Contents

CHARITABLE GIFT ANNUITIESassign his or her annuity to the organization or to a third party in return for alump-sum payment or installment payments over several years. 12 It is contemplatedthat a designated recipient of the annuity will use the funds to attend theinstitution that is the remainder interest beneficiary under the contract, but thisis not required. The annuitant will be able to use the funds for any purpose.Donors in this situation usually make these contributions for the benefit of achild or grandchild.The timing of any conversion is important. If the annuitant sells the annuityand converts the annuity into a lump sum before the starting date of the annuity,the amount that is taxed is the difference between the amount received and theinvestment in the contract. If the conversion occurs after the starting date, all ofthe proceeds are taxable.If this type of deferred payment gift annuity is funded with appreciatedproperty, the ability to pay the capital gain ratably is not available, because thecriteria for this tax feature are not met. 13The IRS has privately ruled that deferred payment charitable gift annuitiesissued in connection with a tuition payment plan do not create any acquisitionindebtedness. 14 The increase generated from investment of the proceeds is notdebt-financed income and thus is not taxable as unrelated business income. 15The IRS has yet to rule specifically on the matter of the availability of the charitablecontribution deduction for these arrangements.§ 14.4 ESTATE AND GIFT TAX CONSEQUENCESWhen a donor names another individual as the annuitant, the donor is making agift to that other individual. The amount of this gift is the value of the annuity. 16When the spouse of the donor is the only annuitant, the gift is sheltered from thefederal gift tax by the gift tax marital deduction. 17When another individual is the annuitant under a charitable gift annuityarrangement, and the donor dies within three years of the date of the transaction,any gift tax paid because of the gift must be included in the donor’s estate. 18§ 14.5 UNRELATED BUSINESS INCOME IMPLICATIONSAn otherwise tax-exempt charitable organization 19 will lose or be denied taxexemption if a substantial part of its activities consists of the provision of commercial-typeinsurance. 20 Otherwise, the activity of providing commercial-type12 If the annuity contract is purchased by the educational institution, it may pay only for the fair market value ofthe contract; a greater payment amount may constitute a form of private inurement or private benefit. See Tax-Exempt Organizations ch. 19.13 See § 14.2, text accompanied by note 11.14 See § 14.6.15 Priv. Ltr. Rul. 9042043.16 IRC § 2503(a).17 IRC § 2523(a), (b)(1).18 IRC § 2035(c).19 That is, an organization described in IRC § 501(c)(3).20 IRC § 501(m). 500