This fourth article in a series on real estate gifting issues covers charitable gift annuities. The first three articles cover options when donating real estate, outright donations and bequests, and bargain sales.
Commercial real estate professionals and their clients should consider all options when discussing the charitable donation of real property. Real Estate Gifting Realized, a new program launched by the CCIM Foundation, facilitates the donation of real estate to charitable organizations. A donation may be made directly to the CCIM Foundation or the Foundation can assist with the donation to a chosen charity.
Charitable Gift Annuities
A charitable gift annuity is when a donor transfers a gift of cash, securities, or real estate to a charitable organization in exchange for a guaranteed life income under a contractual agreement. The annuity may be single for one life or a joint annuity for the life of the donor and another person such as a spouse. The gift connected to the CGA is irrevocable to benefit the donee organization.
A charity receives the asset, sells it if necessary, and contributes the proceeds to a gift annuity reserve to make payments to the donor. The amount of the charitable deduction for the donor depends on the ages of the annuitants, the annuity rate, and the value of the gift. A portion of the annuity income may be received by the donor tax-free as a return of principal. The remainder will include ordinary income and capital gains. Any capital gains taxes on the asset transferred in exchange for the annuity are paid over the annuitant’s life expectancy. The charitable organization generally issues a Form 1099R, detailing this information.
The amount of the payment to the donor is fixed so there is no inflation protection. CGAs are not insured like bank accounts and certain other investments, so if the charitable organization becomes insolvent and is unable to make annuity payments, there is no recourse for the donor. Donors are often concerned with this possibility, so many charitable organizations utilize the services of insurance companies to reinsure the annuity.
There obviously is risk to a charitable organization when issuing an annuity, so many charitable organizations discount the fair market value of the property and issue an annuity for a percentage of the value, such as 85 percent of the value. Other charitable organizations look at the full fair market value but reduce payout rates by 15 percent. There also is an option of a deferred payment gift annuity, whereby payments don’t start for a period of time, generally 12 to 24 months, to give the charity time to sell the property.
CGAs cannot be issued in every state because of differing regulatory requirements. Gift annuity rates are established by the American Council on Gift Annuities, a national organization that suggests rates for nonprofit organizations to offer to annuitants. The recommended rates are based on age.
Before considering a CGA, donors should discuss the pros and cons with their advisers. The rules on charitable deductions to qualified charities are very detailed and require review at the time a charitable donation is contemplated as the rules may change or be impacted by current tax court decisions and case law.
Mary Stark Hood, JD, CFP, is president of the Hood Group, which provides consulting services to business organizations and foundations. She currently serves as a consultant to the CCIM Foundation’s Real Estate Gifting Realized Program.