Charitable Gift Annuity – Flexible :

An FGA is a form of a DGA. However, instead of setting a fixed date in the future for the start of payments, as the donor would with a deferred gift annuity, they can select a range of years or a “window” within which they can elect to start the payments.

With the flexible-start-date option, donors can set any number of years as a window to begin receiving payments. Then donors can wait to choose the payment start date until they’re ready. Because the annuity rate will be determined by the age and the number of years donors wait to receive the first payment, their lifelong income-payment rate will increase each year they decide to delay the first payment.

The donor’s income-tax charitable deduction is based upon the first year in the window he/she can start receiving payments. So if the donor decides that he/she wants to start receiving payments sometime in the window of 5 to 15 years from now, his/her income tax deduction is calculated based on the assumption that the donor starts taking payments in year 5, even if he/she waits until year 15 to do so. The savvy donor will request payments the first year that he/she is eligible, in order to maximize the cash payments over his/her life expectancy.

Just as with the regular and deferred gift annuities, payments from FGAs are taxed based upon the assets used to fund the gift annuity. For example, if a donor funds an FGA with cash, a portion of each payment is taxed at ordinary income tax rates and a portion is a tax-free return of principal. However, when funded with appreciated stock, a portion of each payment is taxed as ordinary income, a portion as capital gains, and a portion is tax-free return of principal.

Payments to a non-spouse can affect the taxation of the donor’s gift. Should they set up an FGA with payments to an elderly parent or loved one, if the payments are more than the annual exclusion amount for the year, then the donor may be subject to gift tax each year. If the annuity is funded with appreciated stock, the donor will owe some capital gains tax in the year they make the gift. Before setting up a gift to benefit someone other than themselves or their spouse, donors should be sure to consult with their tax advisors.

If the donors are certain about the date they want to begin receiving payments, it makes sense to use a DGA. After all, the donors could forget to elect to start the payments on their FGA, and the money would not be available that year.

An FGA can be used for any purpose when the donor might want supplemental income in the future. They are most commonly used to supplement retirement savings. Many individuals max out what they can contribute to a tax-deferred, qualified retirement plan like a 401(k). For those individuals, a series of FGAs allows them to put away money now, get a partial income-tax deduction, and add tax-advantaged payments in their retirement.

An FGA is a simple contract between the donor and your organization. Once the contract is executed, donors do nothing until they inform you that they would like to start receiving payments. Your organization will then turn on the payment stream, making payments as stated in the contract. Each year, your organization will need to issue a Form 1099 showing how the payments are taxed, which should be shared with the tax preparer. When the annuity ends, any amounts remaining are used for your organization’s charitable mission, as the donor has directed.

• An FGA can benefit a maximum of two beneficiaries. Often, the donor and his/her spouse are the beneficiaries, but donors could also name children, parents, or friends as annuitants.
• Note that naming beneficiaries other than a spouse will raise gift-tax considerations and cause immediate recognition of capital gains on appreciated property. For more flexible beneficiary options, donors can explore charitable remainder trust options.

Yes. In fact, donors must elect a specific start date in the defined window if they want to begin receiving payments before the end of the window. Donors can choose whatever date makes sense to them if it is at least one year from the date the FGA is created. And remember: the longer donors defer payments, the larger their payments will be.

One is not necessarily better than the other. Both have distinct advantages. A gift of cash will produce a larger tax-free portion of the annuity and be deductible against a larger percentage of the donor’s adjusted gross income, but the donor will avoid a portion of capital gains on appreciated stock used to fund the annuity (and defer the rest).The donor’s charitable deduction and annuity rate are not affected by the type of asset used to fund
the gift.

• An FGA provides lifetime annuity payments commencing at a future date the donor elects — for example, when the donor retires. An FGA also adds the advantage of giving donors the ability to wait until they know their exact retirement date before receiving payments. This allows donors to calibrate to their future income needs.
• Sometimes a charitably minded donor is unsure if he/she will need additional income in retirement. In such cases, an FGA can be the perfect tool. The donor sets the range of dates to start when he/she might need the income and has it extend well beyond his/her likely life expectancy. Donors can then elect never to start payments, or to simply relinquish the right to payments at a future date, when they are certain they will not need the income. The donors will benefit from an additional income-tax charitable deduction when they give up the right to payments. Best of all, donors have the security of knowing they can wait to begin receiving the payments until such a date when they decide that they want them.