Thursday April 25, 2024
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6.3.2 Deferred Gift Annuity
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Deferred Gift Annuity
Charitable Income Tax Deduction: The fair market value of the contributed property, the corresponding payout rate, the applicable federal rate (AFR), the beneficiary's age, the payment date and the payment frequency are all needed to perform the deduction calculation.
Taxation of Annuity Payments: One of the major benefits of a charitable gift annuity is partly tax-free income.
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The principal difference between a current annuity and a deferred annuity is that the first deferred annuity payment must be more than one year after the date of funding. With a deferred annuity, there is a period of deferral until the annuity starting date. After the annuity starting date, the annuity is treated the same as a current annuity.
The current rates for deferred payment gift annuities are effective as of July 1, 2018. The annuity starting date is defined by the IRS as one period prior to the first payment date. Reg. 1.72-4(b)(1)(ii). For example, a quarterly payment gift annuity has a starting date of one quarter prior to the first payment.
Deferred payment gift annuities use the deferral period to calculate the deferred factor. Based on the deferral period in an actual numbers of years (calculated to four decimal points), there will be a 3.75% increase each year in the deferred annuity factor. This factor is then multiplied by the payout rate on the annuity starting date. The Treasury regulations require using the annuity starting date for all other purposes; thus, it is desirable for the deferred payment rates to be calculated in this manner.
ACGA Rates for a Single Life [Effective July 1, 2018]
| Age | Rate |
| 5-15 | 3.0 |
| 16-20 | 3.1 |
| 21-24 | 3.2 |
| 25-28 | 3.3 |
| 29-34 | 3.4 |
| 35-38 | 3.5 |
| 39-41 | 3.6 |
| 42-44 | 3.7 |
| 45-47 | 3.8 |
| 48-49 | 3.9 |
| 50-51 | 4.0 |
| 52-53 | 4.1 |
| 54 | 4.2 |
| 55-56 | 4.3 |
| 57 | 4.4 |
| 58 | 4.5 |
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| Age | Rate |
| 59 | 4.6 |
| 60-61 | 4.7 |
| 62 | 4.8 |
| 63 | 4.9 |
| 64 | 5.0 |
| 65 | 5.1 |
| 66 | 5.2 |
| 67-68 | 5.3 |
| 69 | 5.4 |
| 70 | 5.6 |
| 71 | 5.7 |
| 72 | 5.8 |
| 73 | 5.9 |
| 74 | 6.1 |
| 75 | 6.2 |
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| Age | Rate |
| 76 | 6.4 |
| 77 | 6.6 |
| 78 | 6.8 |
| 79 | 7.1 |
| 80 | 7.3 |
| 81 | 7.5 |
| 82 | 7.7 |
| 83 | 7.9 |
| 84 | 8.1 |
| 85 | 8.3 |
| 86 | 8.5 |
| 87 | 8.7 |
| 88 | 8.9 |
| 89 | 9.2 |
| 90+ | 9.5 |
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Charitable Income Tax Deduction
The fair market value of the contributed property, the corresponding payout rate, the applicable federal rate (AFR), the beneficiary's age, the payment date and the payment frequency are all needed to perform the deduction calculation.
The charitable deduction for a deferred payment gift annuity is adjusted for the deferral period using Pub. 1457, Table H. To illustrate how the deduction is calculated, consider Jane Donor who creates a charitable deferred gift annuity on June 1, 2017 to begin paying June 30, 2018. Jane is 75 years old. The fair market value of the property used to fund the annuity is $100,000. Jane's annuity has a payout rate of 6.2%. The AFR for the month of June is 2.4% and Jane has selected quarterly payments. Using this information and IRS Pub. 1457, the charity's gift planner creates the following charitable deduction worksheet.
The upper section lists Jane's name, birth date, gift amount, gift date, date of first annuity payment, cost basis in the property and payment frequency.
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| Deferred Payment Gift Annuity -- One Life |
| Donor: |
Jane Donor |
Prop. Value: |
$100,000.00 |
Gift Date: |
6/1/2017 |
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| 1st Person: |
Jane Donor |
Birth Date: |
06/01/1942 |
Pay Date: |
06/30/2018 |
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| Cost Basis: $100,000.00 |
IRS Ann. Starting Date: |
03/30/2018 |
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| Payment
Freq.: Quarterly (Payments at End of Selected Period) |
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| Annuity Percentage: |
6.2% |
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| (A) Annual Payout: |
$6,200.00 |
(A) |
Gift Amt. x Annuity %
AFR of the Month: 2.4 |
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| (B) D Factor: |
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| Age: 76
| 10,238.396627 |
(B) |
| Age: 75
| 10,901.179747 |
(B) |
| (IRS Pub. 1457, Table H) |
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| (C) D Factor/D Factor: |
0.939201 |
(C) |
| (D) Unadjusted Value $1, Ann. Start Age: |
8.8463 |
(D) |
| (IRS Pub. 1457, Table S) |
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| (E) Adjustment for Time of Payment: |
1.0090 |
(E) |
| (IRS Pub. 1457, Table K) |
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| (F) Adjusted Factor: |
8.9259 |
(F) |
| Line(D) x Line(E) |
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| (G) Value $1 of Deferred Annuity: |
8.3832 |
(G) |
| Line(C) x Line(F) |
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| (H) Present Value of Annuity: |
$51,975.84 |
(H) |
| Line(G) x Line(A) |
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| (I) Amount Transferred: |
$100,000.00 |
(I) |
| (J) CHARITABLE GIFT VALUE |
$48,024.16 |
(J) |
| Line (I) less Line (H) |
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| Deferred Payment Gift Annuity -- One Life |
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| (K) Unadjusted Expected Return Multiple |
11.9 |
(K) |
| (Reg. Sec. 1.72-9, Table V) |
| (L) Adjustment if Not Monthly |
-0.1 |
(L) |
| (Reg. Sec. 1.72-5(a)(2)) |
| (M) Adjusted Expected Return Multiple |
11.8 |
(M) |
| Line (K) Plus Line (L) |
| (N) Expected Return |
$73,160.00 |
(N) |
| Line (M) Times Line (A) |
| (O) Exclusion Ratio |
71.0% |
(O) |
| Line (H) Divided By Line (N) |
| (P) Amt. Excluded From Ordinary Taxation |
$4,402.00 |
(P) |
| Exclusion Ratio Times Annuity |
| (I.R.C. Sec. 72(b)(3)) |
| (Q) Basis Allocated to Annuity |
$51,975.84 |
(Q) |
| Basis Times Line (H)/GIFT |
| (R) Gain Allocated to Annuity |
$0.00 |
(R) |
| Line (H) Less Line (Q) |
| (S) Capital Gain Each Year |
$0.00 |
(S) |
| Line (R) Divided By Line (M) |
| (Not to Exceed Line (P)) |
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SUMMARY OF DEFERRED PAYMENT GIFT ANNUITY
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Date of Annuity |
6/1/2017 |
Initial Age |
75 |
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Date of First Payment |
6/30/2018 |
Start Age |
76 |
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Payment Age |
76 |
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Amount Transferred |
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$100,000.00 |
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Annual Payout |
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$6,200.00 |
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Char. Deduction |
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$48,024.16 |
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EXCLUSION RATIO UNTIL 2029 |
71.0% |
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(If current IRS Tables effective) |
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Lines (A) through (J) are used to determine the charitable deduction.
(A) To calculate the amount the annuity will pay Jane, the gift annuity value is multiplied by the annuity payout percentage. The annuity payout percentage of 6.2% is multiplied by the $100,000 gift, which produces an annuity payout of $6,200. This means that Jane will receive $6,200 annually, or $1,550 quarterly. The annuity payout amount is rounded up to the nearest two, four or 12 cents (depending on the type of payment chosen: semiannually, quarterly or monthly) in order to ensure that all payments are the same to the exact cent, thus simplifying administration. In Jane's case, no rounding is necessary because the payments divide equally. The AFR for the month of the gift or for either of the two prior months may be used to determine the charitable deduction under Sec. 7520. With an annuity, if the annuitant desires greater tax-free payments, the lowest AFR is preferable. Therefore, Jane's gift planner selects a 2.4% AFR.
(B) The next step is to calculate the Dx factor. The Dx factor is found in Pub. 1457, Table H. Locate the chart that has the correct AFR at the top. The annuitant's age is listed on the right side of the chart. The factor needs to be found for Jane's age at the first annuity payment (76) and again for Jane's age at the annuity creation (75). The respective factors are 10,238.396627 and 10,901.179747.
(C) Once the two Dx factors have been found, the factor for Jane's age at the first payment (75) is divided by the factor for Jane's age at the annuity creation (68). The corresponding number is the usable Dx factor (10,238.396627 / 10,901.179747 = 0.939201).
(D) The next step is to calculate the annuity factor. The annuity factor for a single life is determined using Pub. 1457, Table S. The appropriate chart in Table S is the one corresponding to the 2.4% AFR. Jane's age at the date of the first payment (76) must be found on the left side of the appropriate chart. The result is the unadjusted annuity factor. For Jane, the unadjusted annuity factor is 8.8463. In contrast, to find the annuity factor for a two-life annuity trust, Pub. 1457, Table R(2) is used. The appropriate chart in Table R(2) is the one corresponding to the chosen AFR. The beneficiaries' ages at the date of the first payment must be found on the left side of the appropriate chart. The result is the unadjusted annuity factor. Once the factor is found, subtract it from 1 and divide the result by the selected AFR. The product of the formula is the unadjusted annuity factor for two lives
(E) The next step is to determine the time adjustment factor. Because Jane selected quarterly payments, the time adjustment factor is found in Pub. 1457, Table K. Locate the appropriate AFR (2.4%) at the left side of the table and use the corresponding payment frequency (quarterly) to determine the time adjustment factor of 1.0090.
(F) The time adjustment factor is multiplied by the annuity factor to calculate the adjusted annuity factor. In the worksheet above, Line (D) is multiplied by Line (E). Jane's time adjustment factor of 1.0090 is multiplied by the annuity factor of 8.8463 to produce the adjusted annuity factor of 8.9259.
(G) This section is a determination of the deferred gift annuity rate. The factor is determined by multiplying the usable Dx factor of 0.939201 by the adjusted annuity factor of 8.9259. Line (C) is multiplied by Line (F) to produce the deferred gift annuity rate of 8.3832.
(H) Once the adjusted annuity factor is calculated, the present value of the annuity must be determined. The fair market value of the property transferred to the annuity is multiplied by the adjusted annuity factor. Line (G) is multiplied by Line (A). The adjusted annuity factor of 8.3832 is multiplied by the annual payout of $6,200 to produce a present value of $51,975.84.
(I) The amount transferred is the amount of cash or the fair market value of the property used to fund the annuity. Here, Jane contributed $100,000.
(J) Finally, the $51,975.84 present value of the annuity is subtracted from the $100,000 transferred to produce the charitable gift value. Here, $100,000 less $51,975.84 produces a $48,024.16 charitable gift value.
Taxation of Annuity Payments
One of the major benefits of a charitable gift annuity is partly tax-free income. Lines (K) through (S) on the charitable deduction worksheet provide the method for determining the taxation of the annuity payments.
(K) The unadjusted expected return multiple is the next item calculated and is found in Reg. 1.72-9, Table V. Jane's age at the date of the first payout (76) is on the left side of the chart. The multiple is shown on the same row. Jane's unadjusted expected return multiple is 11.9.
(L) If the annuity payments are to be made annually, semiannually or quarterly, an additional adjustment must be made. This adjustment is found in Reg. 1.72-5(a)(2). By locating the number of whole months from the annuity starting date to the first payment date, and following that column down to the row that shows the frequency under which payments are to be made (quarterly) the adjustment is found to be -0.1.
(M) Last, the adjusted expected return multiple must be calculated in accordance with Sec. 72. The unadjusted expected return multiple (11.9) is added to the frequency adjustment (-0.1) to produce an adjusted expected return multiple of 11.8.
(N) The expected return is calculated by multiplying the adjusted expected return multiple of 11.8 by the annual payout of $6,600. Thus, the expected return, or the amount that Jane can expect to receive over her life, is $73,160.
(O) The exclusion ratio demonstrates the amount of each annuity payment received that will not be taxed as ordinary income. To determine the exclusion ratio, the $51,975.84 present value of the annuity shown in Line (H) is divided by the $73,160 expected return shown in Line (N). Jane's exclusion ratio is therefore 71.0%. This means that 71.0% of each annuity payment Jane receives will be tax-free.
(P) Line (P) applies the exclusion ratio to the annuity payment to give the exact amount of each payment that will be excluded from ordinary taxation. The calculation is performed by multiplying the exclusion ratio of 71.0% by the annual payment of $6,200 to produce $4,402.00. This means that $4,402.00 of the $6,200 in annual payments Jane receives will be tax-free.
(Q) Another component of each annuity payment is the tax-free return of basis, or principal. This is calculated by allocating the basis to the annuity payments. Jane's basis in the contributed property is $100,000 because she made a gift of $100,000 cash. The basis of $100,000 is multiplied by the present value of the annuity shown in Line (H), or $51,975.84, then divided by the amount of the gift, or $100,000. This formula produces a result of $51,975.84, which will be the amount of the $100,000 basis that will be allocated to the annuity payouts. In other words, $51,975.84 of the total payments Jane receives will be tax-free return of basis.
(R) The third potential component of each payment is gain. The gain allocated to the annuity is calculated by subtracting the basis allocated to the annuity (Line (Q)) from the present value of the annuity (Line (H)). The gain allocated to the annuity is the present value of the annuity of $51,975.84 less Jane's basis allocated to the annuity of $51,975.84. In other words, Jane has no gain to allocate to the annuity because she made a cash gift in return for the annuity. If Jane had given appreciated property in return for the annuity, she would have gain that could be allocated to the annuity.
(S) The gain each year can be computed by dividing the gain allocated to the annuity (Line (R) by the adjusted expected return multiple (Line (M). In this case, the formula would be 0 divided by 11.8, giving Jane a gain each year of 0. This amount should never exceed the amount excluded from ordinary income (Line (P)).
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