Can You Donate an Annuity to Charity?

It is possible to donate an annuity to a charitable organization, but this type of gift involves specific rules and tax considerations. The financial outcome depends on the kind of annuity you own and the donation method you choose. Whether your contract was purchased with after-tax money or is within a retirement account, the regulations will impact your taxable income. The process is more complex than writing a check and requires coordination with the annuity issuer and the charity.

Understanding the Tax Implications of Donating an Annuity

The tax consequences of donating an annuity depend on whether it is a non-qualified or qualified contract. A non-qualified annuity is purchased with after-tax dollars, meaning you have already paid income tax on the principal. When you donate a non-qualified annuity during your lifetime, you must recognize any gain in the contract as ordinary income in the year of the transfer. This gain is the difference between the annuity’s cash surrender value and your cost basis.

This income recognition can create a substantial tax liability. For example, if you paid $60,000 into an annuity that is now worth $100,000, the $40,000 gain is taxed as ordinary income to you upon donation. While you can take a charitable deduction for the gift, it may not fully offset the income you are required to report. Some donors find it more advantageous to surrender the annuity, pay the tax on the gain, and donate the remaining cash proceeds.

A different set of rules applies to qualified annuities, which are held within retirement accounts like an IRA and funded with pre-tax dollars. The most tax-efficient way to donate these assets is through a Qualified Charitable Distribution (QCD). A QCD allows individuals aged 70 ½ or older to directly transfer up to $108,000 each year from their IRA to an eligible charity.

The primary benefit of a QCD is that the distributed amount is excluded from the donor’s adjusted gross income (AGI). This means you do not pay income tax on the withdrawal, and the distribution can also satisfy all or part of your Required Minimum Distribution (RMD) for the year.

Methods for Donating Annuity Assets

Donors have several options for contributing annuity assets to a charity. One straightforward method is the outright donation of a non-qualified annuity contract. This involves formally transferring the ownership of the entire policy to the chosen charitable organization. The charity then becomes the new owner and can decide whether to hold the annuity, surrender it for its cash value, or annuitize the proceeds.

Another strategy involves using a non-qualified annuity to establish a Charitable Gift Annuity (CGA). In this arrangement, you transfer assets to a charity, and in return, the charity agrees to pay you a fixed income for the rest of your life. The income payments are determined by your age at the time of the gift. This method allows you to support a cause while securing a reliable income stream.

A similar structure is the Charitable Remainder Trust (CRT), which can also be funded with an annuity. You would transfer the annuity to the trust, which then pays an income stream to you or your beneficiaries for a set term or for life. After the trust term ends, the remaining assets are distributed to the charity. This option can offer more flexibility in terms of income structure compared to a CGA.

For qualified (IRA) annuities, the primary method of donation is the Qualified Charitable Distribution (QCD). This involves a direct transfer of funds from the IRA custodian to the charity and is often used to fulfill an individual’s annual RMD without increasing their taxable income.

Information and Forms for the Donation

Before initiating a donation, you must gather specific details about your annuity and the charity. You will need the following:

• Your annuity policy or contract number, its current value, and your cost basis (the amount you invested).
• The type of annuity—whether it is qualified (held in an IRA) or non-qualified (purchased with after-tax funds).
• The charity’s full legal name, its official mailing address, and its Taxpayer Identification Number (EIN).
• The specific forms required by your annuity provider, such as a “Change of Ownership” or “Absolute Assignment” form for an outright donation or a “Qualified Charitable Distribution” form for an IRA annuity.

The Donation Process Step-by-Step

After gathering all necessary information and completing the required forms, the next step is to submit the paperwork to the insurance company. It is advisable to send these documents via certified mail with a return receipt requested. This provides proof of delivery and a record of when the company received your instructions.

You should also coordinate with the designated charity, informing them that you have initiated the transfer of an annuity. This communication ensures they are prepared to receive and process the donation correctly once the insurance company completes the transfer. Providing them with a copy of the submitted forms can also help them track the incoming gift.

The insurance company will process the change of ownership or the charitable distribution, which can take several weeks. Once the transfer is complete, you should receive a written confirmation from the insurance company. The charity, upon receiving the funds or the contract, will issue a formal acknowledgment letter detailing the gift for your tax records.