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New Law Governing Charitable Gift Annuities in Tennessee
Dec. 1, 2008
By: Joy Dixon Wilman
The Charitable Gift Annuity Act of 2008 ("2008 Act"), effective as of January 1, 2009, supercedes the current charitable Gift Annuities Exempt Act and makes many important changes in this area of law of note to charitable institutions and professionals in related areas.
Background
A charitable gift annuity is essentially a transaction between a donor and a qualified charity in which the donor agrees to irrevocably transfer property to the charity in exchange for the charity's promise to make a fixed payment to the donor for life. For income tax purposes, the donor is deemed to have made a charitable contribution on the date the property is transferred to the charity. The charitable contribution is equal to the remainder interest passing to the charity at the end of the annuity term. The remainder interest is calculated based on the value of the property transferred, the age of the donor, and gift annuity rate offered by the charity. The annuity payments received by the donor are characterized as part income and part tax-free recovery of basis.
Coverage of the 2008 Act
The Charitable Gift Annuity Act of 2008 ("2008 Act"), effective as of January 1, 2009, supercedes the current charitable Gift Annuities Exempt Act and makes many important changes in this area of law of note to charitable institutions and professionals in related areas.
New Process/New Rules
Beginning in 2009, all charities undertaking to issue charitable gift annuities must apply for and receive a Certificate of Authority from the Tennessee Commissioner of Commerce and Insurance ("Commissioner"). After submitting an application and paying the associated filing fee, the charity will receive a Certificate of Authority if the Commissioner determines that the charity is in sound financial condition and otherwise qualified. Once issued, the Certificate of Authority will remain in force until it is suspended or revoked by the Commissioner or terminated by the charity. However, in order to maintain the Certificate's active status, the charity must pay an annual $100 fee and file an annual report.
Annual Report
- The annual report must be filed and verified each year by at least two principal officers of the charity. The report must include:
- a financial statement of the charity, including a balance sheet and receipts and disbursements for the preceding year
- any material change in the information
- the number of gift annuity contracts issued and terminated during the year as well as the number in existence at the end of the year
- the amount of annuity payments made during the year and the amounts transferred from the charitable annuity separate account to the charity's general account during the year.
Separate Accounts
Under the 2008 Act, charities will be required to maintain in a separate account those funds donated as part of a charitable gift annuity. These assets must be invested in accordance with the Tennessee Uniform Prudent Investor Act, and may not be used to satisfy debts other than those incurred while issuing the charitable gift annuity to which the account applies.
There are two ways a charity can meet the requirement of maintaining a separate account. First, the charity can keep all of the funds related to the annuity in a separate account. As the donors pass away, the charity can then transfer the remainder of the annuity assets to the charity's general account. Second, a charity can keep a separate account that holds an amount equal to at least 110% of the reserves for the charitable gift annuities. In either case, to the extent that the assets contained in the separate accounts are not adequate, the 2008 Act requires that the charity use its own general assets to cover the annuity payments.
Form Approval
Beginning in 2009, all charitable gift annuity forms must be pre-approved by the Commissioner. The forms must include the following information:
- Value of the property transferred
- Amount to be paid to the annuitant
- Manner in which and intervals at which payment is to be made
- Age and sex of person during whose life payment is to be made
- Reasonable value (as of the date of the agreement) of the benefits created using IRS approved methodology
- Date payments are to begin.
The Commissioner will have 30 days to approve or disapprove the submitted agreement form. If the Commissioner takes no action before the 30-day deadline, the form will be deemed approved.
In addition to having the charity's agreement form approved by the Commissioner, the charity must also obtain a signed statement in which the donor acknowledges that the annuity payments are backed only by the credit of the charity, and that the payments made under the agreement are not insured or guaranteed by an insurance company, are not protected by any insurance guaranty association, and are not backed in any way by the State of Tennessee.