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Recent Commentary

IRS Updates Applicable Federal Rates for June 2019

Thursday, May 16, 2019

The IRS has announced the Applicable Federal Rates for June 2019, including the Section 7520 rate of 2.8%.

Private Foundation Grant to Donor-Advised Fund

Monday, November 1, 2010

This case study illustrates how a private non-operating foundation can make a distribution to a donor advised fund to meet the minimum distribution requirement, while deferring a decision on the ultimate charitable distributees.

Visual Planned Giving - Chapter 8 - Introduction to Charitable Gift Annuities

Wednesday, January 23, 2019

In the eighth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James gives a brief overview of the charitable gift annuity or CGA. This charitable vehicle is a contract between the issuing charity, and the donor, in which the donor makes a gift to charity; in exchange, the donor and/or his designees receive payments for life. The payout is limited to one or two (but not more than two) annuitants, for their lives, with the remainder passing to charity. CGAs provide the donor with an immediate tax deduction equal to the present value of the annuity interest to be paid to the annuitant(s). This income interest must be less than 90% of the value of the gift; otherwise, the annuity will be subject to UBIT rules. In addition, IRS could treat the CGA as a commercial annuity, which could jeopardize the tax exempt status of the charity. Stated differently, the annuity will not qualify as charitable if the payment rates are calculated to return less than 10% of the present value of the gift to the charity when the annuitants die. The American Council on Gift Annuities recommends rates for charities, which are calculated to return 20% of the present value to the charity. Due to the relative simplicity of establishing a CGA, many charities will make them available for as low as $5,000.

CGAs are popular with older donors, who may fear outliving their money. By offering the donor fixed payments for life, the CGA can mitigate these concerns. Furthermore, they offer more certainty than other planned giving options like a charitable remainder trust, because they are not affected by market volatility. Nevertheless, CGAs are not risk-free. Most states do not regulate gift annuities, so the charity could receive the annuity funds, and spend them immediately. This may result in the charity being unable to meet its payment obligations in the future, or the charity could actually go bankrupt. Additionally, inflation may reduce the purchasing power of the fixed annuity payments. In short, advisers should investigate the financial health of the charity recommending a gift annuity.

Many charities offer variations on the traditional annuity. For example, a donor can opt to defer the income payments for several years, which results in larger sums when the annuity begins. Another popular option, dubbed the "college gift annuity," involves a donor naming a child or grandchild as the annuitant, with payments running for 4 years starting at age 18.

A charity incurs risk when offering gift annuities to donors. If donors outlive their life expectancy, the charities may receive a much smaller, or even nonexistent, benefit. Donors with charitable gift annuitants live longer, on average, then the IRS life tables. The charity can manage this risk by purchasing a commercial annuity on the donor's life, which essentially insures the annuity, but this reinsurance can be expensive.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 8 and the entire book.

Sanders Proposes "For the 99.8 Percent Act"

Wednesday, May 15, 2019

Senator Sanders' (I-VT) proposed legislation known as For the 99.8 Percent Act ("Bill") to amend estate, gift, and generation-skipping transfer tax provisions to tax the wealthy. The transfer tax would hit 588 billionaires in the U.S. the hardest, taxing their combined net worth of over $3 trillion to the tune of $2.2 trillion.