Transforming Life Income Gifts into Current Gifts
Life income gifts are always deferred gifts. The arrangement is made now, but the charity’s use of the funds is delayed until a future date, normally the death of the donor and any other individual beneficiary of the gift arrangement.
Unfortunately, the donor of a life income gift usually does not get to see the gift in action, and the charity is unable to address pressing current needs. Converting a life income gift to a present gift can be both emotionally satisfying to the donor and immensely beneficial to the charity.
Which Donors Might Consider Converting a Life Income Gift to a Current Gift?
It is common for donors to establish life income plans (remainder trusts, gift annuities and pooled income funds) because they want to make a gift to charity but are concerned about outliving their resources. Some of these donors subsequently realize they were being overly cautious about making a gift. They conclude that they do not need the income and more income just means more income tax.
In addition, some donors simply want to see their money put to use by the charity during their lives.
Gift of the Annuity Interest in a Charitable Gift Annuity
The great majority of charities follow the gift annuity rates promulgated by the American Council on Gift Annuities (ACGA). These rates are designed so that an average of 50% of the donor’s original gift remains for the issuing charity when the annuity ends. Based on the ACGA’s surveys of hundreds of charities, most annuities actually leave a residuum well above 50% of the original gift. However, some annuities can run out of money, and the charity is then stuck with paying the annuity out of other funds so long as the annuitants are alive. By all practical definitions these annuities stop being a gift and instead constitute a net liability to the issuing charity. Annuitants whose contracts are already exhausted, or are nearing exhaustion, may consider surrendering their income interest once you bring this option to their attention. Even annuitants whose contracts have healthy residua may choose to reduce the burden on the issuing charity to make sure there is enough left at the end to be useful for the purpose they wish to support.
When an annuitant assigns her annuity to the charity, the value to the charity is the present value of the remaining annuity payments, computed as of the date of assignment. However, the income tax charitable deduction available to the donor will often be less than that. The analysis is complex, but typically the deduction for the surrender of an income interest in a gift annuity is limited to the present value of the annuitant’s income interest or the unrecovered investment in contract (the remaining tax-free and capital gain income), whichever is less.
Gift of the Income Interest in a Charitable Remainder Trust or Pooled Fund
The beneficiary of a charitable remainder annuity trust, unitrust, or pooled income fund can claim an additional income tax charitable deduction for a gift of all or part of their income interest. It’s important to note the beneficiary could choose to just do a partial surrender of her income. The beneficiary would still get an additional deduction for a proportionate share of the interest surrendered and charity would still get a partial distribution from the remainder trust or pooled fund.
Mechanics of Surrendering an Income Interest
The surrender of the income interest in a life income plan, whether partial or in full, is accomplished through written documentation signed by the beneficiary or annuitant. The document acknowledges the annuitant or income beneficiary’s surrender of the right to receive income going forward in the remainder trust, gift annuity, or pooled fund. If the value of the additional deduction exceeds $5,000, the beneficiary or annuitant will need a qualified, independent appraisal in order to claim an additional income tax charitable deduction. The appraiser will need to complete Section B of Form 8283 and the benefitting charity will countersign the Form 8283 acknowledging receipt of the gift.
PG Calc offers appraisal services for these types of gifts. For more information, see our appraisal service page on our web site. You can learn more about the appraisal process in our frequently asked questions section and pricing information.