What Is a Charitable Gift Annuity?
A charitable gift annuity is an arrangement between a donor and a nonprofit 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.
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.
- A charitable gift annuity is a type of planned-giving arrangement between a donor and a nonprofit organization.
- The donor receives a regular payment for life based on the value of assets transferred to the organization.
- Once the donor dies, the organization retains the remaining assets.
- Charitable gift annuities offer tax deductions for the annuitant, both on the original lump-sum gift and the ensuing annuity payouts.
How a Charitable Gift Annuity Works
Charitable gift annuities function basically like any life annuity. They are a contract in which the annuitant pays a lump sum and in return receives a regular income stream, which is usually paid out quarterly. The payments stop upon the annuitant’s death, and the remaining assets in the account go to the annuity writer. However, instead of the balance being kept by an insurance or financial services company (as with typical annuities), it is retained by the charity or nonprofit as a gift.
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 nonprofit 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.
The annuity payments are backed by the charity’s holdings, not just by the assets donated, and the 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.
Charitable gift annuity payouts tend to be lower than those of traditional annuities, because the primary motive is to benefit a charity rather than provide the highest possible retirement income payment.
Regulations for Charitable Annuities
Many states have issued rules governing the issuance of charitable gift annuities. Charities that offer them must comply with the regulations in both the state in which they are located and 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. The charities that write charitable gift annuities often will use the gift annuity rates provided by the American Council on Gift Annuities. They also abide by its general recommendations and regulations.
For example, 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 targeted life expectancy. It then determines whether the present value of the residual gift to charity, using the tentative gift annuity contract rate, is at least 20% of the funds transferred to the charity under the contract.
The purpose of using standardized rates is to discourage competitive rate setting among charities and thereby ensure that a significant portion of the transfer will be available for charitable purposes. Still, some organizations choose to develop their own rates based on their own investment experience, charitable residuum goals, and the investment/reserve requirements under state law.
Special Considerations: Tax Treatment
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. The money returned to an annuitant in equal installment payments is considered a partially tax-free return of the donor’s gift.
Does a Charitable Gift Annuity Have a Finite Term?
No. A charitable gift annuity continues regular payments until the death of the annuitant.
Is a Charitable Gift Annuity Donation Tax Deductible?
Partially. The annuitant may deduct the amount of the donation in excess of its present value, as calculated by the IRS.
Are Charitable Gift Annuity Payments Taxable?
Yes, but only a portion of them is subject to tax. The IRS rules on how much can be taxed are complicated and found in Internal Revenue Code §72.
Who Regulates Charitable Gift Annuities?
Charitable gift annuities are regulated by the states. If a charity operates in one state and the donor resides in a different state, the regulations of both must be observed.