Commuted Payment Gift Annuity

Sometimes called a "Tuition Assistance Plan," a commuted payment gift annuity is a simple contract between the donor and the charity.

The commuted payment gift annuity is a really a modified deferred gift annuity. In exchange for an irrevocable gift of cash, securities, or other assets, the charity agrees to pay one or two annuitants a fixed sum each year for life, with payments starting at least one year after the gift. The contract includes language, however, that gives the annuitant the option to commute the lifetime of payments to a fixed number of payments of equivalent value. The annuitant may commute the payments immediately or at any time prior to the date of first payment.

In most instances the annuitant (or guardian) exercises the commutation right immediately after the annuity is funded. While commutation and funding should not be simultaneous, a period of weeks or even days should suffice to make the two events adequately distinct. If the commutation is delayed until later, the payments could be higher or lower, depending on the Charitable Midterm Federal Rate (CMFR) and mortality tables in effect at the time. Both the charity and the donor may prefer to know from the outset what the installments will be.

The annuitant is typically the donor child or grandchild, who is expected -- but not required -- to use the commuted payments to pay tuition. As a result, payments are usually commuted to 4-5 years of payments. The donor receives an income tax for the difference between the amount transferred and the value of the annuity, subject to IRS 30%/50% limitations.

In most cases, part of each payment is tax-free, increasing each payment's after-tax value. If the donor gives appreciated property, the donor will pay capital gains tax on only part of the appreciation. If the donor is not the primary annuitant, which is usually the case, this capital gains tax will be due in the year of the gift.

It is not clear how capital gain must be reported when the donor is the primary annuitant. Normally, the donor can report the capital gain over his or her life expectancy in this situation. The commutation of payments into a fixed number of years, however, brings into question whether the donor can report the capital gain over these years rather than in the year of the gift. The IRS has not ruled on this question. Given the lack of IRS guidance, PGM assumes that the donor must report capital gain in the year of the gift.

To enter a commuted payment gift annuity in GiftWrap, choose the Charitable Gift Annuity Gift Type and Commuted Subtype. Enter the payment and tax information as it stands at the time of the gift. If the annuitant commutes the payments after the date of the gift, enter at that time the commuted payment and tax information into each annuitant's check and tax schedule window for the gift. Do not change the entries for the gift term or payout %, however, as they are needed for calculating the gift's FASB liability and reserve amount.

There is a checkbox on the Details tab of the Gift Information window labeled Payments Commuted. Leave this checkbox empty when the annuitant has not yet opted to commute the gift annuity payments. Check this box if the annuitant of the commuted payment gift annuity has, in fact, commuted the lifetime annuity into a fixed number of payments.