A flexible gift annuity is a form of deferred gift annuity. However, instead of setting a fixed date in the future for the start of payments, as you would with a deferred gift annuity, you select a range of years or a “window” within which you can elect to start the payments.
With the flexible start date option, you can set a number of years as a window to begin receiving payments. Then you can wait to choose your payment start date until you’re ready. Because your annuity rate will be determined by your age and the number of years you wait to receive the first payment, your lifelong income payment rate will increase each year you decide to delay your first payment.
Your income tax charitable deduction is based upon the first year in the window you can start to receive payments. So if you decide that you want to start receiving payments sometime in the window 5 to 15 years from now, you income tax deduction is calculated based on the assumption that you start taking payments in year 5, even if you wait until year 15 to do so. For the saavy donor, this means that you want to make the first year you are eligible to take payments the year you are likely to actually want payments. Otherwise, you are not maximizing your income tax charitable deduction. You claim your deduction at the time you make the gift to fund the flexible payment gift annuity.
Just as with the regular and deferred gift annuities, payments from flexible gift annuities are taxed based upon the assets used to fund the gift annuity. For example, if you fund a flexible payment gift annuity with cash, a portion of each payment is taxed at ordinary income tax rates and a portion is 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 gain, and a portion is tax-free return of principal. We can help you to determine the taxation for your particular gift.
What happens if the flexible payment gift annuity makes payments to someone other than me or my spouse?
Payments to a non-spouse can impact the taxation of your gift. Should you set up a flexible payment gift annuity with payments to an elderly parent or loved one, if the payments are more than the annual exclusion amount for the year, then you may be subject to gift tax each year. If you fund the annuity with appreciated stock, you will owe some capital gains tax in the year you make the gift. Before setting up a gift to benefit someone other than yourself or your spouse, be sure to explore these issues with your tax advisors.
If you are absolutely certain about the start date when you want to receive payments, it makes sense to use a deferred gift annuity. After all, you could forget to elect to start the payments on your flexible gift annuity and the money would not be available that year.
A flexible gift annuity can be used for any purpose when you 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 flexible gift annuities allows them to put away money now, get a partial income tax deduction and add tax-advantaged payments in their retirement.
A flexible gift annuity is a simple contract between you and the Roman Catholic Foundation, benefiting your favorite parish, school, or ministry. Once the contract is executed, you do nothing until you inform us that you would like to start receiving payments. We then turn on the payment stream, making payments as stated in the contract. Each year, we 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 put to use for our charitable mission, as you have directed.