October 16, 1997 | Read Time: 2 minutes
The Internal Revenue Service has issued a ruling that fund raisers say could make a little-used type of planned gift — a deferred gift annuity — more attractive to donors.
Gift annuities are set up by contributors who turn over cash or appreciated assets to charities with the understanding that the donors will receive annual payments from the principal during their lifetimes. Once the payments end, the charity keeps all that remains of the original gift.
In the most commonly used annuities, payments to donors begin as soon as the gift is made. But some donors, particularly those still far from retirement, prefer to delay the starting date of the annual payments they will receive from a gift annuity until they need the income.
Until now, most charities that offer deferred gift annuities have required donors to pick a specific starting date for when the annual payments would kick in — largely because charities thought they had to do so to comply with the law. That restriction, say some fund raisers, is the main reason that only about 6 per cent of all gift annuities were set up with deferred payments in 1994, according to the most recent national study by the American Council on Gift Annuities.
In a private letter ruling issued to the Seattle Foundation, the I.R.S. gave its blessing to an arrangement that allowed a donor to set up a $25,000 gift annuity at age 50 with the understanding that she could elect to start receiving income payments from that gift at any time between her 55th and 80th birthdays.
The donor in the case claimed a charitable tax deduction that was based on a conservative calculation of how much money would be left to the charity after the payments ended. That figure — $12,364.25 — was based on what would remain if the payments started when the donor turned 55.
David Wheeler Newman, the lawyer who requested the ruling for the Seattle Foundation, said that having the flexibility to have an open-ended starting date for the income payments from such gifts should make the gifts much more attractive to donors. “Most of us don’t know exactly when we’re going to retire,” he said. “This ruling unlocks the tremendous potential of this type of giving.”
