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Gift annuities, otherwise known as a charitable gift annuities, are not trusts; they are, in fact, a contract between a charity and an individual. In accordance with this contract, a charity receives a transfer "gift" of cash (or other marketable security) in exchange for a fixed sum of money payments to be spread out over the remainder of said individual's life. (The annuities payments cannot be staggered over a predetermined timeframe) The payments received by the beneficiary are fixed and will not fluctuate. A portion of the received payments are considered to be tax-free, and are therefore cannot be categorized as income.
Gift annuities differ from a trust in that the entirety of the charity's assets back it, not just the piece of property that was contributed. That is to say that if your gift were $10,000, you would not stop receiving payments after receiving a return of $10,000. Payments are made for the duration of the annuitant's life. Because gift annuities have a distribution period that lasts until the annuitant's death, many states regulate the maximum annuity rate offered. This regulation is based on what is referred to as the annuitant's "actuarial age" (This is rounded up or down to the nearest year) when charitable gift annuities are given. If you are going to be making payments to an annuitant for the remainder of their life, it makes sense that the younger the annuitant, the higher the rate will be, because chances are that they'll end up living longer than an annuitant 10 years their senior. In this respect, gift annuities are almost like an inverse of life insurance. (In which older applicants pay higher rates)
What are the various types of gift annuities?
- Immediate Gift Annuities: Annuitant starts receiving payments at the end/beginning of the payment period that immediately follows their contribution.
- Deferred Gift Annuities: Annuitant must wait at least 1 year after making their contribution before receiving payments.
- Tuition Annuities: Single-life deferred payment until the child reaches age 18 or enters into college. Generally established by parents/grandparents & NOT permitted in state of NY.
- Flexible Annuities: In essence this is another in the series of deferred payment annuities that allows annuitant to select the payment start date whenever they see fit.
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More on tax benefits of annuities... check out TAX SHELTERED ANNUITY
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