"re-insurance of CGA

"re-insurance of CGA

Forum topic posted in Forum on 25 March 2010| 4 comments
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Joined: 10/08/2009
Points: 30
I have been trying to find out if the IRS allows a charity to use a period certain/life annuity when re-insuring a charitbale gift annuity. Have read two different private letter rulings that seem to approve, but have been told by others that this may not be the case. Any experience from anyone with this?

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Joined: 05/24/2007
Points: 105
Also...
There is a PLR in relation to UBI that states that an annuity purchased for the purposes of Reinsurance can also pay a contingency to the charity. Therefore it does not neccesarily have to be life or Joint life only payouts.
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Joined: 01/08/2009
Points: 30
re-insurance of CGA
James - Our experience has been that if we are reinsuring a CGA, it must be with a life or joint life only annuity, as the IRS only allows life only annuities to be used with CGA's. However, many charities that we work with end up NOT establishing a CGA for a variety of reasons (the charity may not want the responsibilty of the paperwork requrements and monitoring of the gift for possibly decades. Also, some donors do not like the fact that the gift is irrevocable). For example, let's say a donor sets up a CGA for $100,000. To reinsure, the charity may need to give $65,000 to an insurance company to purchase a life only annuity (to fund payments to the donor for their life). This potentially frees up $35,000 to the charity (which can represent an 85-90% residuum without the charity incurring any longevity or investment risk). Alternatively, the same donor could make an outright donation to the charity of say $32,000 (slightly less than the $35,000 the charity realizes above), and use the remaining funds of $68,000 to purchase ANY type of annuity they want - period certain, or even one that offers up to 50% of the original premium as a death benefit. We have used this scenario many times, especially for charities in NY. A CGA is not established, and if the donor wants, the charity can be set up as the beneficiary, so the charity receives funds now and in the future. I hope this is helpful. Please feel free to contact me if I can be of further assistance.
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Joined: 05/24/2007
Points: 105
Interesting
We have seen this done recently and I have facilitated these types of transactions. However it may not be a useful practice for too much longer. As the AFR increases so will the tax deduction of a CGA and there will be a greater difference between a outright gift/annuity and the normal practice of a CGA.
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Joined: 05/24/2007
Points: 105
CGA reinsurance
I work both for a Nonprofit as well consult and do reinsurance for a number of charities. This question comes up often and I find it hard to explain in a comment section. Feel free to call me if you would like. 615-309-5030 ext 139 Erik Faulk
7520 Rates: December 26% November 2.4% October 2.2%

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