facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck

How does it work?

A charitable gift annuity is a contract between you and a charity in which you exchange a large gift for a fixed amount of income to one or two individuals for their lifetime. Generally, the beneficiary (or the receiver of the income) will be the donor and/or their spouse. The payments from the charity to the beneficiary can start immediately, be deferred to a future date or even be flexible, allowing the beneficiary to choose the start date at some point in the future.

The gift becomes a part of the charity’s assets and the payments are a general obligation of the charity (thus a contract and not a trust arrangement). Despite the gift becoming a part of the charity’s assets and not set aside in a trust to provide income to the beneficiary, the donor can rest assured that the charity must maintain sufficient reserves (based upon state laws) to meet the payment obligations.

The income received by the beneficiary will be fixed for their life and a portion of the payment will be considered a tax-free return1 of the donor’s gift. Many charities will follow the suggested payout rates from the American Council on Gift Annuities to determine the payment to the beneficiary, based upon the specifics of the contract.

Not all charities will offer gift annuities. Charities offering gift annuities will generally be large charities that can handle the regulatory burden of state laws.

Why use a charitable gift annuity?

It is important to remember that a charitable gift annuity is meant to provide a gift to the charity; therefore, the income to the beneficiary will not be comparable to a commercially available annuity product. Many charities will use the gift annuity rates recommended by the American Council on Gift Annuities, which calculates rates that on average will result in the charity having 50% of the initial gift remaining at the expiration of the agreement.

With this in mind, the ideal candidate for a charitable gift annuity is someone who desires to make a large donation to the charity and would gift it outright if they could afford it. The charitable gift annuity strategy allows the donor to receive a guaranteed income that is needed to accomplish their personal goals, while still making a substantial impact for the charity. Many charitably inclined individuals without the assets to give significant gifts, will often defer those gifts until their death to reduce the chance of running out of funds during their lifetime. The charitable gift annuity allows individuals in that scenario to guarantee themselves lifetime income, while also giving them the ability to see the impact of their gift. Not only will the donor see the impact of their gift, but they will also receive an income tax deduction2 at the time of the gift.

A charitable gift annuity can be a great tool for many charitably inclined individuals; however, it should be carefully considered within a comprehensive financial plan as it will have impacts in retirement and cash flow planning as well as tax planning. At Guillaume & Freckman, we take great joy in helping people maximize the impact of their charitable gifts in concert with their financial plan.

1Once the donor’s basis has been completely recovered, all additional payments are fully taxable.
2The income tax deduction will vary depending upon the age of the donor, the payout rate and the applicable federal rate (mid-term).
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.