-annually or annually as you decide.

Q: Who can help me consider the benefits of a gift annuity?

The Preservation Society.  Your professional advisor.  Your family.

The Development office of the Preservation Society has the people and software to run gift illustration benefits for a variety of dollar amounts, taxation impact, and personal circumstances.  A draft written agreement can be provided for your review and for your advisor’s review.  Please contact Jim Roehm for a confidential profile at (401) 847-1000 extension 142, or e-mail jroehm@newportmansions.org.

Your professional legal, tax, or investment advisor should also be involved.  They will know your individual circumstances and can most likely recommend the best asset to give as well as when to give it.  For example, to minimize a tax obligation, it may make sense to pull a major charitable gift into the current year rather than next year.  Your advisor may also compare the relative ease of making a gift annuity versus the many advantages of a charitable reminder trust.  We will be happy to work with your advisor as you direct us.

Your family – especially if you are interested in providing an annuity for a loved one – can be helpful in discussing and supporting your giving goals.  The discussion might inspire them to set up their own plan for giving.

Q: What documents does the Preservation Society provide?

Two originals of the formal gift annuity agreement are provided for mutual signature by the Preservation Society and the donor or donors.  One original is retained by both parties for their permanent records.

We provide the donor with documentation to substantiate the charitable deduction in the year of the transfer.  Also, every January, we will provide a Form 1099 that shows the tax-free portion of the annuity (while applicable), the apportioned capital gains for that year (if any), and the taxable portion.

Q: Why isn’t the charitable deduction equal to the gift amount?

In tax terms, a charitable gift annuity is a split-interest gift, meaning it is part gift and part annuity.  The donor is receiving something in return – the right to receive annuity payments for the rest of their life – so there is no charitable deduction for that portion of the agreement.  The charitable deduction is based upon the gift portion of the agreement.

Q: Can a donor add to an existing gift annuity agreement?

Because a gift annuity is specific to that gift at that time, it is not possible to add to an existing agreement.  The answer is to simply fund a new agreement.  A financial planning tip is to create a new gift annuity every year or two and realize the higher rate of return for the older age or ages.  Use of the fee-free gift annuity is a creative way to meet charitable giving goals as well as enhancing financial goals.

Q: Can a gift annuity be set up to benefit another person?

Yes.  Many gift annuity agreements are funded by a couple to make a meaningful gift and provide a payment stream as long as either individual is alive.  A gift annuity can also be set up to provide the annuity payment to one person and, upon their death, direct the payments to a second person.  A donor may also fund a gift annuity where all the payments are for the exclusive benefit of another person or persons.  This option has gift tax implications that will need to be addressed with a legal advisor.

Q: Can a gift annuity have a restricted purpose, such as for collections or for a particular property?

Unrestricted endowment giving has the greatest benefit to the Preservation Society since every property, program and service of the Society is supported.  A gift annuity may have a donor-restricted purpose for the eventual residuum as long as that purpose is acceptable to the Preservation Society and is in line with its Mission.

Q: How do Preservation Society gift annuity rates compare to those offered by other major charities?

The Preservation Society follows the recommended, and uniform, rates of the American Council on Gift Annuities, as do the vast majority of other issuing charities.  Having one standard schedule avoids the dilemma of charities competing on annuity rates.  In addition, all charities suffer when there is little or no residuum due to annuity rates being too high.

Q: What happens to the agreement at death?

The obligation to pay the annuity ends on the date of death of the beneficiary in a one-life agreement or on the death of the second beneficiary in a two-life agreement.  The residuum amount of the gift annuity is then applied to the Preservation Society purposes specified by the donor in the written agreement.  The residuum amount is made in the name of the donor or to honor the name of a loved one.

If the annuity donor and beneficiary should die before their actuarial life expectancy is reached, then their final income tax return is eligible for a credit for the annuity payments they did not receive.  The Preservation Society will provide the estate administrator with the calculation and all necessary documentation to claim the credit.

Q: Are gift annuity agreements available in all states?

Yes.  Charitable gift annuity agreements are available to residents of all fifty states.  Contract law governs gift annuity agreements and varies by state with Rhode Island, Massachusetts, and Connecticut being very supportive of this charitable giving option.  The American Council on Gift Annuities web site has a helpful map summarizing state regulations at http://www.acga-web.org/regsoverview.html.  The Preservation Society can also assist you with any questions about your particular state.  E-mail Jim Roehm at jroehm@newportmansions.org ).

Q: We live in Canada.  What about us?

Charitable gift annuity agreements are available to Canadian residents.  The concept of a charitable gift in exchange for an annuity is exactly the same while the method of calculating the annuity and the deduction are different.  Please contact your local legal or financial advisor to learn more.

Q: How would you summarize the benefits of gift annuities?

For an individual or for a couple:

- personal satisfaction of making a major gift for preservation efforts

- receiving a fixed stream of payments for the lifetimes of one or two people

- possibility of receiving greater payments from the same asset than at present

- converting a variable income to fixed and regular payments

- enhancing retirement or “later on in retirement” income

- no fees, other than review by your professional advisor

- Safety as the annuity is backed by all the assets of the Preservation Society

- removing an asset from possible estate taxation

- allowing one to make their “bequest” now for preservation work

- a generous charitable deduction in the year it is funded

- receiving payments that are partially free of income tax for a period of years

- favorable treatment of capital gain taxation

- a creative way to diversify one’s sources of retirement income

- recognition in the planned giving honorary Conservators Circle

For the Preservation Society:

- creates or enhances a life-long relationship with preservation work

- an immediate major gift to the endowment

- greater investment returns

- provides unrestricted or restricted purpose future funding

- allows the opportunity to receive repeat major gifts

- an irrevocable planned gift                    

Q: How do I learn more?

The Preservation Society of Newport County welcomes all inquiries.  For more information about charitable gift annuities, please contact Jim Roehm in the Development office, 424 Bellevue Avenue, Newport, RI  02840.  The telephone number is (401) 847-1000 extension 142 or by e-mail jroehm@newportmansions.org

The Preservation Society of Newport County is a sponsor of Leave a Legacy ®, a national public awareness initiative to encourage the making of charitable bequests for the continuation of good works.