Charitable Gift Annuity
A charitable gift annuity is a way to donate to a nonprofit and receive a stream of lifetime payments in return. Payment rates depend on several factors, including your age. Any money left in the annuity when you die goes to the charity. Charitable gift annuities can provide a tax deduction.
What Is a Charitable Gift Annuity?
A charitable gift annuity is a contract between you and a nonprofit organization. It allows you to create a financial gift that you can present to your favorite charity while you receive fixed payments for the rest of your life at the same time.
You can fund this type of annuity using cash, stocks, mutual funds, bonds or other marketable securities like real estate.
One additional beneficiary, or annuitant, can be added to the contract. This beneficiary may receive lifetime payments at the same time you do. Or their payments can begin after you die and last until that beneficiary dies.
Thousands of universities and nonprofits generate money using annuities, although specific contract details vary by institution.
While gift annuity payments are supported in good faith by nonprofit institutions, they are not insured by any government agency.
Many charities require a minimum $10,000 to $25,000 initial donation to fund the annuity. Others require you to be at least 65 years old to start receiving payments.
This type of planned giving may be a good option if you’re interested in tax-efficient philanthropy during retirement.
How Does a Charitable Gift Annuity Work?
You donate a sum of money to the charity of your choice. The organization separates that donation into two pots of money, then slowly grows the first pot of money by investing it. This is the source of your regular lifetime payments.
Next, the charity utilizes the other pot of money to help support the organization.
While the charity can immediately spend part of the contribution, it must maintain sufficient reserves to meet annuity obligations and comply with state requirements.
Payments are typically distributed once a year or once a quarter.
The size of your payments from the charity is influenced by how old you are when you establish the gift. The payment rate in your contract is fixed and will never fluctuate or adjust for inflation.
You will receive an up-front partial tax deduction the year following your donation.
Any funds leftover in the annuity when you or your beneficiary dies goes to the charity.
Like all types of annuities, gift annuities have many moving parts. Ask the nonprofit for a financial illustration that details your payment size, how it will be taxed and the tax deduction generated by your gift.
Charitable Gift Annuity Rates
Most nonprofits that offer charitable gift annuities use rates established by the American Council on Gift Annuities (ACGA).
These annuity rates are designed to offer you an attractive payment stream while also securing a good gift for the charity.
You can choose to start payments immediately or later. The size of your payments is tied to your age. Typically, the older the annuitant, the higher the rate.
|Age||Annuity Rate %|
For example, if you created a $100,000 gift annuity at age 70, you could expect to receive $4,700 in payments each year.
The payment rate for joint gift annuities is lower than the rate for single gift annuities. That rate is also based on your age as well as the age of the other beneficiary.
For example, if you’re 70 years old and your spouse is 65 years old, the payout rate is 4 percent. If you’re 70 years old and your spouse is 60 years old, the payout rate is 3.7 percent.
Tax Deductions from Charitable Gift Annuities
To benefit from a charitable annuity tax break, you need to itemize your federal tax return. Otherwise, you will not be able to claim your deduction.
It is important to note that the deduction applies only to a portion of the total gift.
According to Kiplinger, your tax deduction is usually 25 to 55 percent of the amount you transferred to charity.
Your tax deduction is calculated by taking the full amount of your contribution and subtracting the present value of the lifetime payments you’re scheduled to receive.
The present value of your payments is calculated with life expectancy tables and assumed earnings set by the IRS.
How Are Charitable Gift Annuity Payments Taxed?
While charitable gift annuities can provide an initial tax deduction, you’ll still owe tax on some of the lifetime payments you receive.
If you donate cash, part of your yearly payments will be a tax-free return of principal. The rest will be subject to ordinary income tax.
If you’re donating appreciated securities — such as real estate or stocks — you avoid much of the capital gains liability you would otherwise owe, and the rest is spread out over your lifetime payments.
This can be beneficial because a long-term capital gain rate is typically lower than an ordinary income tax rate.
Talk to a financial advisor or a representative from your designated charity to learn more about the taxation of gift annuity payments.
Regulations for Charitable Annuities
Many states have rules and regulations in place that govern charitable gift annuities, including reporting requirements and security laws.
A gift annuity is regulated by the law of the state where the donor is a legal resident.
Financial information on the charity must be submitted to the state, including specifics related to its reserves and investments. Many states also require information on a charity’s board of directors.
Other states require a charity to operate for a specified period continuously — usually at least three years — before offering charitable annuities.
Most nonprofits use rates established by the ACGA. The organization provides other general recommendations and regulations as well.
For example, one ACGA regulation requires charities to use the gift for a specific initiative if the donor specifies one when the gift is established.
6 Cited Research Articles
- American Council on Gift Annuities. (2021, May 13). Current Gift Annuity Rates. Retrieved from https://www.acga-web.org/current-gift-annuity-rates
- American Council on Gift Annuities. (2020, November 24). About Gift Annuities. Retrieved from https://www.acga-web.org/about-gift-annuities
- American Council on Gift Annuities. (2020, November 20). Donor Guide to Gift Annuities. Retrieved from https://www.acga-web.org/donor-guide-to-gift-annuities
- American Council on Gift Annuities. (2020, November 8). State Regulations. Retrieved from https://www.acga-web.org/state-regulations
- Kane, M. (2018, October 26). Gift Annuity Offers Tax Break and Retirement Income. Retrieved from https://www.kiplinger.com/article/retirement/t003-c000-s004-gift-annuity-offers-tax-break-retirement-income.html
- Ambrose, E. (2017, September 22). What You Must Know About Charitable Gift Annuities. Retrieved from https://www.kiplinger.com/article/investing/t064-c000-s002-what-you-must-know-about-charitable-gift-annuities.html