Charitable Gift Annuity: Tax Issues

Oh goodie—tax issues! Yay!

You're to be excused for sarcastically thinking that. Just know that there's a minimum of actual IRS gobbledygook involved in what follows, as the intent here is to lay out different factors for your consideration in the CGA planning stages. 

  1. A gift of appreciated securities is often appealing because the tax on the capital gain is reduced and spread out over the life time of the annuitant(s). This is the case if the benefactor or benefactors spouse receive the annuity payments—if the annuitant is someone other than the benefactor, please seek further advice.
  2. A testamentary gift annuity for the benefit of a spouse, funded by the decedents IRA, may be a really smart tax-advantaged idea.
  3. The older the donor, the higher the annuity rate and the larger the charitable deduction, and a greater portion of the annual income is tax free.
  4. Your organization’s obligation to make annuity payments may not be secured by specific assets.
  5. Assets transferred to create a CGA for the benefactor and surviving spouse should qualify for the gift tax marital deduction and avoid estate taxation as well.
  6. The income tax charitable deduction uses IRS tables to calculate the gift portion of the assets transferred to your organization.
  7. The Applicable Federal Rate (Discount Rate) is set each month by the IRS and is used in the calculation of charitable deduction and tax-free portion of annuity payments. The benefactor may choose the rate for the current month or the rate from one of the two previous months. The higher the AFR, the larger the charitable deduction and the lower the tax-free portion of the annuity payment.
  8. A portion of the donor’s basis in the transferred asset is assumed to be returned tax-free to the designated annuitant(s).
  9. Recommended rates are figured to the nearest birth date of the annuitant(s) – 6 months prior and 6 months following the actual date.
  10. The benefactor’s cost basis and capital gain, if any, is allocated between the gift portion and the annuity portion.
  11. Any capital gain may be spread out over the annuitant’s lifetime (rather than taxed immediately) if the benefactor is the sole annuitant or the benefactor and a survivor are the annuitants, provided the annuity is not assignable to third parties other than your organization.
  12. The annuity payments are taxed by allocating the benefactor’s basis and any capital gain over the annuitant’s lifetime and treating the balance of the annuity payment as ordinary income.*
  13. There MAY by gift or estate tax considerations if the benefactor designates a non-spouse as the sole or surviving annuitant. When a benefactor creates a CGA for someone other than the benefactor or the benefactor’s spouse, the benefactor must be aware that in such a transaction the benefactor is making a gift to that person. The gift is equal to the present value of the income interest (the difference between the fair market value of the assets given for the CGA and the charitable income tax deduction).
  14. An alternative may be for the benefactor to retain the right to revoke the income interest and thereby forestall the taxable transfer and the gift tax implications for the benefactor.  
*NOTE: If the CGA is funded with securities and the annuitant is not the benefactor or the benefactor's spouse, the capital gains will be reportable by the benefactor at the time the gift is made. Capital gains cannot be spread over the life of the CGA in this situation. As such, in this circumstance, cash may be a better funding medium for the benefactor.