The “Double Gift” Gift Annuity

There is no official industry name for this technique  – but it is certainly not new.  What am I talking about?

An inquiry came in last week about a donor renouncing their interest in a gift annuity (i.e. giving up the income so that the charity can use the funds now).  This is actually a great idea which happens to offer more tax benefits to the donor.

I ran a hypothetical gift illustration:

  • $100,000 CGA by a couple both 72 in 2006
  • 5.4% CGA rate according to ACGA, deduction approx. $45,000
  • Oct. 2011, donors both alive at age 78 decide to give up income
  • Approx. $65,000 new charitable deduction in 2011 for giving up right to income

How can it be that both deductions exceed the original cash gift amount?

Deduction calculations are based on the present value of the income stream – which is dependent on the AFR/mid-term bond rate.  When you create a gift annuity, the higher the AFR, the higher your deduction (since the AFR is your investment assumption for the life expectancy of the annuitants, the higher it is means that there is more left for charity).

But, when you donate your right to the rest of the income stream, a lower AFR – Oct. 2011’s 1.4% being the lowest ever – you actually want the present value of the income stream to be higher.  A low AFR (i.e. investment assumption) technically means that you would need more money to cover the lifetime income stream.  Therefore, the present value of the income stream is higher and since you are now donating the income stream, you get a nice new deduction.

Ok, I know I have over simplified this issue.  The point though is that your past CGA donors may not need that income stream anymore.  They may never have needed it but used a CGA to get past their own fears of parting with their money.  The new deduction is just a bonus, the real enjoyment is the fact that the charity can now use the money for something worthwhile during the donors’ lives.

Definitely something to consider talking to your gift annuity donors about, especially since they don’t need to write you a new check.

And, if they do it before the end of the year, I am promising you that they will be entitled to a nice, new deduction because they can use that 1.4% AFR through December 31.

If anyone is interested, comment or email me and I will explain how I do the deduction calculation and the complications regarding appraisals, etc…


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