Charitable Gift Annuities
The other day I was running some errands and flipping through the radio. I stopped the dial once I heard the opening chords to “Band on the Run.” For those who are unfamiliar, this was one of the biggest hits from Paul McCartney and Wings. And, the Foo Fighters also have a rocking cover version out there as well.
Due – Due
Nonetheless, one of my all-time favorite lines ever song just so happens to be in this song;
“If I ever get out of here
Thought of giving it all away to a registered charity
All I need is a pint a day if I ever get out of here
If we ever get out of here”
Obviously if Macca actually following through, that would be a very hefty donation to the charity of his choice. For the rest of us though, we may not be able to donate as much as we would like to a registered charity. This is particularly true if you want to make a donation but also in credit card debt.
But what if I told you there was a way to receive a fixed income stream for life if you donate a sizeable amount to charity? That might sound too good to be true. However, it’s possible through a charitable gift annuity.
What is a Charitable Gift Annuity?
A charitable gift annuity (CGA) is a way to plan for a future gift that’s beneficial to be both charities and donors. Overall, charitable gift annuities aren’t all that different from other annuity types you can purchase. An important difference is that charities purchase these annuities on behalf of donors using their financial gifts — as opposed to being a contract between you and an insurance company. During their lifetime, donors will receive charitable gift annuity payments. And, the remaining annuity balance goes to the charity upon their death.
The main advantage of these types of annuities is that they serve as charitable donations. What’s more, charitable annuities provide a partial income tax deduction for the donation, as well as a guaranteed lifetime income stream to the annuitant and sometimes to a spouse or other beneficiary. And, it’s an effective way to build and maintain a long-term relationship with your favorite organization.
Among the types of gifts, donors can make to nonprofits and charities is the gift annuity.
Other forms of planned giving are:
Donations in cashcha
Charitable remainder trust
Gifts are given after a donor’s death (bequests)
Remainder of retirement account balances
Securities that appreciate in value
Charitable lead trust
Funds with pooled income
Donor-advised fund or private foundation
CGAs may be used by religious, charitable, and educational organizations that qualify as 501(c)(3)s. Take note, however, that these gifts may not be accepted by all nonprofit charities. But, the majority do.
As defined by the Internal Revenue Service, 501(c)(3) organizations are “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.” In addition, private shareholders cannot be the primary beneficiaries of 501(c)(3) organizations.
Charities are required to send CGA annuitants IRS Form 1099R in order to comply with tax law and indicate the type of contributions (whether cash or property) that are taxable, non-taxable, or capital gains.
Looking for more annuity information. Here is our annuities for dummies guide.
How Does a Charitable Gift Annuity Work?
Charitable gift annuities are offered by a number of large nonprofit organizations, including universities. But, what’s the process like?
The first thing to do is identify a charity that is meaningful to you and make a donation to that charity. The gift is then put into a reserve account for future investment. As long as you’re alive, you’ll receive a fixed payout. Often, this is supported by your investment account and your age(s) at the time of gifting. The charity receives the remainder of your gift at the end of your life (or the life of your spouse, if you give together).
Charitable gift annuities can be set up by individuals or couples, also referred to the annuitants. Your annuity can then be funded by a cash donation to the charity, but it can also be funded by securities or gifts of personal property. The minimum gift for setting up a charitable gift annuity may be as low as $5,000, though it is usually much greater.
The annuitant may also be eligible for a tax deduction based on the estimated amount that will go to the charity after all the payments have been made, along with the income stream. Based on your statistical life expectancy, you may also be able to receive a portion of your payout tax-free for a certain period of time.
What is a Gift Annuity Agreement?
Rather than a trust, a gift annuity contract is a long-term contract between a single nonprofit organization and an individual or couple. Just like an annuity contract, the agreement should detail the lock-in rate and the amount and timing of all payments that you’ll receive. If the nonprofit you are interested in supporting offers charitable gift annuities, they will be able to provide you with all the information you need.
Due to the fact that gift annuities are contracts with one charity, there isn’t an option to set up multiple CGA’s simultaneously.
Charitable Gift Annuity Payments
In the case of charitable gift annuities, donors (annuitants) receive payments throughout their lifetimes. You can set up a charitable gift annuity at any age, but the size of your payments is determined by this factor. Younger donors, for example, typically receive more payments, but their checks will be smaller.
Even better? You’ll never have to worry about the amount fluctuating. Moreover, the annuity is backed by the charity’s entire assets, not just your gift. As such, it will last for as long as the donors live, regardless of the investment performance of the annuity.
Regulations for Charitable Annuities
Most states have regulations regarding charitable gift annuities. The charities that provide them must comply with the regulations of the state in which they are located and in which their donors live.
For instance, an organization may spend down some assets immediately after receiving a contribution from a charitable gift annuity program. Even so, it must meet its annuity payment obligations and state regulations related to such annuities and ensure that it has sufficient reserves.
Annuities for charitable gifts are often written by charities using gift annuity rates from the American Council on Gift Annuities. Additionally, these charities adhere to the council’s regulations and recommendations.
As an example, if the annuitant lives only as long as their targeted life expectancy, one regulation governing charitable gift annuities assumes the remaining funds (the “residuum”) must be at least 50% of the initial gift amount. Afterward, it determines if the residual gift to charity is at least 20% of the funds transferred to the charity under the contract, using the tentative gift annuity contract rate.
The reason? Stabilized rates are meant to reduce the tendency for charities to compete with one another for donations, thereby ensuring that a large portion of the transfer goes to charity. Many organizations, however, opt to determine their own rates based on their investment experience, charitable residuum goals, and investment and reserve requirements imposed by state law.
Charitable Gift Annuity Income and Tax Details
A charitable gift annuity may be set up so both beneficiaries receive income payments at the same time. Or, it may be structured so the second beneficiary receives these payments — but only after the primary beneficiary passes away. The charity then receives the remaining value of the annuity after the death of the second income beneficiary.
Donations of cash, publicly traded securities, or other assets, such as real estate, art, or collectibles, can be used to fund a charitable gift annuity. This could result in an immediate partial tax deduction. But, in order to determine how much you’ll be able to deduct, consider the following:
Number of beneficiaries
Age(s) at the time of the gift, as well as life expectancies
The expected annuity income stream beneficiaries will receive
The rate determined by the IRS at the time of the gift to value the annuity.
You can minimize your capital gains liability as well as secure a future income stream by transferring appreciated securities rather than cash to a charitable gift annuity. If so, you’ll l either receive a capital return. Or, you’ll be subject to federal and state income taxes for the income received from the charitable gift annuity whatever the type of asset you donate.
To help determine how capital gains taxes should be treated, charities will issue forms 1099-R.
Benefits and Drawbacks of Charitable Gift Annuities
Provides a lifetime income source. The income will continue for the duration of your life and/or that of your beneficiary’s.
Ensures that highly appreciated assets are preserved. If you donate non-income-producing property such as long-term appreciated assets, you are able to eliminate capital gains tax. The other portion will be deferred. Therefore, this component may be eliminated. The value of your assets becomes preserved if you donate them in kind, rather than reduced if you sold them and paid capital gains taxes. As a result, you’ll be able to donate more to your charity and receive an annuity income.
Offers income tax deductions. When you fund a charitable gift annuity, you may be able to deduct a portion of your income tax. Tax deductions are calculated using several variables. Mainly, this is the charitable gift annuity yield. If you’re unaware, this is based on the charity’s survival rate and the beneficiaries’ survival rates.
Your favorite causes will benefit from your long-term support. A residual annuity is not passed to an insurance company, unlike what happens with an immediate income annuity. It will instead be donated to a charity, such as your alma mater or another organization that’s near and dear to your heart.
Drawbacks associated with charitable gift annuities.
Annuities created through charitable gift contributions are irrevocable and are managed by the organization that created the annuity. Also, a charitable gift annuity offers lower income than a standard insurance annuity, which can make this option less attractive if the donor does not intend to make a bequest to charity.
Other cons to charitable gift annuities to be aware of are;
Taxes must be paid on the annuity income stream.
No adjustments will be made to the payments due to inflation.
Unless you set up multiple annuities, you cannot support more than one charity.
Frequently Asked Questions About Charitable Gift Annuities
1. What is a charitable gift annuity?
Donating to your favorite charity and receiving fixed payments for life are both possible with a charitable gift annuity. Depending on your preference, however, these payments can begin right away or be deferred until later. You can find out more by using the annuity formula here.
Just note, that the number of annuitants associated with a charitable gift annuity cannot exceed two. But, you may be able to establish a gift annuity for someone. This should be clearly outlined in the contract you agreed to with the charity. And, the charity uses the remaining funds when the annuitant dies, at which point the arrangement terminates.
2. Who establishes gift annuities?
Typically, individuals who give gift annuities are retirees seeking increased cash flow, a guaranteed fixed income that will not fluctuate, and tax-saving opportunities.
But, you should also consider these scenarios when considering a charitable gift annuity:
If you want to increase your cash flow, you should invest in a CD or other fixed-income investment that has a low-interest rate.
The stock or mutual fund you own has appreciated and you have considered selling some of the shares and reinvesting the proceeds for increased income, but don’t want to pay taxes on the gains.
Preferably, you want to receive fixed payments. Also, you want payments that aren’t impacted by interest rate changes and stock market fluctuations.
It is important to continue providing tax-efficient payments to a loved one without having to wait for the probate process.
3. How is the amount of the annuity determined?
Gift annuity payments vary depending on the annuitant’s age – generally, the older the annuitant, the higher the payment rate. Typically, the American Council on Gift Annuities (ACGA) sets the rates available by most charities. By setting these rates, the ACGA aims to offer an attractive payment stream to the annuitant while giving a substantial gift to the charity.
There’s a huge difference between the rates offered by insurance companies and those offered by charities.
4. What are the tax advantages associated with a charitable gift annuity?
One major tax advantage of gifting includes deferring federal and state capital gains taxes upon the sale of donated appreciated assets. Other perks include avoiding future capital gains taxes and exempting the entire value of the gifted assets from federal and state estate taxes.
5. Is a charitable gift annuity right for you?
All things, including charitable gift annuities, have risks and benefits. As an example, if a charity is small or not well established, future income payments may be subject to its ability to make payments and not just its assets.
On the other hand, a charitable gift annuity is a good option if you would like the following;
Immediate tax benefits.
A secure lifetime for you and/or another beneficiary with a lifetime income.
Reducing capital gains taxes.
For help determining what’s best for you, consult a financial professional.