Do you have a favorite charity that you’d like to give a rather large gift to? If you could pledge this gift to your charity of choice while taking legal tax-deductions and have a stream of income in return, would this be something that interests you? Here, we’ll discuss the most beneficial way that you can support your favorite charity using a “planned giving” strategy. But first, what is a Charitable Gift Annuity?
What is a Charitable Gift Annuity?
A charitable gift annuity is an arrangement involving a donor and a charitable organization with the following provisions: As the donor, you make a substantial gift to a charitable organization using cash, securities or other assets. In return, for your gift, you become qualified to take a partial income tax deduction based on the value of your gift, and you collect a fixed income stream from the charity as long as you are alive. As with similar life annuities, when the annuitant (annuity owner) dies, the income stream to the annuitant ceases.
Unpacking the Charitable Gift Annuity
Charitable gift annuities are preferred vehicles and a well-known strategy for planned giving. These annuities are designed using a gift annuity arrangement (not a contract) between a charitable organization and an individual or couple. The annuities in unison furnish a charitable donation to the organization, a limited tax deduction for the donation, and a fully guaranteed income stream to the annuitant and in some cases a spouse or some other beneficiary.
The donation tax deduction is restricted to the contribution to the annuity in excess of its present value, as determined using current Internal Revenue Service guidelines. A charitable gift annuity can be funded using cash, securities or other assets. Primary funding may be as low as $5,000, however, most gifts are generally more substantial. Numerous universities and charitable organizations offer charitable gift annuity arrangements.
The payment amount will depend on a variety of components beginning with the current age of the donor. The older the donor, the larger the amount of monthly payments. Payment amounts incline to be lower than conventional annuities because the principal reason for creating a charitable gift annuity is to benefit a charitable organization rather than offer the greatest possible retirement income payment.
In a traditional charitable gift annuity, the account payouts are not limited to the assets that have been contributed, however, the actuarial computations defining payout amounts normally provide that a significant residual amount ought to remain for the charitable organization following the beneficiary’s death. The funds returned to an annuitant in equal payments are treated as a partial tax-free return of the donor’s gift to the charity. Payments are guaranteed by the charitable organization’s holdings, not just the assets that were donated to it.
What are the Tax Benefits Provided to the Donor?
Charitable gift annuities come with specific tax advantages that are not offered with many other donation strategies. Immediate Tax Benefit – When you set up a charitable gift annuity, you will receive a tax deduction for based on the amount of the gift minus the amount of the payments you will receive over your lifetime. Deferral of Capital Gains Tax – There is an additional tax advantage if you donate appreciated securities because when you make the transfer to the annuity you will not be taxed on all of your capital gains since a large portion of the money will remain in the charity and the tax will be spread over the annuity payments you receive. Non-Taxable Income – The entire amount of each annuity payment the donor receives is not taxable because the most payments are considered a return of the principal that you paid to the charity. Only after you reach the age of your life expectancy will your payments be taxed like ordinary income.
Different Versions of a Charitable Gift Annuity
According to the Gordon Fischer Law Firm, there are three versions of a Charitable Gift Annuity:
- A “single life” agreement (annuity paid to only one person for his/her lifetime)
- A “two lives in succession” agreement (annuity paid to A, and then if B survives A, paid to B)
- A “joint and survivor” agreement (pay annuity paid to two persons simultaneously, and at the death of the first annuitant, the survivor is paid full annuity amount). This is most commonly used for married couples who file joint tax returns and/or who live in community property states.
How to Determine the Payout of a Charitable Gift Annuity?
Since Charitable Gift Annuities are arranged by the recipient (charitable organization), most recipients provide an annuity calculator so that the donor will know what to expect as far as the donor income stream and tax savings. Below, we are using a sample from The AFA Foundation annuity program: Here is an illustration of a Charitable Gift Annuity payout using a $25,000 cash donation for a 60-year old donor:
|Principal Donation||$25,000 Cash|
|Annuity Interest Rate||4.7%|
|Annual Payout to Donor over Lifetime||$1,175|
|Income Tax Deduction for Donor||$8,556|
|Tax-Free Annual Payout Until the end of 2041||$694.43|
|Effective Rate of Interest||6.1%|