A Donor's Guide to Gift Annuities
What is a charitable gift annuity?
A charitable gift annuity is a way you can make a gift to your favorite charity and receive fixed payments for life in return. The payments can begin immediately, or can be deferred to a future date which you choose. You may also establish a gift annuity for someone else; however, the total number of annuitants associated with any one gift cannot exceed two. The terms of the arrangement are set forth in a contract signed by you and the charity. The arrangement terminates on the death of the annuitant(s), at which point the charity uses the remaining funds on its mission.
Who establishes gift annuities?
Most gift annuity donors are retired, want to increase their cash flow, seek the security of fixed payments that will not vary, and would like to save taxes. A charitable gift annuity might be appealing in the following circumstances:
- The interest rate on a CD or other fixed income investment is low and you would like to increase your cash flow.
- You own appreciated stock or mutual fund shares, have considered selling some of the shares and reinvesting the proceeds to generate more income, but don't want to pay tax on the capital gain.
- You would like fixed payments which are unaffected by interest rates and stock prices and which you cannot outlive.
- You want to assure continuation of payments to a loved one without the delay of probate proceedings and in a tax-efficient manner.
How is the amount of the annuity determined?
- The payments under a gift annuity contract vary by the age of the annuitant—generally speaking, the older the annuitant, the higher the rate. Most charities offer rates established by the American Council on Gift Annuities (ACGA). The rates established by the ACGA are designed to balance an attractive payment stream for the annuitant with a good gift for the charity.
- Charitable gift annuity rates are lower than those offered by insurance companies. If you want to maximize the amount of income you will receive over your lifetime, you might be better off purchasing a commercial annuity.But if you would like to make a charitable gift, receive an income tax deduction while also receiving fixed payments for life, a gift annuity might be a great fit for you.
- Click here to see the maximum charitable gift annuity rates suggested by the ACGA.
What tax benefits are associated with gift annuities?
- If you itemize your deductions, you can claim a federal income tax charitable deduction for a portion of the amount transferred to the charity in exchange for a gift annuity. The deduction is equal to the amount of the contribution less the present value of the payments that will be made to the annuitant(s). The present value of the payments is determined using life expectancy tables and assumed earnings prescribed by the IRS.
- Charities that offer gift annuities routinely provide illustrations of the benefits of a gift annuity. Click here for links to web sites of organizations that are members of the American Council on Gift Annuities and offer charitable gift annuities.
How will my payments be taxed?
- If you fund a gift annuity with cash, part of the payments will initially be taxed as ordinary income and part will initially be considered tax-free. If you fund the gift annuity with appreciated securities or real estate owned more than one year, part of the payments will be taxed as ordinary income, part as capital gain, and part may be tax-free. In most instances, the payments will eventually be taxed as ordinary income.
- The charity that issues the annuity will send a Form 1099-R to the annuitant each year. 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.
How do I get started?
- Check out the website of your favorite charity to see if they offer charitable gift annuities. If your charity does not offer gift annuities, you might still be able to establish a gift annuity through a community foundation that will benefit a specific cause or organization that you would like to support.
- Contact the development director, planned giving office, or fundraising office of the charity you wish to support.
- Ask the charity 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.
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.