In the ninth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James builds upon the previous chapter covering the charitable gift annuity, addressing the tax implications to the donor and the annuitant(s) when a gift annuity is made. Establishing a CGA is a simple task; figuring out the tax consequences is not.

The donor's income tax deduction is based on the projected amount passing to charity at the time of the gift (the "present value" of the remainder interest), not the actual amount when the last annuitant dies. A portion of each annuity represents a return on investment, which is not taxed, and also imputed earnings on the gift, which is taxed as ordinary income. If the donor gives appreciated property, in addition to some portion of the annuity being a return on investment and imputed interest, the donor will also recognize long-term capital gain ratably over the life of the annuity. If an annuity is funded with appreciated property and is payable to someone other than the donor, the donor will recognize capital gain immediately, rather than ratably.

The rules get more complex if the annuity is funded with mortgaged property, since the bargain sale rules apply to CGAs. Further, the calculations become more convoluted when the donor gives appreciated, unrelated use property, which is deductable at cost basis, instead of fair market value.

In addition to income tax consequences, there may be gift tax and generation-skipping tax implications, assuming the annuitant is not the donor, particularly if the annuity payments exceed the gift tax exclusion for gifts of a present interest.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 9 and the entire book.