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Tue
03
Jun
2008

Residual Value of CGA

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I have an annuity that stipulates that the residual value of the annuity is to become an endowed scholarship upon the date of death of the annuant. I am new to annuities, and am not sure how to calculate this amount. I have received mixed answers so far - one suggestion was that the income tax deduction in the original agreement is the residual amount, another was that it is the present value (which seems more accurate to me). Any other suggestions on what the residual amount should be and how to claculate it?
Tue
03
Jun
2008
143
points
#9 by Elizabeth Roghair    

Residual value of annuity

I assume you are talking about a charitable gift annuity. Are you thinking about the projected amount or the actual amount of the residue? The projected residual amount at the time of issue could be 50% of the face value of the annuity if the issuer is following the ACGA guidelines. This assumes the beneficiaries live for their actuarial life expectancy and the fund earns exactly the amount assumed in setting the guidelines effective at the date of issue. It could be some other amount if you choose to use different investment return assumptions or life expectancy projections. The actual (real) amount, assuming the issuer keeps track of the annuity in a separate fund, would be the amount that is left in the fund at the death of the last beneficiary - the original gift, plus investment earnings, less payments and fees over the years.

Tue
03
Jun
2008
140
points
#8 by Michael McCormack    

Residual value

My understanding is that the residual value is the actual amount that remains at the termination of the annuity agreement. Given that definition, the best estimate of the residual amount should be the future value of the remainder interest.

Tue
03
Jun
2008
147
points
#7 by Scott Lyons    

Residual value of annuity.

You won't know the residual value until the annuitant dies. If you want to make a projection, use 50%--but I wouldn't advise taking any action or making commitments on the basis of that projection. There's just no way to know until it happens.

Wed
04
Jun
2008
146
points
#6 by James Connell    

Residual value of annuity

Reading into your situation and building on Ms Roghair's excellent analysis it sounds like you may be responding to internal counting procedures or perhaps external accounting requirements. If it is external accounting the answer seems easy the current accounting value is the value of the charitable deduction recorded as a current gift and the future payment requirements recorded as a liability. If you are talking about the internal counting procedures you should consult your current counting or treasury policy on planned gift arrangements.

It would be difficult to project the future value since there are some many variables to consider. What if any has been the charities investment experience with gift annuities? Are you in a state which stipulates how the funds will be invested? Will the annuity be co-invested with other assets? There are countless other questions. The safe harbor seems to be to assume your annnuity will perform according to the ACGA assumptions and use 50%. Then will this amount be sufficient according to your internal policies to fund an endowment agreement?

Good luck and let us know what is decided.

Wed
04
Jun
2008
153
points
#5 by Jessica Talbert    

Residual Value

Sorry my description was not clear. The annuant passed away November 2007 at the age of 93, 10 years after the annuity agreement. Thank you for your guidance thus far.

Thu
05
Jun
2008
133
points
#4 by Rod Goodwin    

Residual Value

Generally residual value is determined for tax purposes by use of the tables under Code Section 7520, which change monthly and are based on age and the relevant current market rates on bonds. You take the age of the annuitant and the total value of the annuity and determine the life and remainder interest values under the 7520 tables. It does determine the present value of the annuity based on the combination of age and current interest rates. It may be that rates other than those prescribed by 7520 might be appropriate. If you send me the birth date of the annuitant and the value of the contract, I will calculate the value using the current 7520 rate which I think is about 3.6%.

Best Regards,

Rod Goodwin, MST

Thu
05
Jun
2008
151
points
#3 by Rod Goodwin    

Residual Value

Jessica:

I read your posting more carefully, and while my previous posting will determine the amount based on the tables, the actual amount will be the value left in the annuity at death.

Tue
10
Jun
2008
141
points
#2 by Jessica Talbert    

Residual Value

Rod Goodwin:

The contract value is $20,000 and the birth date of the annuitant is 09/05/1915. The contract was signed 07/04/1997 with quarterly payments, and the last payment was 10/01/07. The annuity rate is 8% and the discount rate is 8.2%. If you are still willing to calculate the value for me I would appreciate it. I am going to do the calcualtions myself, but would love to have your numbers to check my calculations against. Thanks.

Tue
24
Jun
2008
125
points
#1 by RJ    

Residual Value of Annuity

If the annuitant has passed, don't you know the amount remaining, adding investment return and subtracting about 10 years of payments? What am I missing?