Charitable Gift Annuity

Original post

What is a ‘Charitable Gift Annuity’

A charitable gift annuity is an agreement in which an individual transfers assets to a charity in exchange for a lifetime income stream and a tax benefit. As with any other life annuity, when the annuitant dies the annuity payments are stopped. Unlike a traditional annuity, instead of an annuity writer (usually an insurer) keeping the balance of the premium, the charity retains the remaining funds as a gift. The primary goal of a charitable gift annuity is to benefit a charity.

Breaking Down ‘Charitable Gift Annuity’

Charitable gift annuities are popular fundraising vehicles and an example of planned giving. They are set up with a gift annuity agreement (rather than a contract) between the charity and an individual annuitant or couple. The annuities simultaneously provide a charitable donation, a partial income tax deduction for the donation, and a guaranteed lifetime income stream to an annuitant and sometimes also to a spouse or other beneficiary. The charitable donation tax deduction is limited to the amount contributed to the annuity in excess of its present value, as calculated using Internal Revenue Service (IRS) parameters. A charitable gift annuity may be funded with cash, marketable securities or a variety of other assets. Initial funding may be as little as $5,000, though they tend to be much larger. Many universities and nonprofit organizations offer charitable gift annuities.

Payment amounts will depend on a number of factors starting with the age of the annuitant. The older the annuitant the larger (and fewer) the monthly payments will be, and vice versa. Payment amounts tend to be lower than traditional annuities because the primary reason for opening a charitable gift annuity is to benefit a charity rather than provide the highest possible retirement income payment.

In a typical charitable gift annuity, the annuity payouts are not limited to the contributed assets, however the actuarial calculations establishing payout amounts usually provide that a large residual amount should remain for the charity after the beneficiary’s death. The money returned to an annuitant in equal installment payments is considered a partial tax-free return of the donor’s gift. Payments are backed by the charity’s holdings, not just the assets donated.

Charitable Gift Annuity Regulation

Many states have issued rules governing the issuance of charitable gift annuities. Charities that offer them must comply with the regulations in the state they reside in and also those in the state the donor resides. For example, the charity can immediately spend down some of the assets it receives as part of a charitable gift annuity contribution, but it must ensure that it has sufficient reserves (based on state insurance and securities laws) to meet its annuity payment obligations and state regulations specifically governing such annuities. One regulation governing a charitable gift annuity assumes that the money left over after all payment obligations have been satisfied (the “residuum”) should be at least 50% of the initial gift amount if the annuitant lives only as long as their life expectancy.

The charities that write charitable gift annuities often will use the gift annuity rates provided by the American Council on Gift Annuities (ACGA), which also provides a guide to using charitable gift annuities. An IRS ruling in favor of charitable gift annuities may be found here.