Standard Deferred Annuity
With a standard deferred annuity, the payout is deferred for one or more years. However, there is a fixed date for payout. The disadvantage of the standard deferred annuity is that the annuitant is locked in to a specific payment date and amount. If he or she desires to retire earlier or later, the standard deferred annuity does not change. Deferred annuities would be more attractive to donors if there were greater flexibility, similar to the options available with a commercial annuity.
Flexible Annuity
In PLR 9743054, the Service approved the use of a flexible annuity. (A private letter ruling is not permitted to be used as a precedent, but it does indicate the potential Treasury position on an issue.)
With a flexible deferred annuity, the donor selects a target date and age for retirement. However, the annuity contract permits the donor to take the annuity earlier or later than the target date. Since the income tax deduction is based upon the target date, if the donor decides to start the annuity in an earlier year, there will be a reduced payout. The payout is reduced to the level that produces the same income tax deduction as the target year.
Alternatively, if the donor decides to wait until after the target date to receive annuity payments, the ACGA recommended rates are used for the longer deferral period. These rates are based on the rate for the age at which payment is commenced, adjusted for the period of deferral between the funding date and the annuity starting date. Since the rate is based on the ACGA payout rate, the tax-free amount will be adjusted accordingly.
Some flexible deferred annuity donors may choose to take the reduced rate at an earlier time. Others may decide that they do not need income and may choose a later starting date with a higher payout. Finally, some may not require the income at all upon retiring and may choose to give the contract back to the charity and receive an income tax deduction at that future date.
Example 3.4.2A
Mary Desires Fixed Income During a Future Retirement
Mary Wilson desires to benefit from a current income tax deduction. She also would like to have the option of receiving an income during retirement, but is not certain at what age she will retire.
Mary transfers $100,000 cash to a charity to fund a flexible deferred payment gift annuity. She selects age 65 for the target date. The deferred annuity rate is 7.3% and the charitable income tax deduction is $38,291. Mary's contract allows her to start receiving payments at any age between 60 and 80. If she starts receiving payments prior to age 65, the annuity rate will be reduced accordingly. In addition, the tax-free amount may increase with the longer deferral period. With this flexible annuity, she may - for example - select a payout of $5,088 at age 60, $7,300 at age 65 or even $18,200 at age 80.
Election
The annuitant must elect by written notice to commence payment of a flexible deferred annuity. If the annuity is a two-life annuity, the election may be made by either annuitant. The election must be made one payment period prior to the desired annuity start date. Below is a sample election letter and an example election.
Example 3.4.2B
SAMPLE: FLEXIBLE DEFERRED ANNUITY ELECTION LETTER
Dear _____________("Gift Planner"),
On________("Date"), _______________("Donor(s)") signed annuity agreement No. ________________ ("Annuity No.") with ___________________ ("Charity"). In consideration for the property transferred, _________________ ("Charity") agreed to pay __________________ ("Annuitant(s)") for life/lives an annual annuity of the amount set forth in Schedule B of the annuity agreement in equal ______________ ("Frequency") payments with payouts at the end of each period.
The annuity agreement provided for the first payment to commence upon written election made by the Annuitant one payment period prior to the desired payout date. Under Paragraph 2 Flexible Annuity Election of the agreement, I make this election to commence gift annuity payments at the applicable Schedule B payment rate. I hereby irrevocably elect a starting date for payments on _____________________, __________.
Annuitant Name: _______________________________ Date:_____________
Sincerely,
Annuitant
Example 3.4.2C
Flexible Annuity Election Made by John Stock
John and Mary Stock signed a two-life flexible deferred gift annuity agreement on April 29, 2030 with Favorite Charity, a qualified exempt charity. The gift annuity was funded with $100,000 in appreciated stock. Favorite Charity agreed to make quarterly payments to John and Mary for their lives and payments could commence as early as January 15, 2033, but no later than the year 2044. Payments would commence upon written notice by either John or Mary one payment period prior to their desired payout date. In October 14, 2034, John retired and elected to begin taking annuity payments as of January 1, 2035. John signed the following letter provided by the gift planner of Favorite Charity.
Flexible Annuity Election Letter
Dear Ms. Mueller,
On April 29, 2030, I, John Stock, signed annuity agreement No. 4229786 with Favorite Charity. In consideration for the property transferred, Favorite Charity agreed to pay John and Mary Stock for our lives an annual annuity of the amounts set forth in Schedule B of the annuity agreement in equal quarterly payments with payouts at the end of each period.
The annuity agreement provided for the first payment to commence upon written election made by the annuitant one payment period prior to the desired payout date. Under Paragraph 2 Flexible Annuity Election, I make this election to commence gift annuity payments at the applicable Schedule B payment rate. I hereby irrevocably elect a starting date for payments on January 1, 2035.
Annuitant Name: John Stock Date: October 14, 2034
Sincerely,
John Stock
