Are Charitable Gift Annuities a Good Idea?

A charitable gift annuity (CGA) is a financial arrangement where an individual contributes assets to a charitable organization. In return, the charity provides the donor, and potentially another beneficiary, with fixed payments for their lifetime. This allows donors to support a cause they care about while also securing a predictable income stream, combining philanthropic goals with personal financial planning.

Key Features of Charitable Gift Annuities

A charitable gift annuity is established through a contract between a donor and a qualified public charity. The donor makes an irrevocable gift of cash, securities, or other property to the charity, meaning the assets cannot be reclaimed.

Once the gift is made, the charity assumes a legal obligation to pay a fixed amount of income to the donor for life, or for the lives of up to two beneficiaries. These payments are not dependent on the investment performance of the specific gift but are backed by the charity’s general assets.

CGAs can be structured in different ways to suit a donor’s financial timeline. An immediate gift annuity begins making payments to the donor soon after the gift is established. Alternatively, a deferred gift annuity allows the donor to delay the start of payments to a future date, such as retirement. This deferral can result in higher annuity payments later, as the gift has more time to grow and the donor is older when payments commence.

Receiving Annuity Payments

The income a donor receives from a charitable gift annuity is determined primarily by the age of the annuitant(s) at the time of the gift. Older annuitants generally receive a higher payout rate, reflecting a shorter life expectancy. The American Council on Gift Annuities (ACGA) publishes suggested maximum annuity rates that many charities follow.

Payments are fixed and will not fluctuate over time, providing a dependable income stream that can be paid monthly, quarterly, or annually, depending on the agreement. This predictability can be a valuable component of a donor’s financial planning, offering a stable source of funds.

Upon the death of the last annuitant, the remaining portion of the original gift becomes the property of the charitable organization. A charitable gift annuity is a contract between a single nonprofit and an individual or couple, meaning it cannot support multiple charities simultaneously.

Tax Treatment of Charitable Gift Annuities

Establishing a charitable gift annuity offers several potential tax benefits. A portion of the gift qualifies for an immediate charitable income tax deduction in the year the annuity is funded. This deduction is calculated using IRS actuarial tables based on the expected remaining amount with the charity after all payments. If the full deduction cannot be used initially, it can typically be carried forward for up to five additional tax years.

The annuity payments received by the donor are taxed in a specific way, divided into different components. A portion of each payment is considered a tax-free return of principal, representing a return of the donor’s original gift. Another part is taxed as ordinary income. If appreciated assets, such as stocks, were used to fund the annuity, a portion of the payments may also be taxed as capital gains.

When funding a CGA with appreciated securities, capital gains tax on the appreciation is often reduced or spread out over the annuitant’s lifetime, rather than being immediately due. The charity issuing the annuity provides a Form 1099-R annually, detailing how payments should be reported for tax purposes.

Setting Up a Charitable Gift Annuity

Establishing a charitable gift annuity begins with identifying a charitable organization that offers these agreements. Many larger nonprofits, including universities and national charities, provide CGA programs. Inquire about their specific requirements, including minimum gift amounts, which often range from $5,000 to $20,000 or more.

Once a charity is selected, a formal annuity agreement is completed, outlining the terms of the gift, payment amount, frequency, and beneficiaries. The donor then transfers the chosen assets, which can include cash, publicly traded securities, or other property, to the charitable organization.

After the transfer, the charity provides confirmation of the gift and issues annual statements detailing the annuity payments. Donors should consult with their tax or financial advisors to ensure the arrangement aligns with their financial and philanthropic goals, clarify tax implications, and ensure all documentation is properly handled.