A really modest proposal Tom Smith

Many universities get money by selling gift annuities to people who are willing to exchange income for their lives for a tax deduction and the psychic benefit of giving a gift.  The income from the annuity is guaranteed by the endowment of the university (or other charity).  But this means that the more well endowed the university, the more secure is the annuity they can sell.  Someone buying an annuity is obviously interested in security, or they would just donate the money.  So rich universities can get richer on selling annuities, while those with smaller endowments have a much tougher sell.  So what to do?  Universities with smaller endowments could get a big financial institution to guarantee the annuity with a credit default obligation or similar contract, thus allowing the small university to compete with the bigger one.  Though of course, the smaller university would probably have to offer a lesser rate of return to make up for the cost of the CDO. Would the IRS go for this?  I don't know.  Do some universities already do this?  I don't know.  I told you it was a really modest proposal.  It just irks me to see yet another way in which the well endowed have all the fun.

Comments

[Michael F. Martin]

Yes but is the market big enough to justify the transactions costs? How many people are buying annuities from universities? I guess it only takes one really big transaction to make it worthwhile.

[Tim Kay]

Two other benefits received by a donor of a charitable gift annuity are the deferral of recognition of gain on the disposition of the appreciated assets used to fund the annuity and the receipt of income based upon the fair market value of the contributed appreciated assets - the annuity version of an installment sale. I think CGAs are unsecured in order avoid acceleration of income and to leave the charities free from the commercial annuity rules.

Some charities reinsure the annuity obligation in order to mitigate the charity's risk that the annuitant will live too long or that the return on the charity's investment of the contributed assets will be too low to service the annuity. In PLR 200847014, the IRS approved that practice. This is particularly helpful if the charity only writes a few CGAs and does not have a diversified pool of CGA donors (some of whom might die early and some of whom might live an extra 10 years beyond life expectancy). Note that this approach does not actually add to the security of the annuitant - s/he is still only a general creditor of the issuing charity.

[Tom Smith]

Tim
Are you saying that if the annuitant effectively insured receipt of the annuity (even if he remained just a general creditor, which could be done) that would undermine the tax benefits? You could reduce the risk of default for the annuitant a number of different ways without making him a secured creditor.