Seven Lesser-Known Ways To Use A Gift Annuity

Introduction

A gift annuity is a popular planned giving tool. They have been around for over 100 years. They are easy to understand, simple to set up and don’t have the higher administrative costs associated with other charitable giving techniques.

The popular conception is that income from a gift annuity is available only for the donor’s lifetime or for the lifetime of the donor and his or her spouse. But there are a number of additional ways one can use a gift annuity. After summarizing the most common uses, I’ll outline several other lesser-known ways to use a gift annuity, including making your church a beneficiary.

Donor’s Lifetime Only

This is the most common and straightforward way a gift annuity is structured. You contribute cash or an appreciated asset to your church in exchange for a life income. At your death, the church keeps your contribution for its use.

For as Long as You and Your Spouse Live

You can also set a gift annuity up to pay out for as long as either you or your spouse lives. This is the joint and survivor gift annuity option.

Seven Other Ways to Use a Gift Annuity

1. With a Survivor or Joint Option for You and Another Person.

The other annuitant does not have to be your spouse. For example, a woman could establish a gift annuity for her and her sister.

2. For the Life of Someone Other than You

You might want to set up a gift annuity for someone other than yourself. Examples would include a child or sibling who has special needs.

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

Most gift annuities are paid out monthly, quarterly, semi-annually or yearly. Normally, the payments begin within the first year. However, it is possible to defer the start of the payments for a number of years.

An example of a deferred payment annuity might be a gift annuity you set up at age 55 for yourself. You stipulate that it will not pay income to you until you reach age 65 or 70. The funds would supplement your retirement income. This type of plan has the dual advantage of higher income paid and a larger charitable gift deduction.

4. As an Education Fund for a Child or Grandchild

This type of gift annuity would be created when the child is quite young. When the child is ready for college or reaches a stated age, the fund begins to pay out for a stated number of years. The drawback of this type of fund is that there is no way to guarantee that the money will be used for educational expenses.

5. Re-insured Option Gift Annuity

In my opinion, this technique should be employed more often because it provides cash for the church immediately.

Instead of holding the contribution to a gift annuity, then investing and paying out the promised payment, the church buys a commercial immediate annuity from an insurance company. The insurance company is instructed to send the (i.e. quarterly) payments to the church and a check is cut to the donor.

The way this works is that the cost of the immediate annuity is less than the amount needed to pay the required income to the donor. The church then keeps and uses the difference. Those considering this option should keep in mind that a number of factors will affect the cost of the immediate annuity, including the current interest rate and the donor’s age.

6. Exchanging a Charitable Remainder Unitrust for a Gift Annuity

If you are the income beneficiary of a charitable remainder unitrust (CRUT), you can exchange this interest for a gift annuity. This move can satisfy many objectives.

This gives you another charitable income tax deduction for the new gift annuity. The advantage to the charity is that is frees up money immediately that may be needed for a building campaign.

7. Create a Gift Annuity at Death With an IRA

Part or all of an IRA account can be used to create a gift annuity upon your death. This would provide a reliable and consistent source of income for a surviving spouse for as long as he or she lives. The funds would go to the church upon the spouse’s death.

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.