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

The BDQ (Big Dumb Question)

We’ve all been there: at some point during a presentation someone says, “This may be a dumb question, but…” and the presenter (hopefully in a gracious tone of voice) says, “There’s no such thing as a dumb question,” before providing the obvious answer. But sometimes, just to yourself, you have to admit you were wondering about the same thing.

That’s the idea behind this occasional series we’re calling “The Big Dumb Question” (or BDQ). Our aim is to provide easy to understand answers to basic gift planning questions – the kinds of questions you may be reluctant to ask. We’ve got a list of topics in mind (see below).

The Assignment Revocation Rigmarole: A Gift Annuity Pushmi-Pullyu

The provisions of the “IRA Legacy Act” provide a limited opportunity for donors to make a qualified distribution in exchange for a charitable gift annuity. This new option comes with several constraints, including a requirement that the gift annuity contract cannot be “assignable.” This restriction has triggered some discussion about assignment and revocation of life income gifts.

But wait, aren’t gift annuities irrevocable?
Yes, charitable gift annuities are irrevocable. Period. The donor makes an irrevocable charitable contribution today in exchange for a contract promising a stream of payments for one or two lifetimes. The annuity is irrevocable, meaning that the donor cannot change or cancel the contribution once it has been made and the annuity contract issued.

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.

More Big Dumb Questions

Here are some of the BDQs we have addressed or plan to:

If there are other BDQs you’d like answered, let us know. You can remain anonymous, of course!

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