Gift annuity reserve calculations for commuted payment gift annuities
GiftWrap can perform gift annuity reserve calculations for the several states that require them. Performing reserve calculations for commuted payment gift annuities (CPGAs) presents special challenges. In some circumstances, you may want to compute the reserve for a CPGA manually and edit the Gift Annuity Reserves report as needed.
The Gift Annuity Reserves report recognizes a gift as being a commuted payment gift annuity when it has a Gift Type of Charitable Gift Annuity and a Subtype of Commuted.
Computing reserves prior to the commutation of payments
The Payments Commuted check box appears on the Details tab of the Gift Information page. When this check box is empty, it means that the annuitant has not yet opted to commute the gift annuity payments. As a result, the gift annuity is still scheduled to make payments for life, like any other typical deferred gift annuity. The reserve for such an annuity can be computed the same way as a deferred gift annuity.
For the reserve calculation to be correct in these circumstances, you need to be sure that the annuity rate entered for the gift is the deferred annuity rate stated in the annuity contract prior to commutation. Note that this is the rate that is imported when you create a new gift record by importing gift information from a file created in Planned Giving Manager.
Computing reserves after commutation of payments
Once an annuitant has legally commuted the gift annuity payments via the instructions contained in the annuity contract, the maximum number of payments that will be made becomes known. As a result, a reserve calculation computed based on lifetime payments to the annuitant will no longer be accurate. What's more, as the annuity starting date gets closer, the reserve computation based on a lifetime annuity will become too small by a greater and greater margin.
GiftWrap uses the approach described below when you check the box to have it compute reserves for commuted payment gift annuities that have commuted their payments based on the term end date.
Important: For the reserve calculation to be done right, the following fields must be set up correctly for the gift.
- Payments Commuted check box in the Gift Information > Details tab must be marked.
- Payout % in the Gift Information > General tab must correspond to the payment amount after commutation (not the lifetime annuity amount prior to commutation).
- Term End Date in the Gift Information > Trust/Term/PIF tab must show the date of the final commuted payment.
Using the reserve interest rate applicable to the gift, GiftWrap computes a net present value of the remaining commuted payments. This approach calls for discounting each payment for the number of years from the valuation date for the reserve to the date of the payment. If the reserve interest rate is 6% and the first of four annual $5,000 payments will be made in five years, for example, then the reserve amount is:
((1/1.06)^5 x $5,000) + ((1/1.06)^6 x $5,000) + ((1/1.06)^7 x $5,000) + ((1/1.06)^8 x $5,000) =
$3,736 + $3,525 + $3,325 + $3,137 = $13,723