The other day I was running some errands and flipping through the radio. I stopped the dial once I heard the opening chords to “Band on the Run.” For those who are unfamiliar, this was one of the biggest hits from Paul McCartney and Wings. And, the Foo Fighters also have a rocking cover version out there as well.
“If I ever get out of here
Thought of giving it all away to a registered charity
All I need is a pint a day if I ever get out of here
If we ever get out of here”Obviously if Macca actually following through, that would be a very hefty donation to the charity of his choice. For the rest of us though, we may not be able to donate as much as we would like to a registered charity. This is particularly true if you want to make a donation but also in credit card debt.
What Is A Charitable Gift AnnuityA charitable gift annuity (CGA) is a way to plan for a future gift that’s beneficial to be both charities and donors. Overall, charitable gift annuities aren’t all that different from other annuity types you can purchase. An important difference is that charities purchase these annuities on behalf of donors using their financial gifts—as opposed to being a contract between you and an insurance company. During their lifetime, donors will receive charitable gift annuity payments. And, the remaining annuity balance goes to the charity upon their death.
The main advantage of these types of annuities is that they serve as charitable donations. What’s more, charitable annuities provide a partial income tax deduction for the donation, as well as a guaranteed lifetime income stream to the annuitant and sometimes to a spouse or other beneficiary. And, it’s an effective way to build and maintain a long-term relationship with your favorite organization.
Among the types of gifts, donors can make to nonprofits and charities is the gift annuity.
- Donations in cashcha
- Charitable remainder trust
- Gifts are given after a donor’s death (bequests)
- Remainder of retirement account balances
- Life insurance
- Securities that appreciate in value
- Charitable lead trust
- Funds with pooled income
- Donor-advised fund or private foundation
CGAs may be used by religious, charitable, and educational organizations that qualify as 501(c)(3)s. Take note, however, that these gifts may not be accepted by all nonprofit charities. But, the majority do.
As defined by the Internal Revenue Service, 501(c)(3) organizations are “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.” In addition, private shareholders cannot be the primary beneficiaries of 501(c)(3) organizations.
Charities are required to send CGA annuitants IRS Form 1099R in order to comply with tax law and indicate the type of contributions (whether cash or property) that are taxable, non-taxable, or capital gains.
How Does a Charitable Gift Annuity WorkCharitable gift annuities are offered by a number of large nonprofit organizations, including universities. But, what’s the process like?
The first thing to do is identify a charity that is meaningful to you and make a donation to that charity. The gift is then put into a reserve account for future investment. As long as you’re alive, you’ll receive a fixed payout. Often, this is supported by your investment account and your age(s) at the time of gifting. The charity receives the remainder of your gift at the end of your life (or the life of your spouse, if you give together).
Charitable gift annuities can be set up by individuals or couples, also referred to the annuitants. Your annuity can then be funded by a cash donation to the charity, but it can also be funded by securities or gifts of personal property. The minimum gift for setting up a charitable gift annuity may be as low as $5,000, though it is usually much greater.
What Is a Gift Annuity AgreementRather than a trust, a gift annuity contract is a long-term contract between a single nonprofit organization and an individual or couple. Just like an annuity contract, the agreement should detail the lock-in rate and the amount and timing of all payments that you’ll receive. If the nonprofit you are interested in supporting offers charitable gift annuities, they will be able to provide you with all the information you need.
Charitable Gift Annuity PaymentsIn the case of charitable gift annuities, donors (annuitants) receive payments throughout their lifetimes. You can set up a charitable gift annuity at any age, but the size of your payments is determined by this factor. Younger donors, for example, typically receive more payments, but their checks will be smaller.
Regulations for Charitable AnnuitiesMost states have regulations regarding charitable gift annuities. The charities that provide them must comply with the regulations of the state in which they are located and in which their donors live.
For instance, an organization may spend down some assets immediately after receiving a contribution from a charitable gift annuity program. Even so, it must meet its annuity payment obligations and state regulations related to such annuities and ensure that it has sufficient reserves.
Annuities for charitable gifts are often written by charities using gift annuity rates from the American Council on Gift Annuities. Additionally, these charities adhere to the council’s regulations and recommendations.
As an example, if the annuitant lives only as long as their targeted life expectancy, one regulation governing charitable gift annuities assumes the remaining funds (the “residuum”) must be at least 50 percent of the initial gift amount. Afterward, it determines if the residual gift to charity is at least 20 percent of the funds transferred to the charity under the contract, using the tentative gift annuity contract rate.
Charitable Gift Annuity Income and Tax DetailsA charitable gift annuity may be set up so both beneficiaries receive income payments at the same time. Or, it may be structured so the second beneficiary receives these payments—but only after the primary beneficiary passes away. The charity then receives the remaining value of the annuity after the death of the second income beneficiary.
- Number of beneficiaries
- Age(s) at the time of the gift, as well as life expectancies
- The expected annuity income stream beneficiaries will receive
- The rate determined by the IRS at the time of the gift to value the annuity.
Benefits and Drawbacks of Charitable Gift AnnuitiesProvides a lifetime income source. The income will continue for the duration of your life and/or that of your beneficiary’s.
Ensures that highly appreciated assets are preserved. If you donate non-income-producing property such as long-term appreciated assets, you are able to eliminate capital gains tax. The other portion will be deferred. Therefore, this component may be eliminated. The value of your assets becomes preserved if you donate them in kind, rather than reduced if you sold them and paid capital gains taxes. As a result, you’ll be able to donate more to your charity and receive an annuity income.
Offers income tax deductions. When you fund a charitable gift annuity, you may be able to deduct a portion of your income tax. Tax deductions are calculated using several variables. Mainly, this is the charitable gift annuity yield. If you’re unaware, this is based on the charity’s survival rate and the beneficiaries’ survival rates.
Drawbacks Associated with Charitable Gift AnnuitiesAnnuities created through charitable gift contributions are irrevocable and are managed by the organization that created the annuity. Also, a charitable gift annuity offers lower income than a standard insurance annuity, which can make this option less attractive if the donor does not intend to make a bequest to charity.
- Taxes must be paid on the annuity income stream.
- No adjustments will be made to the payments due to inflation.
- Unless you set up multiple annuities, you cannot support more than one charity.
Frequently Asked Questions About Charitable Gift Annuities
What Is A Charitable Gift Annuity?Donating to your favorite charity and receiving fixed payments for life are both possible with a charitable gift annuity. Depending on your preference, however, these payments can begin right away or be deferred until later.
Who Establishes Gift Annuities?Typically, individuals who give gift annuities are retirees seeking increased cash flow, a guaranteed fixed income that will not fluctuate, and tax-saving opportunities.
- If you want to increase your cash flow, you should invest in a CD or other fixed-income investment that has a low-interest rate.
- The stock or mutual fund you own has appreciated and you have considered selling some of the shares and reinvesting the proceeds for increased income, but don’t want to pay taxes on the gains.
- Preferably, you want to receive fixed payments. Also, you want payments that aren’t impacted by interest rate changes and stock market fluctuations.
- It is important to continue providing tax-efficient payments to a loved one without having to wait for the probate process.
How Is the Amount of the Annuity Determined?Gift annuity payments vary depending on the annuitant’s age–generally, the older the annuitant, the higher the payment rate. Typically, the American Council on Gift Annuities (ACGA) sets the rates available by most charities. By setting these rates, the ACGA aims to offer an attractive payment stream to the annuitant while giving a substantial gift to the charity.
What Are the Tax Advantages Associated with A Charitable Gift Annuity?One major tax advantage of gifting includes deferring federal and state capital gains taxes upon the sale of donated appreciated assets. Other perks include avoiding future capital gains taxes and exempting the entire value of the gifted assets from federal and state estate taxes.
Is A Charitable Gift Annuity Right for You?All things, including charitable gift annuities, have risks and benefits. As an example, if a charity is small or not well established, future income payments may be subject to its ability to make payments and not just its assets.
- Immediate tax benefits.
- A secure lifetime for you and/or another beneficiary with a lifetime income.
- Reducing capital gains taxes.
The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.