Retirement Tips: Choose The Best Charitable Gift Annuity
A charitable gift annuity (CGA), as the name implies, is both a tax-deductible gift and an income-producing annuity. It's a way to benefit a charity or non-profit organization whose work you support, while still supporting yourself and your kin. Choosing the best one involves selecting an institution with both laudable goals and financially acceptable terms.
Not to be confused with charitable trusts, a charitable gift annuity is basically a contract (like all annuities). In return for the irrevocable transfer of your gift of cash, marketable securities or other assets, the charitable organization agrees to pay you (aka the annuitant) and/or your designated beneficiary a fixed amount of money for life.
Importantly, the annuity payments, which are partially tax free, are backed by all of the charity’s assets and continue until your and your beneficiary’s death, no matter how the investment of your gift performs.
Types of Charitable Gift Annuities
In general, there are three types of charitable gift annuities (though not every state allows all of them).
- Immediate Gift Annuity: Payment to the annuitant commences immediately following the presentation of the gift. The most common arrangement is quarterly payments, but they can be monthly, semi-annually or annually.
- Deferred Gift Annuity (aka Deferred Payment Gift Annuity): The annuitant begins receiving payments at a future date, chosen by the donor. Payments can be monthly, quarterly, semi-annually or annually and must begin more than one year after the date of the contribution.
- Flexible Gift Annuity: The annuitant doesn't designate a starting date for the payments right away, opting instead to keep that open for some future time (when he or she retires, for example). Of course, the older the annuitant is when payments begin, the larger those payments will be.
Within the three types of charitable gift annuities, there are normally three payment options:
- Single life, paid to one person for his/her lifetime
- Two lives in succession, paid to one person and then to a second person if that person outlives the first
- Joint and survivor, which consists of equal amounts paid to two people simultaneously until one dies; the combined amount is then paid to the survivor
Choosing a Charity
As of 2009, the American Council on Gift Annuities (ACGA) estimates that at least 4,000 charitable organizations offer gift annuities. Knowing and understanding ACGA’s recommended best practices provides a great starting point for your evaluation of prospective charities (for more info, see Differences Between Private Foundations And Public Charities).
The ACGA recommends that charities:
1. Meet State Regulations
This includes providing a disclosure statement to prospective donors before an annuity is established and complying with all state reporting requirements.
2. Specify Assets That Will Be Accepted
While cash and appreciated securities are the most common gifts, some charities also accept real estate, tangible personal property and other types of property interests.
3. Establish Minimum Ages for Immediate and Deferred Annuities
The average age of immediate annuity recipients in 2009 was 79. Many charities require that annuitants be at least 60 years old to receive immediate payments, or to have reached that age to begin receiving deferred payments. Designating someone younger than 60, ACGA says, can create problems for both the donor and the charity: Fixed payments don’t adjust for inflation, which over decades could seriously eat into their real value, and the length of time the annuitant would receive payments could deplete the original gift.
4. Establish Minimum Gift Sizes and Rate Schedules
For many charitable organizations, the minimum required gift for an annuity is $10,000 or more. The ACGA suggested rate schedule (which you can see here) is designed to result in a residuum of at least 50% of the original gift for the charity. ACGA notes that the 50% residuum assumption dictates that nothing will be used for charitable purposes until the payment obligation is finished.
5. Communicate Regularly with Donors and Annuitants
Communications can include newsletters, invitations to special events and so forth. Plus, any promises that your gift will be dedicated to a specific purpose should be honored, and you should be kept updated on the progress.
Put Your Money Where Your Heart Is
The vast majority (97.3% in 2009) of charitable organizations reported that they “always or usually follow the ACGA suggested rates” for annuity payments. Some organizations do offer higher rates. If one you are considering does, it is prudent to make sure its rates are compliant with applicable state regulations. An organization that offers lower rates than those suggested by ACGA should be viewed with scrutiny – especially since ACGA rates are conservative to begin with.
Let's say you have a recipient for your generosity in mind – a community foundation, university or other type of charitable entity. If so, go to the appropriate website or otherwise make contact and:
- Ask if the charity offers CGAs. If it does, continue. If not, seek another charity.
- Find out if it follows ACGA best practices (including suggested rates) and if not, ask about the guidelines and rates to which it does adhere.
There is no known comprehensive list of charitable organizations that offer these annuities, but the ACGA sponsor list consists entirely of organizations that do.
When It Makes Sense
A charitable gift annuity isn’t for everyone. It probably isn’t even for most people. But you may be a candidate if you:
- are in a high tax bracket
- have no heirs (or have already made adequate provisions for the ones you do have)
- are in good health
- have appreciated assets in a taxable account and could use a sizeable tax deduction
For more thoughts, see To Donate or Not to Donate: Tips for Charitable Giving.
The Bottom Line
If you want to make a significant contribution to a charity you care about – but also want the security of fixed, reliable income for life – a charitable gift annuity could be a great choice. If you think a charitable gift annuity is the right planned-giving vehicle for you, search for charities that offer them (and also support causes with which you agree, of course).
Use ACGA guidelines to evaluate these charities, then spend time with your financial advisor to make sure this is the right move for your overall estate- or tax-planning strategy.
If it's not, there are plenty of alternatives out there. For starters, see Using Life Insurance To Make Charitable Donations.