Charitable gift annuities
What is a Charitable Gift Annuity (CGA)?
A charitable gift annuity (CGA) is one of the easiest philanthropic techniques available and consists of a basic, simple contract between you and our organization. In exchange for an irrevocable gift of an asset or cash from you, we will make payments to you (and another person if you choose) for your lifetime(s). The payments are stable and you can never outlive them.
The charitable gift annuity is sometimes confused with a commercial annuity, which is sold by an agent of an insurance company. We are not an insurance company, and a charitable gift annuity is not an insurance product. Instead, our obligation to make the payments to you is backed by our charitable assets. The charitable gift annuity is a charitable gift. It is between you and a charitable organization.
Charitable gift annuities provide us with much needed financial support and allow you to leave a legacy and perpetuate your giving. You will receive lifetime payments, a charitable tax deduction and the benefit from knowing you have helped support our mission.
How Charitable Gift Annuities Work
- A donor transfers property to our charitable organization.
- The donor receives an income tax deduction for a portion of the gift amount.
- Our organization makes lifetime annuity payments to the annuitants, usually the donor and perhaps another named beneficiary.
Why a Gift Annuity?
Charitable gift annuities are popular giving methods because the amount of these payments is often two to three times higher than the income currently received from savings accounts or Certificates of Deposit. Other donors prefer charitable gift annuities because they can count on receiving stable payments every year, avoiding the ups and downs of the stock market.
Gift annuities are often used due to their simplicity and minimum size requirements. Typically, gift annuities are funded with $20,000 to $25,000—although the minimum amounts range between $5,000 and $10,000. Because a gift annuity requires only a simple contract, no trust arrangement is necessary. By not having to create a trust, you save on attorney’s fees to draft legal documents as well as the hiring of a third party administrator to take care of the trust’s paperwork and annual tax filings.
Receiving Payments
You can establish a gift annuity either during your lifetime or through your will. A lifetime gift annuity makes payments typically to you and another person you choose to benefit. A gift annuity created through your will usually provides payments to your surviving spouse or other heirs for their financial security.
You may select up to two individuals to receive the gift annuity payments. In the majority of gift annuities, the donor chooses the payments for himself or herself. In about one-third of gift annuities, the payments are made jointly to both a husband and wife. Still, other scenarios are possible, such as having the payments made to an in-law, a sibling, a family friend, or a child. Certain gift tax situations apply, so be sure to discuss your situation with your estate planning attorney or us prior to making the gift.
If you decide you would like to make additional gifts and increase the amount of your charitable gift annuity payments, just let us know. We can arrange for additional gifts to be completed at any time and your payments will be synchronized to arrive in one check.
Rates
The American Council on Gift Annuities establishes suggested rates for charitable organizations. Gift annuities provide payments to you based on your age at the time of the gift. The following are the rates as suggested by the American Council on Gift Annuities.
Maximum Recommended Gift Annuity Rates
|
Age
|
Rate
|
Ages
|
Rate
|
|
50
|
5.3%
|
50/50
50/55
|
4.7%
4.7%
|
|
55
|
5.5%
|
55/55
55/60
|
5.0%
5.0%
|
|
60
|
5.7%
|
60/60
60/65
|
5.4%
5.5%
|
|
65
|
6.0%
|
65/65
65/70
|
5.6%
5.7%
|
|
70
|
6.5%
|
70/70
70/75
|
5.9%
6.1%
|
|
75
|
7.1%
|
75/75
75/80
|
6.3%
6.6%
|
|
80
|
8.0%
|
80/80
80/85
|
6.9%
7.3%
|
|
85
|
9.5%
|
85/85
85/90
|
7.9%
8.4%
|
|
90+
|
11.3%
|
90/90
90/95+
|
9.3%
10.1%
|
Charitable Income Tax Deduction
Gift annuities funded with cash are deductible up to 50 percent of your adjusted gross income. Gifts of long-term appreciated assets are deductible up to 30 percent of your adjusted gross income. If you cannot use the entire deduction in the year of the gift, you have five additional years to use up your remaining charitable deduction.
The formula to determine your tax deduction takes into account your age at the time of the gift, the fair market value of your gift and the IRS discounted interest rate used to determine the present value of your gift.
Example: Lucy, aged 65, purchased a charitable gift annuity using $10,000 in cash. At her age, her payments are $600 per year. She decides to receive her payments on a quarterly basis ($150 per quarter). Her charitable income tax deduction is equal to $3,338. She can deduct this amount up to 50 percent of her adjusted gross income for the year of the gift. Therefore, as long as her adjusted gross income is $6,676 (twice the amount of her charitable deduction), she may fully use her charitable deduction in the year she makes the gift. Lucy knows, however, that if she cannot take the full deduction this year, she will still have five more years to use her remaining deduction.
Tax-Favored Payments
Lucy’s payments in the above example are tax favored, meaning they are taxed to her on a more favorable basis than, for example, interest from a Certificate of Deposit or a savings account:
Taxation on Lucy’s Gift Annuity Payments
- Portion of Lucy’s payments taxed as ordinary income: $265
- Portion of Lucy’s payments that is tax-free: $335
- Lucy’s total payment: $600
The tax-free portion of Lucy’s payments will stay tax free until she reaches her life expectancy in 19.9 years. After that time, the entire payment of $600 will be taxed as ordinary income to her.
Capital Gains Avoidance
The most tax-effective assets to give in exchange for a charitable gift annuity are gifts of long-term appreciated assets such as marketable securities. Gifts of these assets allow you to bypass immediate capital gains taxes on the gift portion of your donated asset.
Example: Frank and Sarah are 84 and 82 years old, respectively. They are interested in making a charitable gift annuity with our organization to support our good work. They decide to give $35,000 in appreciated securities they originally bought in the early 1990s for $15,000. They will avoid $20,000 ($35,000 - $15,000) in immediate capital gain income by funding a charitable gift annuity. Instead, had they sold the stock and donated the cash proceeds, they would have had to pay taxes at a 15 percent tax rate on the $20,000 of capital gain income, or $3,000.
Using their joint life expectancy, Frank and Sarah will receive 7.4 percent of $35,000, or $2,590 annually, for as long as either one of them is living. If Frank dies first, for example, Sarah will continue to receive the full $2,590 payment. Their charitable deduction is $15,406, and it is deductible up to 30 percent of their adjusted gross income for the year. They can use any remaining deduction during the next five years if they cannot use the entire deduction in the year of the gift.
Taxation on Frank’s and Sarah’s Payments
- Portion of their payment taxed as ordinary income: $ 774
- Portion of their payment taxed as capital gain: $1,038
- Portion of their payment that is tax-free: $778
- Total payment: $2,590
Their payments will be taxed using the described schedule for 10.8 years (their joint life expectancy). After this time, the entire $2,590 payment will be taxed as ordinary income.
Estate Tax Reduction
Another benefit of establishing a gift annuity is that your potential estate taxes are reduced. For example, if you give $30,000 in cash in exchange for a charitable gift annuity, you have removed $30,000 from your taxable estate — therefore lowering your estate tax bill. If someone other than you or your spouse is an income beneficiary, your estate will not be reduced by the entire $30,000, as the value of that income beneficiary’s interest would still be included in your estate.
Deferring Payments
For donors who would like to make a gift now but do not need the payments immediately, a deferred gift annuity is a tax-smart solution. With a deferred gift annuity, you can give a gift now and decide when you would like your payments to begin. By deferring the beginning date, you will receive a larger income tax deduction and higher payments.
One-Life Deferred Gift Annuity Rates
|
50
|
65
|
12.8%
|
|
50
|
70
|
17.9%
|
|
55
|
65
|
9.9%
|
|
55
|
70
|
13.8%
|
|
60
|
65
|
7.7%
|
|
60
|
70
|
10.7%
|
Flexible Deferred Gift Annuities
Another type of deferred gift annuity allows you to defer payments without pinpointing the exact starting time of the payments. For instance, if you are approaching retirement, but are unsure when you will retire, you can make a flexible deferred gift annuity. When you decide it is time to retire, let us know and we will begin making the payments. Your tax deduction, however, will be based on the earliest possible date you could elect payments to begin.
Questions and Answers
Why are gift annuities such popular giving methods?
CGAs are popular because you not only give a gift to us, but you also receive something at the same time — permanent payments for life. Plus, CGAs are easy to implement and do not require extensive paperwork or other complexities.
How are my gift annuity payments taxed?
Part of each payment is considered a tax-free return of your original gift, and part is taxed as ordinary income. If long-term appreciated assets are donated, a portion of each payment is also taxed at lower long-term capital gain rates. CGA payments are taxed more favorably than other forms of income such as dividends from stock.
How much of an income tax deduction will I receive?
A 60-year-old can deduct roughly $2,844* of a $10,000 gift, depending on the fluctuating IRS discount rate. An 80-year-old could deduct $4,803* for the same $10,000 gift. If the deduction exceeds the annual ceiling, the remaining deduction may be carried over for an additional five years.
*Assumes quarterly payments and a 4.6 percent charitable midterm federal rate.
For More Information
Charitable gift annuities offer many benefits for you and our organization. Our representatives are available to answer your questions and provide confidential proposals for you without obligation. Please call (831) 625-4506.
The information on this web site is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are based on current rates at the time of printing and are subject to change. References to estate and income tax include federal taxes only; individual state taxes may further impact results.