The Most Adaptable of Gifts

Charitable Gift Annuities (“CGAs”) are a wonderful split interest gift arrangement.  The donor receives an income stream, receives an income tax deduction, and if the CGA is funded with appreciated assets, is able to avoid a portion of the capital gain tax.  The charity benefits by receiving the asset used to fund the CGA.  This unique win-win arrangement for donors and charities enjoys increasing popularity.

Most CGAs are designed to begin paying the income stream immediately.  They are called current gift annuities.  Others are structured to begin paying the income stream at some future date.  If the payment is to begin in one or more years, it is considered a standard deferred annuity.

While standard deferred annuities provide an excellent arrangement for deferring income, the disadvantage is that the annuitant must decide, when the contract is written, when the payment stream is to begin.  The donor is locked into a specific beginning payment date which cannot be changed.  In many circumstances, deferred annuities would be more attractive to donors if there were greater flexibility.

In 1997 Frank Minton and David Wheeler Newman requested a ruling on what has become known as a Flexible Deferred Annuity.  In PLR 9743054, the Internal Revenue Service approved the use of this arrangement.  With the flexible deferred annuity, the donor selects a target date and age to begin receiving payments.  The contract is written so that the donor can take the annuity earlier or later than the target date.  The income tax deduction is based on the target date, and therefore if the donor opts to take payments before the target date, then the payments would be reduced.  Alternatively, if the donor decides to delay the beginning of his or her payments until after the target date, the payout amounts are at a higher rate.  The longer the donor waits, the higher the payout.

A synonym for the word flexible is the word adaptable.  This word seems to appropriately describe this type of arrangement.  As many of us have seen, some donors feel they don’t have enough, despite their commitment to our cause and their net worth.  This is true even with donors that are committed to leaving assets to charity at their demise.  They hesitate making irrevocable gifts of their net worth during their lifetimes.

The flexible deferred annuity provides the “best of both worlds”…it allows the donor to purchase an annuity that has a strong income component which the donor can control as he/she wishes.  The donor can defer making the decision to begin annuity payments until he/she actually needs the income.  The longer the donor waits, the higher the payout.  Additionally, the donor has the joy of making a current gift to charity while benefiting from the deduction.

Because of the flexibility of the deferral, we expect that many of the flexible contracts that have been written will never be exercised simply because the donor does not need the income.  With that in mind, we suggest that you consider writing a series of contracts and not just one large one.  For example, if a donor is considering a flexible deferred $100,000 contract, why not write four individual $25,000 contracts?  Using this strategy, the donor can decide when to begin receiving income and how much income he or she will receive.  It is possible that the donor will utilize only some of the annuity contracts, leaving the others untapped.

Both Crescendo and PG Calc’s software are capable of producing flexible deferred annuity illustrations.  Crescendo’s GiftLaw provides information on this subject in article 3.4.2.  Additional information on flexible deferred annuities can also be found in Chapter 18 of PG Calc’s Charitable Gift Annuities: The Complete Resource Manual.  Of course, the staff at Cornerstone Management is also available to work with you as you consider offering this type of CGA arrangement.

Ray Tyler is one of the founders of Cornerstone Management and currently serves as President.  He spends much of his time providing deferred gift consulting to Cornerstone’s clients. 

Learn more about Cornerstone Management’s services: OCIO, Planned Giving, Gift and Estate Consulting, and Asset Management Consulting services.