The Office of General Counsel issued the following opinion on May 9, 2005, representing the position of the New York State Insurance Department.
Re: Charitable Gift Annuity
Does the 2004 amendment to N.Y. Ins. Law §1110(a), expanding the category of authorized gifts pursuant to a charitable gift annuity agreement to include "cash and other property," permit a gift of real property with a retained life estate in the donor?
No, the amendment of N.Y. Ins. Law §1110(a) does not permit a gift of real property with a retained life estate in the donor in return for issuing a charitable gift annuity agreement.
Since this is a general inquiry, no facts have been provided.
N.Y. Ins. Law §1110(a) (McKinney 2000 and 2005 Supplement) permits a charitable organization to receive gifts under annuity agreements and provides:
The superintendent may, in his discretion, issue a special permit to make annuity agreements with donors to any duly organized domestic or foreign non-stock corporation or association conducted without profit and engaged in active operation for at least ten years prior thereto solely in bona fide charitable, religious, missionary, educational or philanthropic activities. The permit shall authorize such corporation or association to receive gifts of cash and other property conditioned upon, or in return for, its agreement to pay an annuity to the donor, or his nominee, and to make and carry out such annuity agreement. Every such corporation or association shall, before making such agreement, file with the superintendent copies of its forms of agreements with annuitants and a schedule of its maximum annuity rates, which shall be computed on the basis of the annuity standard adopted by it for calculating its reserves so as to return to it upon the annuitant's death a residue at least equal to one-half the original gift or other consideration for such annuity.
Prior to the amendment by 2004 N.Y. Laws 199 of New York Insurance Law §1110(a), charitable organizations were only authorized to receive "gifts of money" under an annuity agreement. The 2004 amendment has expanded the category of authorized gifts under an annuity agreement, and charitable organizations are now authorized to accept "gifts of cash and other property." Thus, a gift of real property would be authorized as "other property." However, the requirements of New York Insurance Law §1110(b) (McKinney 2000 and Supp. 2005), would prevent a gift of real property with a retained life estate.
New York Insurance Law §1110(b) provides in pertinent part:
The required admitted assets shall be invested in accordance with the prudent investor standard as defined in section 11-2.3 of the estates, powers and trusts law and shall not be subject to the investment limitations set forth in this chapter. Such assets shall be segregated as separate and distinct funds, independent of all other funds of such corporation or association, and shall not be applied to pay its debts and obligations or for any purpose except the aforesaid annuity benefits. (emphasis added).
Estates Powers and Trust Law §11-2.3(a)(3)(A) (McKinney 2000 and 2005 Supplement) states that the prudent investor standard requires a trustee "to pursue an overall investment strategy to enable the trustee to make appropriate present and future distributions to or for the benefit of the beneficiaries under the governing instrument ." Estate Powers and Trust Law §11-2.3(a)(3)(D) (McKinney 2000 and 2005 Supplement) also provides that the prudent investor standard requires a trustee "within reasonable time after the creation of the fiduciary relationship, to determine whether to retain or dispose of initial assets."
A gift of real property with a retained life estate under an annuity agreement would transfer to the charitable organization only a "remainder interest" in the real property; full ownership and control over the property would only be transferred upon the donors death. In handling a "remainder interest" in real property, the trustee would have no discretion to determine whether to sell or otherwise dispose of the real property during the lifetime of the donor as the prudent investor standard requires, unless the donor relinquishes its rights as owner of the life estate. Additionally, during the time when the charity has an obligation to make annuity payments, the charity could not invest the gift to enable the charity to make the present or future annuity payments, resulting in a mismatch of assets and liabilities. Accordingly, donation of real property to a charity with a retained life estate in exchange for annuity payments would not be permissible.
For further information please contact Principal Attorney Alan Rachlin at the New York City office.