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| Best Practices: Matters of Trust |
To Give and Receive
Lani Luciano
06/01/2005
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While Allen could have earned 15 to 16 percent on his money with
a commercial annuity (male seniors receive the highest rates of any annuity
buyers), charities offered him lower rates to enable them to retain more capital
when annuity payments end. But Allen enjoys significant benefits for his
philanthropy. The difference between higher commercial and lower charitable
interest payments constitutes a tax-deductible contribution for him.
Additionally, if he dies earlier than mortality tables predict, his favorite
charity (rather than a profit-making company) reaps the windfall of the money
remaining in his annuity. “Two more good reasons to go with the charity,” he
says with a laugh.
 | | (Illustration by Jim Frazier.) |
CGA interest payouts are backed by the assets of the
charity, a fact that steers most buyers to large, stable nonprofits.
Universities are among the most frequent recipients, followed by the Salvation
Army and the Smithsonian Institution. More than 9 in 10 charities in the United
States follow an investment model set by the American Council on Gift Annuities
(ACGA), an educational and advocacy organization that recommends a conservative
portfolio of 40 percent equities, 55 percent 10-year Treasury bonds and 5
percent cash. “When charities follow these guidelines, they wind up, on average,
with 50 percent of the original donation retained after the annuity ends,”
explains Betsy Mangone, an ACGA board member. “The bigger risk is that the
charity will end up with less, not that the donor will.”
Still, CGAs are not
fail-safe. Only 10 states (Arkansas, California, Hawaii, Maryland, New Jersey,
New York, North Dakota, Oregon, Washington and Wisconsin) regulate charities
offering CGAs under state insurance laws, and require them to put aside adequate
reserves to cover their liabilities to annuitants. Each state has its own
definition of what constitutes an adequate reserve, but the calculation is based
on projected growth and liability potential, and the timeframe for the
annuity.
CGA buyers can find out how tightly their state regulates these
products, including the reserve requirements, by checking the ACGA website (www.acga-web.org). If regulation is loose in
your state or the charity you are considering is small, new or little known,
there are other annuity options that do not depend on the charity’s assets.
Charitable Remainder Annuity Trusts
You can, in essence, become your own
insurer for a charitable annuity by setting up a trust. Charitable remainder
annuity trusts (CRATs) offer a number of tax advantages over charitable gift
annuities if you want to donate highly appreciated assets, and they work well if
you want to name a young beneficiary.
With this type of annuity, he could donate a lump sum—in either cash or
equities—to a charity; in return the charity would pay him a fixed amount
of interest, usually on a quarterly basis. |
With this vehicle, instead of giving
the donation directly to the charity, you place the donated assets within an
irrevocable trust, naming a charity as the ultimate beneficiary. You and the
trustee—generally the charity—draw up an agreement that the trust will pay a
fixed income for a stipulated period to someone you designate. You can name
yourself or anyone else as income beneficiary and specify that payments continue
for either a limited term of at least 10 years or the lifetime of the
beneficiary, which is what makes a CRAT a viable choice for young beneficiaries.
The trustee fulfills the agreement by managing the trust assets, generally by
selling and reinvesting them. At the end of the prescribed period, the trust is
dissolved and the charity receives all remaining assets.
The primary
advantage of a CRAT lies in your ability to actually remove assets from your
estate, reducing your estate tax liability. Of course, if annuity payments are
set too high or the assets are poorly managed, a CRAT can conceivably run out of
money.
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