This Isn’t Your Grandfather’s Gift Annuity PART II: Six MORE Advanced CGA Applications

Gift annuities are the oldest, simplest, and most popular life income giving vehicle (there are more gift annuities than all other split interest gifts combined!).  But that doesn’t mean they can’t provide solutions to complex assets or planning goals.  Last month, we at Charitable Solutions, LLC, discussed The Now-N-Later Impact CGA, The Testamentary Stretch IRA CGA and the Crypto CGA. This month, there are the following six new, advanced applications.

#1 The S-Corp UBIT CGA.

We all know that S-Corps don’t work well with CRTs (see 100% UBIT tax).  But most don’t realize that a trust-form DAF issuer of a S-corp CGA may drive down the UBIT tax to 8% (and possibly 0% in 2021!)  This allows donors to have a fixed life-income donation issued on roughly 90% of the fair market value as a deferred, flex-deferred, or immediate annuity.  This can work with an active LLC or debt-financed real estate.

#2 The Deduction Stretch CGA

Most advisors and donors know that a charitable deduction can only be used in the year of the gift, plus an additional five carry-forward years.  There is no way to increase that…unless there is!  What if a donor, who has no interest in receiving a life income, calibrates the donation between an outright donation and a deferred CGA such that the entire deductible amount can be used over the six years?  Then, after the full deduction is used by year seven, the donor simply revokes some, or all the deferred CGA.  That triggers a new charitable income tax deduction for a new six-year period.  For all the donors who wish to donate more – or have CPAs who tell them they shouldn’t - but don’t want to lose any deductions, this is a simple solution.  Even better, the future donation can be triggered in ANY year at ANY amount to be even more optimal.

#3 The Term of Years Commuted CGA

Gift annuities can only be issued over 1 or 2 lives – there is no period certain per se.  You may, however, issue a CGA over a lifetime(s) but then commute or shorten the period with higher payouts.  On a present value basis, it has the same tax results, but this can accomplish goals you may not have considered.  The classic example is a College Annuity – a parent or grandparent establishes a CGA over an annuitant’s life, but then sets the deferred start date to when a child turns 18 and stops at 22.  This creates four years of very large payments.  But this approach can also be used in any situation to provide a term payment.  We were recently referred a case of a testamentary CGA for a non-spouse beneficiary providing income for 10 years. This can open possibilities for someone with a shorter than normal life expectancy.

#4 The CRT Punt to CGA

You may have learned in life that things seldom go as expected.  Let’s imagine that someone established a Charitable Remainder Unitrust some years back, but the performance has not been as expected, the administration is a hassle, circumstances have changed (the donor is older and wants fixed income) and it is now worth $475,000 (less than the trustee’s minimum required balance).  What to do?  The donor can donate the life income interest in the CRT in exchange for a CGA.  This allows the CRT to collapse, and then the CGA contract is funded by the full current balance.  All the new goals are accomplished through this relatively straightforward solution.

#5 Retained Life Estate for CGA

Many donors, especially now, are house rich and perhaps cash poor.  Maybe they have already taken care of their kids and wish to leave their house to charity.  One recent case we completed is where the donor didn’t have children and said, “I don’t want my estate to be a burden to my two nieces and nephew who all live out of state.  And I have a lot of equity in my home and planned to leave it to charity but would love to have some additional income.”  Our charity, and perhaps others, can front the income payments during the donor’s life as a CGA issued on the retained life estates [note: this strategy tends to work best when the donor is at least 85 years old, and the home/equity is greater than $500K].  In this way, the donor can get a current income tax deduction, which would have been lost by giving the home through her will; she effectively creates a charitable reverse mortgage without all the costs/complexity; she avoids probate, and she provides a legacy gift to the charity(ies) of her choice.

#6 Testamentary Spendthrift CGA

Charitable Solutions has worked on two $25 million+ gift annuities in the last few years that have had identical donor goals: 1) provide a fixed amount to heirs with low/no administration, 2) have no investment risk, and 3) direct the remainder/residuum to charity.  One option would be to create a spendthrift trust to provide guaranteed income. However, that involves legal docs, a trustee, administrator, investment advisor, fees, etc.  An easier option is to simply create a testamentary gift annuity.  The CGA is a very simple and inexpensive way of accomplishing all the goals with the full residuum granted to the charity(ies) of the original donor’s choice (kind of like a Q-Tip provision).

While last month’s webinar covered three additional advanced planning strategies, think of how these additional six strategies might create particularly interesting combinations.  Could you have a Now-N-Later Impact CGA combined with a S-Corp UBIT CGA and a Deduction Stretch CGA?  Yep.  A donor could fund a current and deferred CGA with S-Corp stock.  The current CGA could be used for the Impact CGA approach and the deferred CGA could be used for the Deduction Stretch approach.  Like Legos, there are a lot of interesting configurations based on the donor’s goals…I bet you are getting as excited as I am thinking about all the possibilities!

Please watch the webinar recording to dive deeper into these six advanced CGA topics presented by Bryan Clontz, Ph.D., CFP®, CAP®.