Should You Accept Real Estate for a Gift Annuity? Carolina Planned Giving 2017 at Kanuga

September 12, 2017

Mark Smith, Relationship Manager

Fred’s Charitable Gift Annuity

1

Donor Annuity Contract

1

2

3

4

$100,000 Cash

Income tax

deduction

Remainder

Payments

for life

Charity

Annuitant

: What Are the Risks?

Risks Specific to an Outright Real Estate Gift

2

Fred’s CGA: What Are the Combined Risks?

3

Donor Annuity Contract

1

2

3

4

Real Estate

Income tax

deduction

Remainder

Payments

for life

Charity

Annuitant

Mitigating the Combined Risks

4

It might be necessary to add cash to the CGA state reserve account

Ask donor to contribute

to cover expenses

Double down on

due diligence

Discount annuity rate

% off

Raise minimum age for

CGA with real estate

AGE

Defer payments

2017 2019

Gift Annuity Funded by Outright Gift of Real Estate Approach #1: Discount Annuity Rate by 20% or 25%

5

Martha is 85 years old

Appraised value of real estate: $1,000,000

Applied discount: 13% or 19%

Annuity contract price: $800,400 or $745,200

Annuity @ ACGA rate: 7.8% = $62,431 or $58,125

Nominal CGA contract rate: 6.2% or 5.8%

Approach #1 Analysis

6

Donor Pays

Expenses

Charity Pays

Expenses

Appraised value $1,000,000 $1,000,000

Less discount (13% or 19%) 130,000 190,000

Final gross sale price 870,000 810,000

Less closing expense of 8% 69,600 64,800

Estimated net proceeds 800,400 745,200

Multiplied by CGA rate 7.8% 7.8%

Target annuity amount 62,431 58,125

Divided by appraised value 1,000,000 1,000,000

Discounted annuity rate 6.2% 5.8%

20% discount to

rate table

25% discount to

rate table

Gift Annuity Funded by Outright Gift of Real Estate Approach #2

7

John is 85 years old

Appraised value of real estate: $1,000,000

Applied discount: 17% = $170,000

Annuity contract price: $830,000

Annuity @ ACGA rate: 7.8% = $64,740

Nominal CGA contract rate: 6.474%

Approach #2 Analysis

8

Q1 Q4 Q5 Q8

Real estate gift 1,000,000 1,000,000 1,000,000 1,000,000

When will the property sell?

Cash Outflows

9

Acceptance Expenses Q1 Q4 Q5 Q8

Due diligence 1,000 1,000 1,000 1,000

Closing 1% 10,000 10,000 10,000 10,000

Carrying Costs Q1 Q4 Q5 Q8

RE tax 1,000 4,000 5,000 8,000

Utilities 500 2,000 2,500 4,000

Insurance 2,206 8,824 11,030 17,648

Annuity payments 16,185 64,740 80,925 129,480

Interest @ 5% 450 1,800 2,250 3,600

Sales Costs Q1 Q4 Q5 Q8

Commission 6% 60,000 60,000 60,000 60,000

Closing 1% 10,000 10,000 10,000 10,000

Summary of Financial Outcome ACGA Rate Is 7.8%

10

Q1 Q4 Q5 Q8

Sales price $1,000,000 $1,000,000 $1,000,000 $1,000,000

Acceptance expenses 11,000 11,000 11,000 11,000

Carrying costs 20,341 81,364 101,705 162,728

Sales costs 70,000 70,000 70,000 70,000

Total costs 101,341 162,364 182,705 243,728

Cash to CGA pool 898,659 837,636 817,295 756,272

CGA contract price 830,000 830,000 830,000 830,000

Surplus/(deficit) 68,659 7,636 (12,705) (73,728)

Effective annuity rate 7.20% 7.73% 7.92% 8.56%

Other Risk Mitigating Strategies

11

Advance marketing of property SALE

“Charitable put” strategy

Buyer

Donor pledges to give property

12

Can you base

the annuity on

the sales proceeds

Gift Annuity Funded with Remainder Interest in Residence or Farm

13

Income to

donor

Charity

issues annuity

Donor/life tenant dies

Charity sells property

Donor gives remainder

interest to charity and

retains life tenancy

CGA

2 3

1 4

5

Annuity Based on the Sale Price

14

References

• Paper by David Wheeler Newman, Charitable Gifts of Real Property

Planned Giving Design Center (see section IV.)

http://www.pgdc.com/pgdc/charitable-gifts-real-property

• CHARITABLE GIFT ANNUITIES: The Complete Resource Manual (Minton)