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A New Wealth Management Dimension
Nicholas Gregory ChFE, CEBA
The seldom used “coupling” of a charitable gift annuity with a single premium immediate annuity can provide clients with an easy and tax efficient means of garnering guaranteed payouts that are excluded from the estate with no market risk. Leaving out trust documents and legal fees, this strategy will simultaneously provide tremendous benefits to charitable organizations and increase the visibility of your practice. The charitable gift annuity is a contractual arrangement between a donor and a charity. The donor makes an irrevocable gift in exchange for guaranteed payments for life. The charity issues the gift annuity agreement, then sells (if necessary) the assets gifted, and places the funds into a separate account on behalf of the named annuitant. The charity can then either self-insure or reinsure its payout obligation while making the stipulated payments to the annuitant for life. Although the term “reinsurance” is misused in this context, the charitable community does refer to such an arrangement as “reinsurance.” It involves the purchase of a single premium immediate annuity contract by a charity from an insurance company. The insurance company guarantees the lifetime payments the charity is obligated to pay through a gift annuity agreement. The insurance company makes payments directly to the charity on the same periodic basis as the payout obligation that the charity has made to the named annuitant. The remainder (the amount donated less the reinsurance premium) is available to the charity immediately. Government regulations require charities that self-insure gift annuities to reserve 100 percent of the risk, effectively restricting the use of amounts contributed until the annuitant’s death. However, in most states, should 100 percent of the gift annuity risk be “reinsured” by an authorized insurance company, no reserves are required.
The following examples demonstrate how charitable “reinsurance” can be used for a variety of client planning goals:
Deferred Retirement Payments
John, a married 50-year-old father of two, wishes to supplement his retirement income by contributing $100,000 to a gift annuity and defer the lifetime payments to age 65. John can receive a substantial income tax deduction in the year of contribution and begin receiving an annual lifetime payout of over $10,5001 at age 65.
BREAKDOWN
Immediate Payments
Beth, age 75, is frustrated by the renewal rates of her bank certificates of deposit. Beth can use $100,000 of her maturing certificates of deposit to establish an immediate gift annuity. In doing so, she can generate an annual lifetime payout of $6,700 as well as a substantial income tax deduction.
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