BDQ #3: The Assignment Revocation Rigmarole: A Gift Annuity Pushmi-Pullyu

So, what’s all this chatter about revocation and assignment clauses?
Gift annuity contracts can, and often do, include provisions giving the donor the right to assign the annuity to the charity. Essentially, the donor reserves the right to surrender the annuity and accelerate the final contribution to charity. If the annuitant happens to be someone other than the donor, assigning the annuity to the charity would revoke the remaining payments to the annuitant.

Why would an annuitant surrender their income interest?
Life is unpredictable, and there could be circumstances under which the annuitant no longer wants or needs the annuity payment. The annuitant may want to accelerate giving the charity the residual from the gift annuity during their life. Or, if the annuity is about to run dry, the annuitant may give up the income to relieve the charity of the obligation to make payments. Finally, an annuitant might be able to take an additional income tax charitable deduction equal to the value of the remaining income interest from the annuity.

Why include an assignment clause if the donor is not the annuitant?
An assignment or revocation clause clears the way for early surrender of the gift annuity. Such a clause also helps manage the potential gift tax liability when a donor creates a charitable gift annuity naming someone other than herself as the annuitant. In that case, she has made a current gift to the annuitant equal to the present value of the annuity payments over the annuitant’s lifetime. This gift could potentially trigger the need for the donor to file a Gift Tax return. The donor might owe a gift tax if she previously used up her Unified Gift and Estate Tax credit. However, if the donor reserves the right to revoke the annuitant’s annuity, then the amount subject to potential gift taxes is only the value of the current year’s payment.

So why all the rigmarole now?
The Legacy IRA Act legislation requires that a life income gift funded with a qualified charitable distribution must be “non-assignable.” It seems Congress’s intention was to ensure that the income interest could never be assigned to anyone. (It’s likely Congress wanted to be sure annuitants continued to pay income tax on their gift annuity payments.) However, the non-assignment requirement is very broad and seems to preclude gift annuity provisions allowing assignment to the charity.

I see, but what about those pesky State regulations?
Good question. Some highly regulated states require charities to submit their gift annuity contracts for pre-approval. For many years, the standard language for gift annuity contracts has included a common provision allowing assignment of the annuity to the charity. If you are registered to issue annuities in one of these states, you may need to consider amending your state approved contracts or seeking approval for an alternate form without the assignment clause.

In the end, the rigmarole over revocation and assignment clauses in charitable gift annuity contracts seems a bit like Dr. Doolittle’s Pushmi-Pullyu: it is an interesting discussion that, ultimately, goes nowhere.