I was pleasantly surprised to learn that my alma mater offers a charitable gift annuity. Why did this grab my attention? Well, like any other type of annuity, I would exchange cash or securities for a fixed lifetime income.
Here’s where things diverge. Instead of working with an insurance company, this payment would go to my university. And, whatever remains will go to my alma mater.
In short, this could be a way for me to not only supplement my retirement income but also give something back.
While appealing, however, a charitable gift annuity isn’t for everyone. So, before you make such a commitment, here’s everything you need to know about a charitable gift annuity.
What Is a Charitable Gift Annuity?
Charitable gift annuities are contracts between you and nonprofit organizations, mainly colleges and universities. By doing so, you can make a large donation to your favorite charity, while also receiving fixed payments for the rest of your life.
This type of annuity may be funded with cash, stocks, mutual funds, bonds, or any other marketable investment like real estate. As a result, the donor may be able to deduct a portion of their donation from their taxes.
The contract can be amended to include one more beneficiary or annuitant. That person will receive lifetime payments along with you. After you die, their payments will continue until the beneficiary dies.
Thousands of universities and nonprofit organizations raise money through annuities. Although specific details of the contracts will vary by entity. Furthermore, while gift annuity payments are supported by nonprofit institutions in good faith, no government agency insures them.
Most charities require an initial donation of at least $10,000 to $25,000 in order to fund these annuities. Most charities require recipients to be at least 65 years old before payments begin. However, my alma mater recommends that you’re at least 60 years of age at the time of the gift.
A planned giving plan such as this may be advantageous if you would like to make philanthropic contributions during your retirement years.
Organizations Using Charitable Gift Annuities
Charitable, educational, and religious organizations are all 501(c)(3) organizations that can use CGAs. Although not all nonprofits accept CGAs, many of them do.
According to the Internal Revenue Service, 501(c)(3) organizations are “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.” Under the same definition, private shareholders cannot be the primary beneficiaries of 501(c)(3) organizations.
Other groups known for offering charitable gift annuities include:
- Colleges and universities
- Community foundations
- Religious groups
- National health organizations
- Environmental groups
- Arts and social service organizations
- Arts and social service organizations
Hundreds of organizations offering gift annuities can be found on the American Council on Gift Annuities (ACGA) website, which oversees the use of CGAs. According to the ACGA, there are at least 4,000 organizations that offer charitable gift annuities.
Charity organizations are required to send CGA annuitants IRS Form 1099R and declare which contributions (cash or property) are taxable, nontaxable, or capital gains.
How a Charitable Gift Annuity Works
A charitable gift annuity works much like any other kind of annuity. The annuitant pays one lump sum and receives regular payments, usually quarterly, in exchange. The payments stop upon their death, and all remaining assets are turned over to the annuity writer.
With a charitable gift annuity, however, the balance is retained by the charity or nonprofit as a gift. This is the main difference between a CGA and other annuities where the remaining balances are turned over to the insurance or annuity company you bought the annuity from.
It is possible to fund a charitable gift annuity with cash, securities, or any other asset. The initial investment may be as little as $5,000. Although, in most cases, this would be much larger in the $10,000 to $25,000 range. Most colleges and universities offer this kind of gift plan, as do most nonprofits.
The number of payments will vary depending on a number of factors, starting with the annuitant’s age. It is common for monthly payments to increase (and decrease) with the age of the annuitant. In addition to the assets donated, the annuity payments are backed by the charity’s assets, not just the contributions.
It is common for actuarial calculations used to determine payout amounts to provide for a residual amount for the charity to receive after the beneficiary dies.
What’s more, it’s guaranteed that the payment rate in your contract will not fluctuate or adjust with inflation. And, your charitable donation will be deductible partially as a tax expense the year following the donation.
Charitable Gift Annuity Rates
Charitable gift annuities are frequently offered by nonprofits that use rates set by the American Council on Gift Annuities (ACGA). The annuity rates are intended for you to receive an enticing payment stream while also providing a gift to your favorite charity.
Choosing when to start making payments is up to you. In other words, you can receive payments immediately or at a later date. And, again, the size of your payments will vary depending on your age. Annuitants who are older typically receive higher payments.
For a single-donor annuity, the American Council on Gift Annuities suggests the following payout rates based on age:
- 60 – 3.9%
- 65 – 4.2%
- 70 – 4.7%
- 75 – 5.4%
- 80 – 6.5%
- 85 – 7.6%
- 90 – 8.6%
An example would be if you established a $100,000 gift annuity at the age of 70. If so, you would receive $4,700 annually.
You should also be aware that the joint gift annuity payment rate is lower than the single gift annuity payment rate. In addition to your age, the other beneficiary’s age is also considered.
Suppose you’re 70 years old and your spouse is 65 years old, then the payout rate is 4 percent. If your spouse is 60 and you are 70, your payout rate is 3.7 percent. Still struggling, here is our annuities for dummies guide.
Benefits of Charitable Gift Annuities for Donors
A charitable gift annuity offers many benefits to donors, such as;
- The income from annuities is guaranteed until the donor dies.
- It is possible for donors to support a philanthropic cause and profit at the same time.
- There are many types of assets that can be donated, including cash, securities, and personal property
- Donations to charitable organizations have a number of tax advantages. Contributions are eligible for tax credits that lower income taxes in the year of the donation.
- Because they are considered a return on the original principal, portions of each gift annuity payment are also tax-free.
- The tax liability on gifts of appreciated securities and personal property is reduced or eliminated.
Charitable Gift Annuities for Charities
Charities also benefit from charitable gift annuities in the following ways;
- CGAs entice hesitant donors to donate by providing something in return for their donation.
- Long-term relationships with donors are fostered by gift annuities.
- Donations to charities are flexible. Firstly, they can use the donation immediately or invest in the donation. Secondly, they use the earnings to make annuity payments.
- Instead of the insurance company receiving the balance of the annuity after the annuitant dies, the charity receives the balance when the donor passes away.
Potential Drawbacks of Charitable Gift Annuities
Having a small income for the rest of your life means you can give money to charity and you get a steady income. On the downside, however, charitable gift annuities are not inflation-protected.
Getting inflation-adjusted payments is often possible with a regular annuity by paying extra or receiving smaller payments at first. As such, you will get a lot less money from a $100 or $1,000 annuity check in 20 or 30 years if you receive payments for 20 or 30 years.
Annuities vary in size depending on your age at the time of setting up the contract. So, you will receive smaller payments if you are young, and therefore likely to collect more. Nevertheless, the payments will be larger for older folks who are more likely to pass away sooner. Similarly, if a couple wishes to make a charitable donation, the charity must wait to receive the remainder of the gift until both spouses have passed away.
Some other drawbacks of CTAs include;
- An annuity is created by irrevocably parting with donated funds.
- Payments from an annuity are subject to income tax.
- Because the primary purpose is for nonprofit support, payments could be lower than with a non-charitable annuity.
- Unless you set up multiple annuities, you cannot support several charities at the same time.
Tax Deductions from Charitable Gift Annuities
It is necessary to itemize your federal tax return in order to qualify for a charitable annuity tax break. If you don’t, your deduction won’t be available.
Please note that only a portion of the gift is deductible. What’s more, a tax deduction for transferring money to charity usually ranges from 25 to 55 percent, according to Kiplinger.
Taking your contribution amount and subtracting the present value of the lifetime payments you expect to receive, you can calculate your tax deduction. Based on life expectancy tables and annual earnings assumed by the IRS, the present value of your payments is calculated.
How Are Charitable Gift Annuity Payments Taxed?
In spite of the initial tax deduction, your lifetime payments will still be subject to tax. Donating cash can give you the opportunity to return a portion of your principal tax-free each year. Otherwise, ordinary income tax will apply.
Typically, you avoid a large portion of the capital gains liability if you are donating appreciated securities, like real estate or stocks. However, they must be spread out the remainder over your lifetime.
Since long-term capital gains are typically taxed less than ordinary income, this is advantageous. With that in mind, always learn more about the taxation of gift annuity payments from a financial advisor or representative of the designated charity.
Regulations for Charitable Annuities
Most states have passed laws that govern charitable gift annuities. As such, both the charity that offers them and the donor must comply with the laws of their respective states.
If the charity receives a charitable gift annuity contribution, for example, some of the assets can be immediately spent down. Nevertheless, it must ensure that it maintains an adequate reserve to meet its obligations to provide annuity payments and state regulations that specifically govern them.
The American Council on Gift Annuities provides gift annuity rates to charities that write charitable gift annuities. These institutions, in turn, follow these general guidelines and regulations.
So, let’s say an annuitant lives only as long as their target life expectancy. An annuity regulation stipulates that the “residuum” remaining after the payments are made (the “remainder”) is at least 50% of the initial gift amount. Using the tentative gift annuity contract rate, it determines if the residual gift to charity is at least 20% of the funds transferred.
Using standardized rates deters charities from competing with one another and ensures that a significant portion of the transfer goes to charities. However, some organizations determine their own rates based on their previous investment experience, charitable residuum goals, and state requirements for investment/reserves.
Frequently Asked Questions About Charitable Gift Annuities
1. What is a gift annuity agreement?
This type of gift annuity agreement is not a trust. But rather a long-term contract between a nonprofit organization and a single individual or couple (annuitant(s)). All payments will be determined by the terms of this contract, including the amount, timing, and rate. If you are interested in supporting a nonprofit that offers charitable gift annuities, the fundraising or planned giving departments may be able to provide information about which rates are offered. A fundraising department or a planned giving department is normally the point of contact as well.
An annuity agreement with a single organization can only support that one organization, so a charitable gift annuity can’t support multiple organizations at the same time.
2. Who establishes gift annuities?
Retirement donors who buy gift annuities tend to want to increase their cash flow, secure payments that won’t change and reduce their tax burden. These are some circumstances when gift annuities might make sense;
- The payments you need to make should not be affected by interest rates or stock prices, and they should not be outlived.
- You would like to increase your cash flow from a CD or other fixed-income investment at a low-interest rate.
- Rather than having probate proceedings delay payments to a loved one, you would rather ensure they are made in an efficient and tax-effective manner.
- You own appreciated mutual fund or stock shares, feel tempted to sell some of them and reinvest the money to earn more income, but do not want to pay capital gains tax.
3. Can donors or charities sell gift annuities?
Sometimes, charities can sell the CGAs they receive. The remainder of an annuity is usually given to charities after a donor passes away. The individual payments may not suffice in certain instances, such as a building project. A charity may decide to sell payments from a CGA if they need a lump sum paid immediately, rather than small payments over time.
Annuitants cannot sell their rights to future payments from charitable gift annuities without the charity’s approval. Due to the fact that both parties must agree, and the sale can alter the tax benefit, such transactions are infrequent.
4. How many annuitants may receive payments on a gift annuity?
There can be a single gift annuity or one that is based on two lives, such as a couple. For two beneficiaries, the annuity rate is always lower than for one.
5. Is a charitable gift annuity right for you?
As with everything, charitable gift annuities have their own benefits and risks. If your charity is small or not yet well established, for instance, their ability to make future income payments may be in doubt. The charity must pay claims inclusive of all assets, not just reserve account assets, in order to receive future income payments.
If you want an immediate tax deduction in addition to a lifetime income source, a charitable gift annuity may be a better choice. In addition, it may be a good option if you would like to reduce capital gains tax and make a substantial donation to a charity at the same time.
Make sure you consult a financial professional before making any decisions.