Why would a donor want to create a testamentary charitable gift annuity (CGA)?
In the past the reasons to create a testamentary CGA were simple – provide for someone like a caregiver with guaranteed retirement income, assist a child or grandchild with poor money management skills, or bless a family friend with retirement or lifetime income. Now there is additional incentive due to the latest IRA law changes in the SECURE Act of 2019. The Stretch IRA option is no longer available. Now non-spouse beneficiaries of an inherited IRA must withdraw the full balance of the IRA account within 10 years of the death of the original IRA owner. In Private Letter Ruling 200230018, the IRS ruled in favor of the IRA owner who requested the funding of a testamentary CGA from an IRA.1 This option would allow the IRA owner to create lifetime income for a non-spouse such as a child or grandchild – not to mention a gift at the end of the child’s or grandchild’s life to the original IRA holder’s favorite charity.
How would a donor create a testamentary CGA?
One can create a testamentary CGA by the retirement account beneficiary designation, a bequest in a will, or as a gift in a revocable living trust. The language could name a percentage of the estate or IRA, a specific dollar amount, or a specific asset such as a stock.2 The future annuitant(s) should be named with legal name, date of birth, address, and social security number of the annuitant(s).3 If the charity requires a minimum age before payout, then mention that a deferred annuity is an option if annuitants do not meet the organization’s minimum age requirement. The donor can specify the frequency of annuity payments. Also, the donor can designate where the residuum of any funds from the CGA should go after the annuitant(s)’ death. The donor should be mindful that the testamentary charitable gift annuity will be created at the time of his or her death, and therefore the donor should make the charity aware of the testamentary gift annuity.
What are some risks or concerns with testamentary CGAs?
- Who signs the gift annuity agreement? Since the donor is deceased, either the donor’s executor if from a will, the trustee if from a revocable living trust, or the annuity beneficiary if from a retirement account beneficiary designation can sign the annuity agreement. 2
- What is the gift date of the new annuity? The date of the annuity will be the date of death of the donor (not the date the funds are received by the charity). This will allow the donor’s estate to use the charitable deduction from the CGA on the final tax return.2
- How does the charity discover the information needed to create the annuity agreement? The charity will need the death certificate for the donor and the document naming the creation of the testamentary CGA.
- When do annuity payments begin? If the annuitant(s) do not meet the charity’s minimum age requirement for payout, then a deferred annuity can be created to move the first payment out to the minimum annuitant age. Otherwise, the organization can try to move the first payment out as far as possible since it may take some time to receive the funds for the new annuity. If the donor has added the clause to move the first payment out to one year and one day after the donor’s date of death, that will allow the charity time to receive the funds from the estate or IRA first before having to begin payments.
- What if conditions have changed, like the charity no longer exists? The document setting out the testamentary CGA should have instructions regarding what would happen if the charity no longer exists, if the annuitant is deceased before the donor, or if the charity is unable or unwilling to issue a CGA. The donor should give options for future unforeseen circumstances such as being able to designate another similar charity in its place.
What are the tax implications of a testamentary CGA?
“The entire amount used to fund a testamentary CGA is typically included in the donor’s taxable estate at death.”2 However, if the donor’s estate is taxable, the charitable deduction available for the CGA would apply to the estate. For this to apply, the date of the CGA must be the same as the donor’s date of death. The charitable deduction would be the excess of the funding amount of the CGA over the present value of the annuity (the value to the annuitant). 2
For the testamentary CGA from an IRA, it is important to remember that this new technique is available due to the private letter ruling from the IRS. Again, the value of the IRA at the account holder’s death in included in the donor’s gross estate per the IRS, but the estate may claim a charitable deduction for the portion exceeding the present value of the annuity.3 This scenario differs from a direct beneficiary designation from an IRA to either an individual (non-spouse) or a charity by combining features of both—income for a designated individual and a gift to charity—while still mitigating taxes.
As one can see, a charitable testamentary gift annuity may well be an estate planning tool that we will see more of in the days to come. Best to be prepared and ready to assist your donors with this innovative plan.
2 Bawden, Elizabeth. “Navigating the Twists and Turns of Testamentary Gift Annuities.” withersworldwide.com (accessed September 24, 2020)
3Raffin, JD, Ryan. Charitable Solutions, LLC ‘The Testamentary CGA: A “Stretch IRA” Alternative’