What Is A Charitable Gift Annuity?
/Similar to a charitable remainder trust (CRT), a charitable gift annuity allows you to make money and make a difference. You donate to a charity and the charity turns around and pays you a consistent, fixed income for the rest of your life.
Yep, you read that right.
A charitable gift annuity is a contract that provides you (the donor) a fixed income stream for life in exchange for a sizeable donation to a charity. As a donor, you make a sizable gift to charity using cash, securities, or possibly other assets. In return, you become eligible to take a partial tax deduction for your donation, plus you receive a fixed stream of income from the charity for the rest of your life.
How does a charitable gift annuity work?
A gift annuity agreement is a lifelong contract between a single nonprofit organization and an individual or couple, who are referred to as annuitant(s).
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First, you make a donation to a single charity that offers a charitable gift annuity. Minimum gifts for establishing a charitable gift annuity may be as low as $5,000, but are often much larger. Many large nonprofit organizations, including a number of universities, offer charitable gift annuities. You are now considered an annuitant.
Then, the gift is set aside in a reserve account and invested.
Lastly, you receive a fixed payout for the rest of your life supported by the investment account. This payout can be monthly or quarterly. At the end of your life (as well as your spouse’s, if you’re giving as a couple), the charity receives the remainder of the gift.
In addition to the payouts, you may also be eligible to take a tax deduction at the time of the original gift. Also, a portion of your income payments from the gift may be tax-free for a period of time.
The payment is fixed and will never fluctuate or adjust for inflation. It is guaranteed because it is backed by the charity’s entire assets, not just your gift. In other words, you can guarantee payment regardless of how well, or poorly, the investments perform.
Cha-ching.
How much are you paid each year?
The size of your payment is determined by many factors, including the amount of the gift and your age(s) when you set up the charitable gift annuity. For example, younger donors usually receive more payments but the amount will be smaller. Some charities offer higher rates for donors who agree to wait a number of years before starting to receive payments.
Keep in mind, that the rates of return are generally lower than traditional, non-charitable annuities because the primary purpose is to benefit the charity.
What are the benefits of a charitable gift annuity?
Supporting an organization you care about
Income stream for the rest of your life
An immediate (partial) tax deduction, based on lots of different factors
Possibility of donating many types of assets: cash, securities plus personal property
Potential for a portion of the income stream to be tax-free
Reduced or eliminated capital gains tax liability for gifts
What are the drawbacks of a charitable gift annuity?
Once you donate the funds, it’s a done deal
Your payments do not adjust for inflation
You can’t support multiple charities unless you open multiple annuities
You may have to pay income tax on your fixed payouts
Payments may be lower than with a non-charitable annuity
Key Takeaways
A charitable gift annuity is a way to make money and make a difference. It is a strategic giving arrangement between you and a non-profit or university.
As the donor (annuitant), you will receive a regular payment for life, based on the value of the assets.
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Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
