Respect for the Deceased: Your Final Obligations When a CGA Terminates at Death

While some charitable gift annuities (CGAs) are voluntarily terminated by annuitants, either for a charitable deduction or a lump sum payout, the vast majority of CGAs terminate with the death of the final annuitant. When this happens, the charity must fulfill their final contractual obligation to the CGA’s donor, which is to distribute the residuum to the charitable purpose. Here’s our recommended list of steps that should be completed before releasing the gift.

1. Confirm the Date of Death

The gold standard for confirming the date of the annuitant’s death is the death certificate. However, the most frequent confirmation of date of death is a published obituary. While these are often received from the deceased’s family, you can search the internet for obituaries or use a death screening service, such as PG Calc’s Death Screening module in our GiftWrap software, to locate date of death information.

2. Review the Contract for Critical Information

With most CGAs lasting 15-20 years, it is entirely possible that the team who booked the CGA has moved on from your organization. Don’t rely on how that former team entered the gift into GiftWrap or your Constituency Relationship Management system (CRM) to determine how the CGA will terminate. Make sure you review the signed contract.

The first item to look for in the contract is whether the annuitant who has died is the final annuitant. It may be that when the gift was booked, the staff concerned themselves only with the immediate annuitant and did not add the successor annuitant to your CRM or GiftWrap. Make sure that the annuitant whose death you are processing is the final annuitant.

Secondly, review the contract for the rules governing the CGA’s final payment. While most CGAs are drafted to ensure that the last entitled payment was the regular payment that preceded the date of death, some older CGAs are drafted to allow for a final prorated payment. For example, if the annuitant benefitted from quarterly payments and died on April 5, the drafting of a standard CGA typically would define the final payment as the one made five days earlier on March 31. While your organization may currently issue CGAs that fit this model, twenty years ago, you may have been persuaded to issue a CGA with a final prorated payment. Review the contract and determine whether the final payment has been or must be made.

Lastly, review the designation of the CGA’s residuum. While it would be great if every donor made gifts for unrestricted purposes, often they have a specific designation in mind. Make sure you review the designation in the contract, as errors of transcription may have occurred when the gift was entered in your CRM.

In addition, your organization should have a policy in place to address gifts for purposes that are no longer part of your mission. For instance, an arts organization that began as an umbrella organization for both fine and performing arts may have evolved to support only painters and sculptors, and a CGA designated for a long-gone dance program will need to be addressed.

3. Determine If Revocation Is an Issue

If you learn by reviewing the contract that there is a surprise second beneficiary, you will need to review the revocation clause in the CGA contract. Most CGAs involving multiple persons include revocation language, either allowing the original donor to disinherit the successor annuitant(s) through their will or giving the donor the right to disinherit through their will and, while they are alive, via a written declaration delivered to the charity.

If the CGA only allows revocation through the estate, then outreach to the executor or family is necessary to confirm that the will does not revoke the second beneficiary’s CGA payments. If the CGA also allows revocation during the donor’s lifetime, review your CRM and donor files to see if you received a written letter disinheriting the second beneficiary.

4. Stop Making Payments to the Deceased

It may seem absurd to list this step, but for many organizations the donor stewardship unit is separate from the finance team, meaning that the folks who most often learn of a death are not the same unit that processes CGA payments. Make sure that the news of the death is appropriately shared, recorded, and acted upon by stopping payments to the deceased.

5. Reclaim Overpayment

It is not uncommon for a charity to learn an annuitant has died only after making one or more inappropriate payments. If this has happened, you need to reach out to the deceased’s family or executor, provide them with a copy of the contract showing when the final payment should have been made, and requesting the return of any overpayment. When received, this amount will become part of the residuum released to the final charitable purpose of the CGA.

6. As a Courtesy, Calculate the Undistributed Investment in Contract (UIC), If Any, and Send It to the Executor

The deceased annuitant is entitled to take an income tax deduction for any unpaid tax-free income. This is not an estate tax deduction, but a deduction taken on their final Form 1040 filing. GiftWrap has a feature for calculating UIC, and it can also be calculated in PGM Anywhere by selecting the Termination of Charitable Gift Annuity chart.

Many executors will not be aware of this potential deduction, which is taken on line 16 of Schedule A of IRS Form 1040. While not a fixed requirement for the charity, sharing the UIC information is a great stewardship practice.

7. Set Up the Second Beneficiary’s Payments

If the second beneficiary is the spouse of the deceased, they may want to continue to receive the payments into the existing joint account you have been sending payments to. While common, this should not be considered the default, and the spouse’s direction should be captured in writing.

Some charities issue joint and survivor CGAs in which each annuitant is a donor and receives one-half of the income. These are often entered manually into GiftWrap, dividing the CGA in order to issue separate payments and 1099-Rs. This situation is most common when donors file separate tax returns. If the deceased had a joint and survivor annuity, now is the time to manually transfer the information from the deceased’s payment and tax records to the survivor’s, thereby ensuring that the survivor receives the entire annuity. If you need guidance on this, our Client Service Advisors can guide you through the process. Please email support@pgcalc.com to request an appointment.

8. Confirm the Final 1099-R Amount Is Correct

If you have had to reclaim payments from the estate, you will need to make sure that the amount on the final 1099-R is correct. If you use GiftWrap, the reclaimed payments are tracked within the payment fields, but the 1099-R is pulled from the taxation fields. Check and make sure that both have been adjusted.

9. Calculate the Amount to Be Distributed to Your Charity

If your CGA was issued using ACGA rates, you know those rates are designed with the objective of ensuring a residual gift to charity of one-half of the amount that established the CGA. However, you cannot just go into your CGA pool and grab half of the original booked gift and distribute it. You need to know how much of the value of your CGA pool is attributable to the gift you are terminating.

GiftWrap’s CashTrac function allows you to easily track the ongoing value of each CGA in your pool by entering the investment return or a total pool value. If you haven’t been using the function, please reach out to Client Services to arrange a walk through of this essential feature.

10. Distribute the Gift and Report on the Distribution

Now is when the donor’s philanthropic intention is realized. Deliver the residuum to the area of support.

Like bequests, the realization of a CGA can feel like manna falling from heaven. It is important to the continuing health of your planned giving program that you report on realized CGAs along with your bequest totals. If you have GiftWrap, the distribution value of the CGA can be added to the gift record, making it easy to run reports showing distributions by areas of designation at your organization.