Thursday April 18, 2024
|
|
|
|
|
3.3.7 Annuity Contract to Charity
|
|
|
Annuity Contract - State Property Right
When a gift annuity is created, the annuitant receives the right to annuity payments for his or her lifetime. This annuity stream is a property right under state law that may be valued. Under Sec. 1011 bargain sale rules the donor has made a gift to charity, but has retained the balance of the value for the annuitant or annuitants. While the annuity contract typically does not allow assignment, there is an exception that allows assignment of the annuity contract value back to the issuing charity.
Irrevocable Assignment of Annuity Contract to Issuing Charity
Through a signed and dated writing, the annuitant may transfer the contract back to the charity. Some annuitants no longer need annuity payments and desire a charitable deduction. For example, an annuitant may be receiving progressively larger distributions from his or her IRA. Consequently, the annuity income is less important than a charitable deduction that could offset taxable distributions from the IRA. After the annuitant irrevocably assigns the annuity contract to the charity, the charity has no further obligation to make annuity payments.
Example 3.3.7A Assignment of Annuity Contract
Dear Charity Executive:
I am currently the income recipient of a one life gift annuity. Gift annuity agreement No. 12345 was created on December 13, 2004 between George Washington, 123 Main Street, Anytown, Illinois 60606 and your organization, known as the Charity, 123 Main Street, Anytown, Illinois 00000.
The gift annuity was funded with $10,000 in cash. Under its terms, Charity pays to me an annual annuity of $730 in equal quarterly payments. My birth date, Social Security number and address are July 11, 1938, SSN 123-45-6789 and 123 Main Street, Anytown, Illinois 60606.
Under the agreement terms, the annuity contract is irrevocable and nonassignable, except that it may be assigned to your charitable organization. Since it is my voluntary desire to make a charitable gift of the annuity contract, I hereby irrevocably give and assign all my rights and interest in gift annuity agreement No. 12345 to the Charity. The Charity shall have no further payment obligations under this agreement and may use any annuity reserve value for its charitable purposes.
Sincerely yours,
_____________________ Date: _______________
Donor-Annuitant
Income Tax Deduction
An annuitant who transfers the annuity contract to the issuing charity makes a gift to the charity of the contract value on the date of the assignment. The calculation of the contract value may be completed using all of the parameters from the initial gift annuity agreement, with several modifications for the gift date the date of the gift, date of the contract to the charity and the AFR. See GiftLaw Pro 6.1.1 for further instructions. Because the annuity contract assignment qualifies for a charitable deduction, Sec. 7520 permits selection of the applicable federal rate for the gift month or one of the prior two months. In valuing the annuity contract, the lowest AFR will produce the highest contract value.
Sec. 72(a) characterizes annuity payments other than the investment in the contract as ordinary income. Sec. 170(e)(1)(A) requires charitable deductions to be reduced by the ordinary income portion. Therefore, the irrevocable assignment of a gift annuity contract to charity will usually be subject to a reduced deduction.
Lesser of Basis or Contract Value
The deduction for an irrevocable assignment to charity of an annuity interest varies depending on the type of asset originally used to fund the annuity. For annuities funded with cash, the deduction equals the lesser of any unrecovered basis or the present value of the annuity contract on the date of the irrevocable assignment. For annuities funded with long-term appreciated property, the deduction equals the lesser of any unrecovered basis plus capital gain or the present value of the annuity contract. Sec. 170(e)(1)(A), Reg. 1.170A-1(c)(1). This deduction is treated as an appreciated property contribution and may be deductible up to 30% of the donor's AGI.
This "lesser of" rule may especially be applicable with deferred annuities irrevocably assigned to charity before payments have commenced, but can also apply to immediate annuities. If the gift annuity was funded when there was a low applicable federal rate (AFR) and the AFR is much higher on the date of the irrevocable assignment, the fair market value of the contract on that date may be less than the unrecovered basis.
In testamentary situations, the estate of the last surviving annuitant may only deduct the unrecovered basis under Sec. 72(b)(3), since there is no contract present value at death of the annuitant.
Because the annuity contract assignment qualifies for a charitable deduction, Sec. 7520 permits selection of the applicable federal rate for the gift month or one of the prior two months. In valuing the annuity contract, the lowest AFR will produce the highest contract value.
Example 3.3.7B Gift of Annuity Contract Funded With Cash
Mary Johnson funded a gift annuity on Aug. 8, 2013 with $10,000 cash. She was age 82 and the gift annuity paid 7.7%, or $770. Her initial deduction was $4,826 and the investment in the contract was $5,174.
On March 15, 2018, she decided to give the annuity contract back to charity. At age 87, she was withdrawing substantial payouts from her IRA, no longer needed the annuity income and desired to make a gift to the charity. Using an AFR of 3% and the March 15, 2018 gift date, the life annuity contract value is $3,880. Because she has been recovering a portion of her basis each year, her remaining basis is $2,328. Her deduction is the lesser of contract value or unrecovered basis, or $2,328.
Example 3.3.7C Contract Value Less Than Unrecovered Basis
Bill Smith funded a gift annuity on August 2, 2016 with $20,000 cash. He was 73 and the 5.5% gift annuity produced an income tax deduction of $7,877. The investment in the contract was $12,123.
On March 15, 2018, he decided to give the annuity contract back to charity. At age 75, Bill no longer needed the annuity payments and desired to make a gift to the charity. Using an AFR of 3% and the March 15, 2018 gift date, the life annuity contract value is $10,549. Since he had been recovering a portion of his basis each year, his unrecovered basis is $10,735. Because the contract value is lower than the unrecovered basis, Bill's deduction is the contract value of $10,549.
Treatment of Gains in Appreciated Property Annuity Interest Assignments
For gift annuities funded with appreciated stock or real estate by a donor-annuitant, capital gain allocated to the investment in the contract is prorated over the annuitant's life expectancy. If a contract with unrecognized capital gain is irrevocably assigned to the issuing charity, then under Reg. 1.1011-2(a)(4) there is no recognition of capital gain. The charitable deduction will be the lesser of the contract value on the date of assignment or the unrecovered basis plus the unrecognized capital gain.
If the annuitant has reached life expectancy, recovered all basis and reported all capital gain, all further payments are ordinary income. Under Sec. 170(e) there is no charitable deduction for a gift of an ordinary income asset. The irrevocable assignment of that annuity contract qualifies the donor only for a very gracious thank-you letter from the issuing charity.
Example 3.3.7D Gift Of Appreciated Property Gift Annuity Contract
Bill Smith funded a gift annuity on August 2, 2013 with $20,000 of stock that he had bought ten years earlier for $4,000. He was 78 and with an AFR of 2%, the 6.4% gift annuity produced an income tax deduction of $9,370. The investment in the contract was $10,630.
On December 5, 2016, he decided to give the annuity contract back to charity. At age 81, Bill no longer needed the annuity payments and desired to make a gift to the charity. Using an AFR of 1.6% and the December 5, 2016 gift date, the life annuity contract value is $9,303. Because he had been recovering $203 of basis and reporting $810 capital gain per year, his unrecovered basis is $1,451 and unreported capital gain is $5,807. The total unrecovered basis and unreported capital gain is $7,258. Because the unrecovered basis and unreported capital gain total is lower than the $9,303 contract value, Bill's deduction is $7,258.
Two Life Gift Annuity Contract Gifts
Two life gift annuity agreements are usually for a married couple or parent and child. If a married couple both irrevocably assign their contract to the issuing charity and file a joint income tax return, then the tax deduction is reported on that joint return. If one of the spouses passes away, the present value of the annuity contract is based on the life of the survivor. With a one life contract value, it is very possible that the unrecovered basis is greater than the contract. However, the deduction will be limited to the fair market value of the one life gift annuity contract.
Example 3.3.7E Gift Of Two Life Annuity Contract
Bill and Mary Smith funded a two life gift annuity on Dec. 1, 2013 with $20,000 of stock that they had purchased ten years earlier for $4,000. Bill was 78 and Mary was age 75. The 5.2% gift annuity produced an income tax deduction of $7,634. Their investment in the contract was $12,366.
Bill and Mary are now receiving the gift annuity payouts for their lifetimes. On December 6, 2016, they decided to give the annuity contract back to charity. At ages 81 and 78, they no longer needed the annuity payments and desired to make a gift to the charity. Both irrevocably assigned their income interests and their contingent future interests to the issuing charity. Using an AFR of 1.6% and the 12/6/2016 gift date, the two life annuity contract value is $10,979.
Because they had been recovering $161 of basis and reporting $647 capital gain per year, the unrecovered basis is $2,016 and unreported capital gain is $8,061. The total unrecovered basis and unreported capital gain is $10,077. Because the unrecovered basis and unreported capital gain total is lower than the $10,979 contract value, their deduction is $10,077.
Example 3.3.7F Gift By Survivor of One Life Annuity Contract
Bill and Mary Smith funded a two life gift annuity on Dec. 1, 2013 with $20,000 of stock that they had purchased ten years earlier for $4,000. Bill was 78 and Mary was age 75. The 5.2% gift annuity produced an income tax deduction of $7,634. Their investment in the contract was $12,366.
Bill passed away quite suddenly during the fall of 2015. Mary is now receiving the gift annuity payouts for her lifetime. On December 6, 2016, she decided to give the annuity contract back to charity. At age 78, Mary no longer needed the annuity payments and desired to make a gift to the charity. Using an AFR of 1.6% and the 12/6/2016 gift date, the life annuity contract value is $8,594.
Because she had been recovering $161 of basis and reporting $647 capital gain per year, her unrecovered basis is $2,016 and unreported capital gain is $8,061. The total unrecovered basis and unreported capital gain is $10,077. Because the unrecovered basis and unreported capital gain total is higher than the $8,594 contract value, Mary's deduction is the lower amount of $8,594.
Parent Child Gift Annuity Contract Gifts
If an annuity is issued for a parent and child, normally the parent retains a testamentary power of revocation. The income interest of the child is contingent upon nonexercise of that power of revocation. If the parent irrevocably assigns his or her interest and the child also assigns the second contingent interest, the charity's payment obligations terminate. Since the parent owned both the first life income interest and the power of revocation, the parent will report the applicable income tax deduction. Because the interest of the child was contingent and not yet vested, he or she receives no income tax deduction.
With a parent-child two life gift annuity, the parent may decide to relinquish his or her annuity interest, and permit payments to commence to the child. Under state property law and applicable state insurance regulations, this relinquishment of the annuity interest may be permitted. In this case there is no federal income tax deduction for the parent. While the present value of the parent's annuity interest may be calculated, there is a contingent interest that precedes the potential charitable benefit - the life income interest of the child.
Contingent charitable gifts are subject to the "so remote as to be negligible" standard. For example, a gift of land to a city was subject to a contingency. If the city did not use the land for a public park, the donor's children would have the right to recover the land. The risk of the city not creating a park and its subsequent reversion to the children was negligible. Therefore, the gift and income tax deduction was permitted. Reg. 1.170A-1(e).
If the child lives to normal expectancy or beyond, there is no added charitable benefit for the relinquishment of the parent's interest. Because the actuarial probability that the child could live to normal life expectancy or beyond is much greater than the "so remote as to be negligible" standard, there is no charitable income tax deduction for the parent's relinquishment of his or her annuity interest.
Steps To Complete An Annuity Contract Gift
There are four possible steps in completing an annuity contract gift. These are as follows.
- Donor Letter of Gift. The donor signs a letter of gift similar to the letter above. The charity may replace all applicable information in the sample letter with the annuitant's information. For a two life annuity, also include the information for the second person.
- Valuation of Deduction. The charity must calculate both the contract value on the date of the gift and the unrecovered basis. If the gift annuity was funded with appreciated property, the unreported gain is also determined. For a current gift annuity, Crescendo provides the complete calculation. Crescendo users should load the Present Value Gift Annuity Program 82. Load the prior record or enter the information from the original gift annuity. In the Data Entry page, check "Gift of Contract to Charity" and enter the date of the delivery of the Donor Letter of Gift. Print both the original deduction and income tax schedule and also the "Gift Annuity Contract to Charity" page. The contract value, unrecovered basis, unreported capital gain and applicable income tax deduction are printed at the base of the Gift Annuity Contract to Charity page. For a deferred gift annuity, Crescendo users should consult GiftLaw Pro 6.1.1 "Present Values" and follow the steps about Deferred Charitable Gift Annuity in "Present Value Calculations in Crescendo - IRS Method vs. CFO Method" section.
- Receipt For Donor. If the value of the deduction is over $250, a receipt is required. In all cases, a receipt from the charity to the donor is recommended.
- Appraisal Over $5,000. Because the gift annuity is a noncash asset, if the deduction value is over $5,000 an appraisal is required. The appraiser must have college-level education in gift annuities, two years of experience and certify its educational and professional qualifications to appraise a gift annuity interest. Sec. 170(f)(11)(E)(ii). Notice 2006-96; 2006-46 IRB 1.
|
|
|
|
|
|
|
|
|
|
|
© Copyright 1999-2024 Crescendo Interactive, Inc.
|
|
