Charitable Gift Annuities

Immediate Payment Charitable Gift Annuities

Immediate Payment Gift Annuities are time-tested contracts between donors and Luther Seminary. In exchange for a gift of cash or other assets, the seminary promises to pay an annuity amount (at least annually) to the donor (or other named beneficiary) for his/her lifetime or for a predetermined number of years. Although regulated in many states, charitable gift annuities are relatively simple and secure. Typically, charitable gift annuities provide a fixed, secure income stream to an individual or couple for as long as they live.

Moreover, a charitable deduction is generated at the time the gift is made. The deduction amount varies, depending upon the age(s) of the donor(s) and the applicable federal rate (also known as the discount rate) in effect at the time the gift is made. The deduction may typically range from 35% to 50% of the gift amount. Annuity rates depend upon the age of the donor, not whether or not the charitable deduction or discount rate is high or low.

A portion of each annuity payment is tax-free for a number of years (the life expectancy of the donor). The tax-free income results in a higher taxable equivalent yield. The agreement is funded with appreciated assets such as stock, capital gain is partially avoided and taxed over the donor’s life expectancy. To the extent capital gain income is recognized, the tax-free portion of the income decreases.

Upon the death of the last income recipient, the contract terminates and the residue is used, as the donor wishes, to support Luther Seminary’s mission.

Example:
Fred, age 72, is retired and would like to increase his annual income but is looking for a secure, fixed return. He supports the seminary with annual gifts, but would like to establish an endowed scholarship for qualified Luther Seminary students following his death.

Solution:
Fred contributes $50,000 (proceeds from a matured CD) to Luther Seminary through its charitable gift annuity program. In return he receives a fixed annual payment of $3,450 (6.9%). The annuity amount will be paid quarterly for as long as he lives. Nearly 37% of his gift amount is deductible as a charitable contribution. If he is unable to fully use the charitable deduction in the year the gift is made, he may roll the unused portion forward for up to five more tax years. Almost two-thirds of his annual payment will be tax-free for 14.5 years (his life expectancy). Upon Fred’s death, the remaining annuity value will be transferred to his named endowed scholarship account that will provide scholarship support to deserving Luther Seminary students (as stated in the annuity agreement).

IRS discount rate of 4.2% used for calculations

Deferred Payment Charitable Gift Annuities

Deferred Payment Charitable Gift Annuities are very similar to immediate payment charitable gift annuities, except that with deferred annuities, payment of the annuity amount is usually deferred to a specific future date stated in the agreement – quite often when current income is projected to be lower (such as in retirement). Payments must be deferred a minimum of one year from the date of gift. Deferred payment charitable gift annuities are often used as retirement supplements, but may also be used to help with college expenses. (See commuted annuities, next page.)

A charitable deduction is generated at the time the gift is made. Because of the deferral, the deduction is typically larger than with an immediate payment gift annuity. The deductible amount will vary depending upon the age of the donor, length of the deferral period, and the applicable federal rate (also known as the discount rate) in effect at the time the gift is made.

Usually, a portion of each annuity payment is tax-free for a number of years (the life expectancy of the donor). This results in a higher taxable equivalent yield. If the agreement is funded with appreciated assets such as stock, a portion of the capital gain is not taxed. Taxable capital gain is normally taxed over the donor’s life expectancy. To the extent capital gain income is recognized, the percentage of tax-free income decreases.

Example:
Ann, age 55, would like to provide additional retirement income when she reaches 70 years of age. She also would like to make a gift in support of Luther Seminary and, because she is at the peak of her career, would benefit from a current year charitable deduction.

Solution:
Ann contributes $10,000 (from a money market account) to Luther Seminary through its charitable gift annuity program. She elects to defer receipt of her first payment until she turns 70. In return, she will receive a fixed annual payment of $1,440 (14.4%) fifteen years from now. This amount will be paid quarterly for as long as he lives. Nearly 40% of her gift amount is deductible as a current year charitable contribution. If she is unable to fully use the charitable deduction in the year the gift is made, she may roll the unused portion forward for up to five more tax years. Nearly 27% of her annual payment will be tax-free for 15.9 years. Upon Ann’s death, the remaining annuity value will be used for the general support of Luther Seminary (as stated in her annuity agreement).

IRS discount rate of 4.2% used for calculations

Commuted Payment Charitable Gift Annuities

Commuted Payment Charitable Gift Annuities are sometimes called a “College Annuity Plan” because they are frequently used to help a young person finance part or all of an education. The donor names a young person as the annuitant, determines the starting date, the frequency and amount of each payment, and the number of years that payments will be made. At the end of the payment period, the contract terminates and the residue is used to support Luther Seminary. Donors will need to discuss gift tax consequences with their advisors.

Example:
Mary and Martin would like to make a gift that would provide them with additional income to help fund their 13-year old daughter’s college education, and eventually fund an endowed scholarship at Luther Seminary.

Solution:
Mary and Martin contribute $50,000 to Luther Seminary in exchange for a commuted payment charitable gift annuity. They defer receipt of the first payment for four years – when their daughter is about to enter college. The contract provides that their daughter will receive $10,000 annually (semi-annual payments of $5,000) for five years. Payments will be taxed to their daughter and a portion of each payment will be tax-free income. Mary and Martin receive a charitable income tax deduction of $11,742 in the year the gift is made.

IRS discount rate of 4.0% used for calculations

Flexible Payment Charitable Gift Annuities

Flexible Payment Charitable Gift Annuities are simple contracts in which the seminary agrees to pay the annuitant a fixed sum each year for life, with payments beginning at least one year after the gift date. Unlike deferred payment charitable gift annuities, the annuitant does not have to select a date of first payment at the time the contract is signed. Rather, the donor may select from a range of payment dates set forth in the contract. The longer the donor defers receipt of the first payment, the greater the payment will eventually be. As with other charitable gift annuities, part of each payment will be tax-free for the donor’s life expectancy.

Example:
Dan and Mary, ages 73 and 72, wish to support the seminary’s capital campaign but are reluctant to part with assets outright. They do not need additional income at this time, but may need the income at some future date.

Solution:
Dan and Mary contribute $50,000 to Luther Seminary to fund a flexible payment charitable gift annuity. Beginning one year from the date of gift, they may begin receiving annuity payments of $3,250 annually. If they defer receipt of payments another year, they payment increases $200 and the percentage of tax-free income also increases. Their income tax deduction is based upon a one year deferral. The annuity becomes fully taxable once the donors outlive their joint life expectancy.

IRS discount rate of 4.2% used for calculations