I remember one of the leading planned giving directors at one of the largest, most successful planned giving programs in the country showing me how “College Annuities” were going to revolutionize grandparent giving to day schools and/or for college tuitions.
So exciting. The day school plan was this: grandparent creates a commuted payment gift annuity that pays term annuity to child (used for tuition) and then at the end of the child’s stay in the day school, the remainder stays with the school’s endowment. At the time, our quandary was the “kiddie tax” – that the children were likely to pay income tax at their parents’ rates. The kiddie tax certainly put a damper on the plans as well as questions like “what if the kid leaves the school?” In truth, the NY State Dept. of Insurance hadn’t yet approved these commuted payment annuities so we were just getting ready for what we assumed was an imminent change (Ironically, NY never did approve them, as far as I know).
What happened to these revolutionary CGAs? Any planned giving professional can tell you stories about grandparents and parents wanting to do something for their offspring – this seemed to be a great solution to that problem.
Well, in preparing to give an advanced class on CGAs, I thought to expose the audience to the commuted payment annuity concept. Outside of NY, they can be done and I have done some with donors (just none with the day school or college tuition plan). So, I entered into PGCalc a 13 year old annuitant who would start receiving payments in 5 years for 5 years (college now take 5 years, if you hadn’t heard).
Lo and behold (to my own ignorance on this issue), PGCalc warned me of an unintended consequence of doing a commuted payment annuity with a “life” under age 59 1/2.
WARNING: THIS COMMUTED PAYMENT GIFT ANNUITY MAY BE SUBJECT TO INTERNAL REVENUE CODE SECTION 72(Q), WHICH IMPOSES A 10% PENALTY TAX ON PREMATURE DISTRIBUTIONS FROM ANNUITY CONTRACT TO ANNUITANTS UNDER AGE 59 1/2.
In my own quick research, I found a legal memo online that said that while the IRS did approve commuted payment CGAs over a series of Private Letter Rulings (Ltr. Ruls. 9527033, 9407008, 9108021, and 9042043), a negative consequence came to light in those rulings – that any commuting of annuity payments to someone under age 59 1/2 would be subject to the 10% early withdrawal penalty applicable to annuities under Section 72(q).
Ouch. Let’s forget there was ever such a thing as College Annuities. Outside of NY, we still have commuted payment CGAs but only for those older than age 59 1/2.