Information for donors that answers questions about what a gift annuity is, payments and the factors affecting the size of payments, persons who might benefit from a gift annuity, rates, taxation, the income tax charitable deduction, legislation affecting charitable gifts, the steps to complete a gift annuity, and which members of ACGA offer gift annuities.
What is a Charitable Gift Annuity?
A charitable gift annuity is a way to make a gift to your favorite charity, and still receive an income for yourself or others. It is a contract under which a charity, in return for a transfer of cash or other property, agrees to pay a fixed sum of money for a period measured by one or two lives. The person who contributes an asset for the annuity is called the "donor", and the person who receives payments is called the "annuitant" or "beneficiary." Usually, the annuitant is also the donor, but this is not always true. The maximum number of annuitants is two, and payments can be made to them jointly or successively.
Charitable Gift Annuity Payments
Payments from a charitable gift annuity are fixed from the outset. They will neither increase nor decrease, whatever happens to interest rates or the stock market. A charity is contractually obligated to make the payments, even if it has to dip into its general funds to do so.
Factors Affecting the Size of Payments
The size of the payments from a charitable gift annuity depends on the following factors:
- The gift annuity rate offered by the charity (most charities follow rates suggested by the American Council on Gift Annuities).
- The value of the contribution.
- The number of annuitants (no more than 2 people).
- The age(s) of the annuitant(s).
About Gift Annuity Rates
Since 1927, the American Council on Gift Annuities (ACGA) has periodically published a schedule of suggested charitable gift annuity rates. Although a charity is free to offer any schedule of rates it wishes – so long as its rates don't exceed the limits imposed by federal and state laws – most charities, in fact, follow the rates suggested by the ACGA. Thus, donors generally find that the rates offered by various charities are identical. This encourages donors to make philanthropic decisions based on the cause of the charities they consider supporting, rather than the rates offered.
Charitable gift annuity rates are lower than those offered by insurance companies to purchasers of commercial annuities so that a significant portion of a contribution will be available for charitable purposes. Though lower than commercial rates, gift annuities are still very attractive to individuals who want simultaneously to support a favorite charity and provide payments to themselves or others.
Click here to see the charitable gift annuity rates recommended by the American Council on Gift Annuities.
Persons Who Might Benefit From a Gift Annuity
Most gift annuity donors are retired, want to increase their cash flow, seek the security of guaranteed payments and would like to save taxes. A charitable gift annuity could be right for people in any of the following circumstances:
- The interest rates on their CDs and other fixed-income investments have declined, and they would like to increase their cash flow.
- They own appreciated stock or mutual fund shares and have considered selling some of the shares and reinvesting the proceeds to generate more income, but they don't want to pay tax on the capital gain.
- They would like to count on fixed payments, which are unaffected by interest rates and stock prices and which they cannot outlive.
- They want to assure continuation of payments to a surviving spouse without the delay of probate proceedings.
- They would like to provide financial assistance to an elderly parent, a sibling, or other person in a tax-advantaged manner.
Taxation of Gift Annuity Payments
If the gift annuity is funded with cash, part of the payments will be taxed as ordinary income and part will be tax-free. If funded with appreciated securities or real estate owned more than one year, and the donor is receiving the annuity payments, part of the payments will be taxed as ordinary income, part as capital gain, and part may be tax-free. The charity that issues the annuity will send a Form 1099-R to the annuitant. This form will specify how the payments should be reported for income tax purposes. For details regarding the taxation of gift annuity payments, it is wise to consult with representatives of the charity as well as your financial advisors.
Income Tax Charitable Deduction
Taxpayers who itemize deductions can claim a charitable deduction for a portion of the original gift. This deduction can result in significant income tax savings. In short, the deduction is equal to the amount of the contribution less the present value of the payments that will be made to the donor and/or other beneficiary during life. The present value of those payments is determined using IRS tables regarding life expectancy and assumed earnings, and taking into consideration the amount contributed and the gift annuity rate.
There is a variety of software that provides accurate tax calculations. All charities that offer gift annuities can provide these calculations to individuals who are exploring whether a gift annuity is appropriate for them, and many of those charities have calculators on their web sites that allow potential donors to enter basic information and see how their income tax situations might be affected by a charitable gift annuity agreement.
Click here for links to web sites of organizations that are members of the American Council on Gift Annuities and offer charitable gift annuities.
Legislation Affecting Charitable Gifts
The American Council on Gift Annuities, along with charitable organizations throughout the country, has advocated legislation allowing individuals to make tax-free gifts from Individual Retirement Accounts and other retirement plans. This legislation has not yet passed. Currently, withdrawals from such retirement plans are taxed as earned income. However, the charitable tax deduction and favorable tax treatment of gift annuity payments might still make sense to an individual who would like to support a favorite charity and receive a life income.
Steps to Complete a Gift Annuity
- Contact the development director, planned giving office or fundraising office of the charity you wish to support. Perhaps contact a few different charities to see how policies might vary from one charity to another. Types of charities that offer gift annuities include religious organizations, colleges and universities, hospitals and health care organizations, social service agencies, cultural and arts organizations, community foundations, environmental organizations and other non profit organizations. Many large charities also have information about gift annuities on their websites.
- If you do not have a specific charity in mind, ask for recommendations from friends and family members, or contact an "umbrella" charity or your local community foundation. They can often help you benefit multiple charities or aid you in directing your donation to a specific cause or organization.
- When you contact the charity of your choice, ask them for a financial illustration showing the amount of payments, how they would be taxed, and the charitable deduction generated by the gift.
- Discuss the financial illustration with your tax and financial advisors. They can help you make an informed decision, taking into consideration all relevant factors.
Which Charities Offer Gift Annuities?
The American Council on Gift Annuities is unaware of a complete list of organizations that offer charitable gift annuities. However, many of those organizations that have gift annuity programs support the work of the American Council on Gift Annuities through membership.
Click here for a list of organizations that are members of the American Council on Gift Annuities and offer charitable gift annuities or charitable gift annuity services.
This information is provided for informational purposes as a service of the American Council on Gift Annuities, and in no way should be construed as legal or financial advice.