Equal Annual Contributions
Most retirement plans are funded with regular contributions until retirement. One planning option with a series of deferred annuities is to fund one annuity contract each year. All the contracts may be established to have the same payout date and schedule.
An illustration may be prepared that shows the contribution, the estimated tax deduction and payout. Since the Applicable Federal Rate will change each year and the ACGA rates may change, the actual contracts must be recalculated on a year-by-year basis. However, the illustration will show the approximate payout and tax deduction benefits.
Example 3.4.4A
Mary Wilson would like to supplement her other retirement plans with deferred payment gift annuities. She transfers $20,000 per year for eleven years into gift annuities. The first 10 contributions are deferred payment gift annuities and the final contribution is a current year gift annuity.
Based upon the estimated payout rates and charitable deductions, she will receive significant benefits. The $220,000 of contributions will result in an annuity at retirement of approximately 6.4%, or $11,120. During the 10 years, she will have received charitable income tax deductions of $65,490. While the contracts will be recalculated and the exact amounts will vary, this estimate shows the approximate tax deduction and income available during retirement.
One to Six Contributions
An individual may choose to fund a series of gift annuities over a period of years. For example, a donor may wish to transfer securities over a term of three years in exchange for gift annuity contracts. Since the securities may vary in value, the illustration will permit a different amount and a different cost basis for each contribution, up to a maximum of six contributions. As is also true with equal annual contributions for deferred gift annuities, the future contributions are merely estimates. When the value of the stock is known and the Applicable Federal Rate has been released by Treasury, then the final calculation can be done for each contract in future years.
Term of Years Retirement Annuities
A qualified gift annuity must initially be written for one life or two lives. Sec. 514(c)(5). However, some individuals desire a deferred payment gift annuity for a term of years. This deferred annuity could provide supplemental income between the initial retirement date and the time when another retirement plan will commence payouts. For example, an individual over 59 ½ could convert a one- or two-life deferred annuity to a term of years gift annuity. The term of years payments may "bridge" the gap between retirement and the selected age for IRA or other pension plan payments.
Example 3.4.4B
Mary Wilson desires to create an agreement that would provide supplemental income between ages 65 and 70. At age 70, she plans to start taking withdrawals from her IRA.
Mary uses an asset with a cost basis of $20,000 and a fair market value of $100,000 to fund a one-life deferred gift annuity. The deferred payment gift annuity will pay $6,400 per year. However, the agreement uses the Applicable Federal Rate for the month of the gift and allows her up to three months to elect to convert the one-life agreement to a term of five years. Within two months, Mary gives the charity written notice that she elects to receive the term of years payment.
Mary receives a charitable gift deduction of $31,839. The annuity contract value allows her to receive for the term of years an annuity of $19,409.04 annually. Of this amount, $683.85 is tax free, $2,740.15 is capital gain and the balance is ordinary income. Mary receives the payout for five years and then starts taking withdrawals from her IRA.
