One of the most advantageous aspects of annuities is that they are highly customizable. Annuity contracts can include specifications that make the annuity fit the personal needs of the annuitant. With such a wide variety of types of annuities, it is crucial for potential annuitants to research all of the options that are available. Keep reading to learn more about one specific type of annuities: charitable gift annuities.
What is a Charitable Gift Annuity?
A charitable gift annuity is an arrangement between a donor and a charity whereby the donor makes a sizable donation to the organization and receives regular annuity-like payments for the rest of their life from the charitable organization in return. The annuity payouts are based on the value of the assets that the donor transferred to the charity. Once the donor dies, the assets are retained by the charity. Charitable gift annuities are a type of planned giving.
A charitable gift annuity can be funded with cash, securities, or a variety of other assets. In return for the donation, the donor becomes eligible to take a partial tax deduction for the donation, plus he or she will receive a fixed stream of income from the charity for the rest of his or her life.
How Does a Charitable Gift Annuity Work?
Many large nonprofit organizations, including a number of universities, offer charitable gift annuities. Charitable gift annuities can be donated by an individual, or the donation can be made as a couple. Once the annuitant(s) make the donation, the gift is set aside in a reserve account and invested. Then, the annuitant(s) will begin to receive fixed monthly or quarterly payouts that will continue for the remainder of the donor’s lifetime, or until both spouses have passed away if the donation is made as a couple. Once all the annuitants have passed away, the charity retains the remainder of the gift.
The amount of the fixed payout that the annuitant(s) receive is based on several factors, including the donor’s age at the time of the gift as well as the size of the donation. In addition to these considerations, charitable gift annuity rates vary from organization to organization. Older donors may see significantly higher payouts than younger donors due to the fact that they have a shorter remaining life expectancy. Some charities offer higher rates for donors who agree to wait a number of years before starting to receive payments, similar to a deferred annuity.
Compared to a traditional annuity, rates of return may be lower with a charitable gift annuity because the primary purpose of a charitable gift annuity is to benefit the charitable organization or university.
Taxes on a Charitable Gift Annuity
Donors may be eligible to claim a partial charitable tax deduction for the year in which they set up the charitable gift annuity. It is only a partial deduction because the IRS views one portion of the contribution as a gift, to be used immediately by the organization for its tax-deductible charitable purposes. The other portion is viewed as an investment for the donor, which ultimately generates his or her payments.
The donor can deduct the part of his or her donation that won’t be returned to him or her in annuity payments. The deduction is calculated by taking the full amount of the gift and subtracting the present value of all the payments the annuitant is expected to receive during his or her lifetime.
If the donation is made in cash, part of the annuitant’s payouts each year will be a tax-free return of principal, and the rest will be subject to ordinary income tax, similar to the way a non-qualified annuity is taxed.
Advantages of Owning a Charitable Gift Annuity:
Potential Downsides of Charitable Gift Annuities:
The Bottom Line
Charitable gift annuities are a great way for people to make a donation to an organization that matters to them, while also receiving stable lifetime income. However, the relatively lower rate of return that is associated with charitable gift annuities is an important consideration for anyone thinking about how to best balance their charitable goals with their financial plans. Potential annuitants should be sure to research all aspects of a charitable gift annuity before deciding if it is a good fit for them.
Special thanks in preparing this summary of “What is a Charitable Gift Annuity?” goes to Bob Carlson, leader of the Retirement Watch advisory service and chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.