Charitable Gift Annuities: A Complete Guide

The Ultimate Guide to Charitable Gift Annuities

Charitable gift annuities are agreements between donors and nonprofit organizations that allow donors to contribute in exchange for a lifetime income stream. At the end of the donor’s lifetime, the remaining balance in the annuity account transfers to the charity as a final gift from the donor.

This type of contribution is commonly used for a capital gains tax fund and offers donors various benefits depending on the type of gift annuity. While there are many upsides to charitable gift annuities, it’s essential to understand this agreement before you begin your donations. To help you out, we’ve compiled the ultimate guide to charitable gift annuities so you can start donating wisely and confidently. Let’s dive in!

How Does a Charitable Gift Annuity Work?

A charitable gift annuity works similarly to a lifeannuityin which the annuitant pays a sum to a charity in exchange for a consistent income stream, typically paid quarterly. The remaining funds are gifted to the annuity writer when the annuitant passes. Rather than the remaining funds being held by insurance companies, the recipient nonprofit organization retains assets upon the annuitant’s death.

The standard process to set up a charitable gift annuity and for establishing the gift to the charity goes as follows:

1. The annuitant selects a nonprofit organization, such as a large institution like a university, to offer charitable gifts to
2. The annuitant donates to this charity.
3. The donated gift is set aside in a secure reserve account and invested in the organization.
4. Long-term charitable gift annuity payments begin to the donor once the gift annuity is established at the charity.
5. The annuitant receives a monthly or quarterly payment stream for the rest of their life.
6. The charity receives the remainder of the charitable gift annuity at the end of life.
7. If the annuitant donates with their spouse, the remainder is given after the end of both lives.

What Assets Can be Donated?

The assets you can donate with a charitable gift annuity typically vary on the nonprofit organization. While many annuitants offer cash donations to their charity of choice, some organizations allow donations of securities (such as stocks and bonds) and personal property.

The minimum for charitable annuity gifts is as low as $5,000, though most donors offer more significant sums and assets.

Who Sets the Standards?

TheAmerican Council on Gift Annuities(ACGA) is the leading organization for setting standards for charitable gift annuities. The ACGA sets guidelines for the minimum and maximum amount of annuities and recommended rates of return.

ACGA is an independent nonprofit organization, and many charitable institutions use its annuity rates nationwide. The council determines donation rates based on a few factors; for instance, life expectancy contributes to rates, meaning that older donors will qualify for higher annuity rates than younger, healthy donors. The rate also depends on the size of the donation.

The American Council on Gift Annuities recommends the following payout rates for the average single-donor annuity:

Age Payout Rate

65 4.8%

70 5.3%

75 6.0%

80 7.0%

85 8.1%

90 9.1%

Special Considerations for Tax Deduction

A charitable gift donation tax dedication depends on the amount you contribute to the annuity that exceeds its value. Money returned to the annuitant is a partially tax-free return to the donor, and the amount is determined through parameters provided by theInternal Revenue Service(IRS).

Organizations Qualified for Charitable Contribution Deductions

The IRS permits deductions for charitable contributions made to or used within organizations qualified under section 170(c) of the Internal Revenue Code, including the following:

1. State, U.S. possession, or political subdivision of the United States or District of Columbia made for public purposes.
2. A community chest, corporation, fund, trust, or foundation created in the U.S., its possessions, territories, or the District of Columbia
3. Churches, synagogues, and other religious institutions
4. War veteran organizations or an organization’s post, auxiliary, trust, or foundation within the United States
5. Nonprofit volunteer fire companies
6. Civil defense organizations that are created according to U.S. law
7. Fraternal societies operating under the lodge system if the contribution is made exclusively for charitable reasons
8. Nonprofit cemetery companies, when funds are irrevocably dedicated to ongoing care

Benefits of Charitable Gift Annuities

Charitable gift annuities can benefit donors, depending on their situation and goals. Individuals in a secure financial situation may consider charitable gift annuities to access some of the following benefits:

• Lifetime income source: Charitable gift annuities provide payment for life and a retirement income source that continues as long as you, your beneficiary, or your spouse survive.
• Offers income tax deductions: A charitable gift annuity offers annuitants the possibility of a partial tax deduction when the annuity receives funds. Determine the deduction by variables such as the charitable gift annuity yield.
• Preserves the value of your highly-appreciated assets: Charitable gift annuities allow annuitants to eliminate capital gains taxes if the annuitant is donating long-term appreciated assets. These assets include non-income-producing property, allowing donors to preserve the market value of their assets instead of reducing the value.
• Potential for tax-free income: A specific portion of your income stream may be tax-free when you contribute to a nonprofit organization.
• Option to donate various assets: Charitable gift annuities are not limited to cash donations, making them a flexible option for many donors.
• Support a cause you love: One of the best parts of charitable giving is donating to causes you have a deep passion for. Because the remainder of your annuity after you pass transfers to the charity, you can continue supporting the cause you love even after your lifetime. Charitable gift annuities make a significant difference and are rewarding for donors and receivers alike.

Drawbacks of Charitable Gift Annuities

While the benefits of charitable giving far outweigh the downsides, it’s always important to know the potential factors that might contribute to your decision. Below are some of the possible drawbacks of charitable gift annuities to consider:

• Payments are irrevocable
• Your income stream may be subject to income tax
• Payments are fixed and will not be adjusted based on inflation
• Payments with non-charitable annuities are often lower than with charitable annuities
• Payments cannot support multiple charities without numerous annuities

How are Payments Taxed?

Gifts made in cash are likely taxed as ordinary income. Those funding a nonprofit organization with securities or property will have a portion taxed as ordinary income while another portion is taxed as capital gains.

Charities issue donors aform 1099-Rannually to report payments for income tax purposes. According to the IRS, file form 1099-R for each individual receiving a designated distribution or treated as having made a distribution exceeding $10 from charitable gift annuities. The form describes how the annuitant should record payments for income tax purposes.

What About a Charitable Remainder Trust?

An alternative to charitable gift annuities is a charitable remainder trust (CRT), which allows a donor to support the charity of choice while simultaneously earning a steady income stream used to establish a remainder trust. Though CRTs operate similarly to charitable gift annuities, there are some critical differences, including the following:

• CRTs typically require a costlier minimum contribution.
• You and any beneficiary receive payments and a specific percentage of your remainder trust’s value on a different schedule, such as once annually.
• CRT assets delivered to one or multiple charities upon the donor and beneficiary’s end of life

Important Considerations

Given the various benefits of charitable gift annuities, you might want to jump in and get started. However, before you do so, always keep in mind the following essential considerations:

1. Choice of Charity: Before deciding to become an annuitant, it is vital to research the charity that will be receiving your gift. Check out their mission, how they operate, and where they allocate their funds.
2. Tax Benefits: The payment tax benefit for a charitable gift annuity can be significant, depending on the gift. Consult with a tax professional to determine how to maximize your tax benefits.
3. Gift Amount: Make sure you understand the usage of the gift and the terms and conditions.
4. Payment Schedule: Understand the payment schedule of the annuity. Some annuities pay out regularly, while others may have variable payment schedules.
5. Estate Planning: Consider how the charitable gift annuity will affect yourestate planningand real estate income. Make sure you understand the handling of the annuity upon death.
6. Professional Advice: Seek professional advice when considering a charitable gift annuity to ensure you understand all the implications of the gift and the annuity before making a decision. Consult with your attorney, a certified public accountant, or a financial advisor before making this decision.