Contents

CHARITABLE GIFT ANNUITIESthe person purchasing the annuity), that is paid annually, either in one sum orin installments (such as semi-annually or quarterly). The charitable gift annuityis nonetheless a planned giving method that is based on the concept of splitinterests—an income interest and a remainder interest—though not, as noted,established through a trust.In fact, the donor, in the process of creating a charitable gift annuity, isengaging in two transactions, albeit with one payment: the purchase of an annuityand the making of a charitable gift. It is the latter that gives rise to the charitablededuction. One sum (money and/or property) is transferred; the amount inexcess of that necessary to purchase the annuity is the charitable gift portion ofthe transaction. There is generally a federal income tax charitable contributiondeduction for the value of the remainder interest created in this manner. 5As discussed, 6 this annuity is for one or two lives. The amount of the annuityis fixed as part of the gift annuity contract. Also as discussed, 7 a portion ofeach annuity payment is excludable from income.§ 14.2 TAX TREATMENT TO DONORA portion of the annuity paid is tax-free, being a return of capital. This amount isa function of the donor’s life expectancy, obtained by calculating the expectedreturn multiple. 8 The tax-free portion of the annuity payment is determined byascertaining the exclusion ratio, which is an amount equal to the investment inthe contract (the amount initially paid for the annuity) divided by the expectedreturn.The balance of the annuity payment is ordinary income, which is subject toincome taxation. 9 All of the annuity becomes taxable once the capital element isreturned.When appreciated securities are given, there will be—in addition to the foregoingconsequences—capital gain on the appreciation attributable to the valueof the annuity. It is because of this feature of this type of transaction that thecharitable gift annuity transfer constitutes a bargain sale. 10 Thus, the basis in thegift property must be allocated between the gift portion and the sale (annuity)portion of the transfer.The manner in which capital gain is recognized in this setting depends onthe language in the annuity agreement. If the donor is the annuitant, the capitalgain can be recognized ratably over the individual’s life expectancy. More specifically,the capital gain can be recognized ratably in this context when• the annuity isnonassignable, orassignable but only to the charitable organization involved, and5 Reg. § 1.170A-1(d)(1).6 See § 14.6.7 See § 14.2.8 Reg. § 1.1011-2(c).9 IRC § 72; Reg. § 1.1011-2(c).10 See § 9.19. 498