What Is a Charitable Gift Annuity?
A charitable gift annuity is an arrangement between a donor and a non-profit organization in which the donor receives a regular payment for life based on the value of assets transferred to the organization. After the donor's death, the assets are retained by the organization. The charitable gift annuity is a type of planned giving.
- A charitable gift annuity is a type of planned giving arrangement between a donor and a non-profit organization.
- The donor receives a regular payment for life based on the value of assets transferred to the organization.
- After the donor's death, the assets are retained by the organization.
Understanding Charitable Gift Annuities
With a typical life annuity, the payments stop and the balance of the assets in the account remains with the annuity writer, which is usually an insurance or financial services company. However, with a charitable gift annuity, the balance is retained by a charitable organization as a gift.
Such annuities are set up by an agreement between the charity and the 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 the annuitant and sometimes a spouse or other beneficiary.
How the Annuity Works
A charitable gift annuity may be funded with cash, 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 non-profit organizations offer charitable gift annuities.
Payment amounts will depend on a number of factors beginning 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 for traditional annuities because the primary motive is to benefit a charity rather than to provide the highest possible retirement income payment.
Special Considerations: Tax Treatment
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.
Requirements for Charitable Gift Annuities
Many states have issued rules governing the issuance of charitable gift annuities. Charities that offer them must comply with the regulations in the state in which they are located and in the state in which 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. Still, it must ensure that it has sufficient reserves 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 his or her life expectancy.
The charities that write charitable gift annuities often will use the gift annuity rates provided by the American Council on Gift Annuities. An IRS ruling was made in 2008 in favor of charitable gift annuities allowing for the tax deduction and the use of the products.