A charitable gift annuity is a type of donation that allows you to give back to your favorite charity and receive payments in return. It is a great way to support a cause that is important to you while also receiving income during your retirement years. In this guide, we will discuss how charitable gift annuities work and how you can donate to receive them!
What Is A Charitable Gift Annuity?
A charitable gift annuity (CGA) is a concept whereby a donor makes a gift of money or property to charity, and the charity gives back an agreed-upon income stream to the donor for the remainder of their life or joint lives.
If the actuarial value of the annuity is less than the value of the property transferred, then the difference in value constitutes a charitable deduction for federal tax purposes.
CGAs are not investments.
Annuity payments are tax-free partial returns of the donor’s gift based on actuarial tables of life expectancy.
The American Council on Gift Annuities (ACGA) established the maximum rates of return typically paid on these uninsured annuities.
Gift annuity payments are fixed. The income never goes down or up.
How A Charitable Annuity Works
When you establish a charitable gift annuity, you make a donation to the charity of your choice in exchange for fixed payments each year. The amount of your payments is based on your age and the current interest rate. For example, if you are 60 years old and donate $1000 to a charity with a current interest rate of four percent, you would receive $40 per year for the rest of your life.
The payments you receive from a charitable gift annuity are tax-free and can help supplement your retirement income. Additionally, the donation itself is tax-deductible. Charitable gift annuities can be an excellent way to support a cause you care about while also receiving financial benefits.
While there are many benefits to establishing a charitable gift annuity, there are some drawbacks to consider as well. First, you will not be able to access the money that you donate until you reach retirement age. Additionally, the payments you receive may not keep up with inflation if the interest rate remains low. Finally, if you pass away before receiving payments, your beneficiaries will not receive anything.
Charitable Gift Annuities are not insured.
A charity could become insolvent and be unable to make annuity payments. Any state guaranty fund does not protect most gift annuities.
The National Association of Insurance Commissioners has adopted two models to regulate CGAs.
- The Charitable Annuities Model Act (#240) contains a detailed licensing scheme for CGAs.
- The Charitable Gift Annuities Exemption Model Act (#241) calls for a simplified registration mechanism.
Who offers a charitable gift annuity?
Many individuals are charitably inclined later in life. They want to benefit their school alma mater or benefit their church, synagogue, or temple. They want to give away assets while living but would still like some form of income from those assets while still alive.
The Charitable Gift Annuity can satisfy the desire to make gifts while still living to improve retirement cash flow. Many charitable and religious organizations will accept gifts for charitable gift annuities and then purchase an immediate annuity to fund the cash flow promised on a charitable gift annuity. This then allows the charity to utilize the remaining funds after purchasing the immediate annuity. In this way, an individual donor can benefit the charity while at the same time turning a non-productive asset into a lifetime income stream.
The charity benefits, the donor benefits, and the donors receive lifetime cash flow and an income tax deduction based upon the value of the gift remaining with the charity.
This makes for a win-win situation for everyone.
What is a Deferred Gift Annuity?
A deferred charitable gift annuity is a deal where you give your money, and in return, the charity pays you fixed payments for the rest of your life. They start on a day that you choose at least 1 year after the money was given.
How Do Charitable Gift Annuities Work?
How is the amount of the annuity determined?
- The payments under a gift annuity contract differ based on the annuitant’s age—in general, the older the annuitant, the greater the rate.
- The rates for charitable gift annuities are often lower than those offered by insurance companies. If you want to make the most of your lifetime income, a retirement annuity may be a better option.
- If you wish to make a charitable donation while receiving an income tax deduction, and fixed payments for the rest of your life, a gift annuity may be ideal for you.
What tax benefits are associated with gift annuities?
- If you itemize your deductions, a portion of the money donated in exchange for a gift annuity can be claimed as a federal income tax charitable deduction.
- The annuitant’s monthly payment is calculated by subtracting the present value of the payments projected to be made over the life expectancy at retirement.
- Charities that provide gift annuities frequently include quotes illustrating the benefits of a gift annuity.
How will my payments be taxed?
- If you fund a gift annuity with cash, the first portion of your payments will be taxed as ordinary income and the other portion will be tax-free. If you fund the gift annuity with long-term assets that have appreciated, such as stocks or real estate, a portion of the payments will be taxed as ordinary income, a portion as capital gain, and a portion may be tax-free. The payouts will generally be taxed as regular income in the end.
- The annuitant will receive a Form 1099-R from the charity that issues the annuity each year. This form describes how the payments should be recorded for income tax purposes.
Charitable Gift Annuity At a Glance
|Charitable Gift Annuity||Variable|
|Access To Principal||No||Yes||Yes||Yes||No|
|Control Over Money||No||Yes||Yes||Yes||No|
|Long-Term Care Help||No||Yes||Yes||Yes||No|
|Guarantees||No||State Guaranty||State Guaranty||State Guaranty||State Guaranty|
If you are interested in establishing a charitable gift annuity, contact your favorite charity to learn more. They will be able to provide you with information about the process and help you get started. Donating to a worthy cause has never been easier or more rewarding!
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