Charitable gift annuities offer many benefits to donors, including:
- Lifetime payments to them, and/or to someone they designate, guaranteed by the available assets of the charitable organization.
- In most cases, partially tax-free income, since a portion of their annuity payment is treated as a return of principal.
- An immediate income tax deduction for the portion of the annuity amount that is a charitable contribution.
- A partial bypass of capital gain taxes when they donate appreciated securities for an annuity on their life and/or that of a spouse. The remaining capital gain is generally reported ratably over the donor’s life expectancy.
- Possible estate tax savings, as assets used to fund the charitable gift annuity may be removed from their taxable estate.
- The satisfaction of knowing that their chosen charitable organization receives a significant gift to help further its mission.
What is a charitable gift annuity, and what are its tax advantages?
A charitable gift annuity is similar in many respects to a traditional commercial annuity. In a commercial annuity, individuals pay a lump sum to an insurance company and the company, in turn, promises to make regular payments to them for as long as they live or in some cases another period of time. In a charitable annuity transaction, however, donors transfer funds for an annuity contract from a charitable organization for more than its fair market value. The difference between what they receive for the property they transferred and what they could have received in the commercial annuity market represents their charitable contribution and is tax deductible in the year they fund the annuity.
If a donor uses cash to fund the gift annuity, he or she may claim a deduction of up to 50% of his or her adjusted gross income (AGI). If the annuity is funded with gifts of appreciated securities, the donor may deduct up to 30% of AGI. Any unutilized deduction may be carried forward for five years. If the donor transferred appreciated property in exchange for a charitable gift annuity, any capital gains arising from the transaction may qualify to be reported by the annuitant on the installment basis over his or her lifetime. This special capital gains treatment is generally not available if a gift annuity is established for another person.
Gift annuities may be a particularly good choice to augment retirement income because they help assure that a donor won’t run out of income late in life. What’s more, one of the great advantages of a gift annuity is that a portion of the payments the annuitants receive (for a period of years based on government life expectancy tables) will be considered a tax-free return of a portion of their investment; the remainder of the payment is taxed as capital gains or as ordinary income. This increases the amount they will have after taxes to spend during their retirement years. The amount of tax-free payments is reduced if the annuity is funded with appreciated securities, such as publicly traded stock.
What can be used to fund a charitable gift annuity?
While most charitable gift annuities are funded with cash, many donors instead choose to donate other assets, most often appreciated, low-yielding securities. As noted above, when donors give appreciated property in this way, capital gain taxes may be avoided or delayed.
When will the donor’s annuity payments begin?
Donors may choose for their annuity payments to begin immediately, or the payments can be deferred until a later date that they designate (for example, in the year they expect to retire). In addition, the payment period can be measured solely by the donor’s life, or by the lives of the donor and a loved one (often a husband and wife or siblings) or for the lives of one or two persons other than the donor. The payments are fixed when the donor enters into the gift annuity contract, and remain unchanged for the term of the contract. These payments are guaranteed by all of the available assets of the charitable organization.
What annuity rate can a donor expect to receive?
Gift annuity rates are determined by the age of the person or persons who receive the income payments. Because they are based on life expectancy, rates are higher for older annuitants and lower for younger annuitants. Many charities use the “uniform gift annuity rates” that are recommended by the American Council on Gift Annuities (ACGA). The ACGA is a private not-for-profit organization that deals with matters pertaining to charitable gift annuities and establishes suggested annuity rates designed to result in the issuing charities realizing approximately 50% of the amount originally transferred by the donor (the actuarial residuum). (See www.acga-web.org for current rates and the assumptions underlying them.)
What if donors’ financial circumstances change? Can they change their minds later?
You should remember to tell your donors that a charitable gift annuity is irrevocable. This means that they can never withdraw the funds used to establish the gift annuity. For this reason, a donor should always retain other assets to be used in case of an emergency.
Editor’s note: This is the first in a series of “Back to Basics” articles dealing with the workings of various charitable gift plans. With over ten years of experience in the gift planning field, Christine Sturm Kirk is a third-year law student and a staff member of The Sharpe Group.