Reporting the Unrecovered Investment in Contract – an Act of Stewardship

A donor’s investment in contract in a gift annuity equals the present value of the annuity payments received by the donor over his or her lifetime. A donor’s unrecovered investment in contract equals the total amount of tax-free payments that he or she would have received had he or she lived to reach life expectancy, minus the total amount of tax-free payments the donor actually received while alive. Capital gain income is not considered when computing an annuitant's unrecovered investment in contract.

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If a donor dies prior to reaching his or her life expectancy and there is no surviving annuitant, the IRS allows an income tax deduction on the deceased donor’s final income tax return for his or her unrecovered investment in contract. This is a miscellaneous deduction, not a charitable deduction. Moreover, the deduction is not subject to the 2% floor that applies to certain miscellaneous deductions, so every dollar of unrecovered investment in contract is deductible, not just the amount that exceeds 2% of adjusted gross income.

When a donor dies, you should report any unrecovered investment in contract to the donor’s executor. While not a requirement, it is a thoughtful final act of stewardship that will be appreciated by the family or heirs.

How to compute the unrecovered investment in contract?

In GiftWrap, the unrecovered investment in contract, if any, is automatically computed when the death of the final annuitant is recorded.  The value is displayed on the Final Log provided by the Record Death function and stored in the Gift Information Screen on the Details tab.

In Planned Giving Manager and Gift Annuity Manager, the value can be computed in a simple process:

  1. Select Basic Gift Illustrations.
  2. Enter all the facts of the gift annuity as they were on the date of the gift.
  3. Go to the Menu bar and select Tools > Deduction for a Gift Annuity Termination.  The gift details will be loaded into the form or, if not, click the Reload button.
  4. Select Death of last annuitant as the reason for the termination, then enter total amount paid in the final year and the year of final payment.

Update:

In PGM Anywhere, the value is computed as follows:

  1. Enter all the facts of the gift annuity as they were on the date of the gift.
  2. Select Presentations, then select Termination of Gift Annuity. A follow-up window will open.
  3. Enter the date of death and the total annuity amounts paid in the year of the termination. “Death of last annuitant” should already be selected as the “Reason for termination” and “Computed automatically” as the “Annuity taxation schedule for calculation.” Click Close.
  4. Select Results. The unrecovered investment in contract appears on the last line of the Termination of Gift Annuity chart.