How to Donate an Annuity to a Charity
Gifting an annuity can be an effective way to support a charity. This guide explains the financial nuances and procedures for making an informed donation.
An annuity, a contract with an insurance company that provides regular payments, can be used for philanthropy. Donating an annuity allows an individual to support a charitable organization using a specific financial asset. This method of giving can be structured in several ways, offering a planned approach to supporting a cause.
Tax Rules for Gifting Annuities
For tax purposes, an annuity is “ordinary income property,” meaning any gain is taxed at ordinary income rates rather than capital gains rates. An annuity’s value has two parts: the cost basis, which is the sum of premiums paid with after-tax money, and the earnings. The cost basis is not taxed upon withdrawal, but the gain is.
When gifting an annuity to a qualified charity, the donor’s charitable deduction is limited to the contract’s cost basis. This rule prevents a donor from deducting the annuity’s full market value, as the untaxed appreciation would have been considered ordinary income if surrendered for cash.
The “partial interest rule” under Treasury regulations restricts donations where the donor gives less than their entire interest in the property. For example, a donor cannot receive a charitable deduction for assigning only future income payments to a charity while retaining ownership of the contract. To receive a deduction, the donor must transfer their entire interest.
Methods for Donating a Non-Qualified Annuity
A direct method for donating a non-qualified annuity, purchased with after-tax funds, is to make an outright gift of the entire contract. This involves formally transferring full ownership to the charitable organization. The charity can then surrender the contract for its cash value or hold it.
A donor can also name a charity as the annuity’s beneficiary. The charity will receive the contract’s remaining value upon the owner’s death. This action provides no immediate income tax deduction, but the annuity’s value is removed from the donor’s taxable estate and the transfer bypasses probate.
Donors may also use the regular payments from their annuity to fund their giving. The annuitant receives scheduled payouts and then contributes that cash to their chosen charity. These cash donations are fully deductible, subject to adjusted gross income (AGI) limitations, allowing the donor to retain ownership of the annuity.
Annuity payments can also be directed to fund structured charitable vehicles. The income can be used to make contributions to a donor-advised fund or to establish a charitable gift annuity (CGA). A CGA is a contract where a charity, in exchange for a contribution, agrees to pay the donor a fixed income for life.
Using an IRA Annuity for Charitable Giving
Annuities held within an Individual Retirement Account (IRA) are subject to different rules, primarily through a Qualified Charitable Distribution (QCD). This option is available to IRA owners age 70 ½ or older. A QCD allows a donor to instruct their IRA custodian to transfer funds directly from the IRA to a qualified public charity.
The annual limit for QCDs is adjusted for inflation; for 2025, an individual can direct up to $108,000 from their IRA to charity. A tax advantage of a QCD is that the distributed amount is excluded from the donor’s adjusted gross income (AGI). This can be more beneficial than an itemized deduction by helping the taxpayer stay in a lower tax bracket and reducing the impact of AGI-based limitations.
A feature of the QCD is its ability to satisfy all or part of an IRA owner’s Required Minimum Distribution (RMD) for the year. The RMD is the amount IRA owners must begin withdrawing annually starting at age 73. Using a QCD to fulfill this requirement means the donor avoids recognizing the RMD as taxable income.
The funds must be transferred directly from the IRA provider to the charity. If the IRA owner withdraws the funds first and then makes a contribution, the distribution is treated as taxable income. The donation is then a separate act subject to normal deduction rules.
Executing the Donation Process
Information and Document Preparation
Before initiating a donation, you must gather specific information. You will need the charity’s full legal name, its official address, and its Taxpayer Identification Number (TIN). You will also need your annuity contract number and the contact information for the issuing insurance company.
Contact your annuity provider to request the appropriate paperwork. For an outright gift, you will need a “Change of Ownership Form” or an “Absolute Assignment Form.” If naming a charity as a beneficiary, you will need a “Change of Beneficiary Form.” Complete these forms, ensuring the charity’s details are entered precisely.
Submission and Confirmation
Submit the completed forms to the annuity provider, following the company’s specific instructions for submission, which may involve mailing physical documents or using a secure online portal. If mailing, it is advisable to use a method that provides tracking and delivery confirmation, such as certified mail.
After submitting the paperwork, the annuity company will process the change, and you should expect to receive written confirmation from the provider. The charity will also typically send a thank-you letter that serves as a written acknowledgment of the donation for your tax records.