Does a Charitable Gift Annuity Make Sense?

Published In Financial Decisions

September 10th, 2016

Maybe the phrase “the gift that keeps on giving” seems trite, but for some — in the right circumstances — it can fit charitable gift annuities. Whether a charitable gift annuity can also qualify for that other overused and abused phrase, “a win-win situation,” depends on the precise facts and circumstances.

What is a Charitable Gift Annuity? In exchange for a gift to the charity — and the charity can be an arts organization, an educational institution, a hospital or health oriented body, a religious group, or a social service non-profit — the charity promises to pay you a fixed stream of income for life.

How Does it Work?

A Charitable Gift Annuity also can provide the donor with what may be very sizeable tax benefits in the year of the gift — especially if the assets donated have appreciated in value.   Further, a portion of each year’s annuity payments will be tax-free.

The amount of the charitable annuity payment will depend on the value of the gift and the age of the person at the time payments are set to begin. (A Charitable Gift Annuity can also be structured for payments to continue until a second named person dies, although each of the payments would then be somewhat lower.)

How does a Charitable Gift Annuity work? The charitable organization invests the gift and uses a portion of the gift, plus the related investment income it earns, to make the ongoing annuity payments. When the donor dies, the charity keeps whatever remains to use for its goals.

Here is an example. Let’s say that Mary Jones, age 75, makes a $100,000 cash donation to a charity on July 1, 2016 in exchange for a charitable gift annuity. Based on the organization’s rate tables (and nearly all charities use the same rates), she would be promised annual payments of $5,800 from the charity for the rest of her life.

She would be entitled to a $41,000 charitable deduction to use on her 2016 tax returns. (If she were in the 35% federal income tax bracket for ordinary income and can use up the entire deduction, she would save about $14,350 on her 2016 Federal income taxes.)

Of the $5,800 she would receive each year, for the next 12 years, $4,756 per year would be tax-free, and only $1,044 would be taxable at ordinary income rates. If Mary Jones had made the gift to the charity using appreciated shares of stock, she would also be able to avoid paying capital gains tax that she otherwise would have paid had she sold the shares and then made the gift in cash.

About Charitable Gift Annuities

The idea of charitable gift annuities is not new. In fact, the American Council on Gift Annuities was launched 1927. The concept, however, has staying power. Currently more than 4,000 non-profit organizations — including many well-known colleges and universities, medical research charities, major museums, etc. — offer some form of charitable gift annuity.

Each charity sets its own minimum for a gift — typically at least $10,000. All charities will accept cash, and most will also accept publicly traded shares or bonds. Some will even take other forms of property, such as real estate.

The tax write-off for such a large donation to a non-profit group is one reason this form of annuity is attractive to those who can afford the gift and are philanthropically inclined. Another reason is the guaranteed steady stream of income.

For the very wealthy, Charitable Gift Annuities also can be used as estate-planning tools. A large charitable contribution can be used to reduce the size of an estate and, hopefully, reduce the eventual estate tax. It also can be used to help eliminate what otherwise would have been a significant capital gains tax if the assets had significantly appreciated in value and been sold rather than donated to the charity.

So, yes, a charitable gift annuity can be both a “win-win” and a “gift that keeps on giving,” but, as you might expect, with a few cautions. Once the charitable gift is given, it is irretrievable. In other words, there is no prospect of return even in a dire emergency. Further, if the person who is to receive income for life is in poor health, or knows he or she has a shorter than average life expectancy, it’s rarely a good idea to buy a Charitable Gift Annuity. Finally, the person to receive the income is fully dependent on the long term health and viability of the charity — there is no FDIC or insurance company that guarantees that the annuity payments will continue. While many solid and well-established charitable organizations and institutions are financially stable, that’s not necessarily true of all non-profits.

For those with the ability to make the large charitable donation required, the idea of generating a sizeable income tax deduction up front plus a fixed, partially tax-exempt income for life might be very appealing. And yes, those are ample reasons to turn to those trite and overused sayings. In the right circumstances, a charitable gift annuity can be both “win-win” and a “gift that keeps on giving.”

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