Charitable Gift Annuities: A Plain Introduction

At some point, many generous people in their sixties and seventies hear about a charitable gift annuity. Maybe it comes up at a ministry banquet or in a letter from a college. The idea sounds almost too good to be true: make a gift, and receive fixed payments for the rest of your life.

It is not impossible. It is a real, long-established giving arrangement. But it is also a contract with tradeoffs, and it deserves a plain explanation before anyone signs anything. This is an introduction, not a recommendation.

What a Gift Annuity Is

A charitable gift annuity is a contract between you and a charity. You transfer cash or other assets to the charity. In exchange, the charity promises to pay you, or you and one other person, a fixed amount each year for life. When the last payment is made, whatever remains of the gift belongs to the charity.

The payments are backed by the charity's general assets, not by an insurance company or a government guarantee. That is the heart of the arrangement and also its main risk.

How the Numbers Are Figured

Three pieces make up the picture, and each depends on your age and the size of the gift.

1. 1

   The Payment Rate

   Set when you sign and fixed for life. Many charities follow rates suggested by the American Council on Gift Annuities, which rise with age.

2. 2

   The Deduction

   Only part of the gift is generally deductible, roughly the value expected to be left for the charity, and only if you itemize.

3. 3

   The Tax on Payments

   Part of each payment may be treated as a tax-free return of your gift for a period of years. The rest is generally taxable.

Because the charity is supposed to keep a meaningful remainder, gift annuity payments are generally set lower than what a commercial annuity might pay. That is by design. A gift annuity is a gift first. If the payment is the main attraction, it is probably the wrong tool.

One honest reminder: giving always costs you more than it saves. A deduction lowers your tax by a fraction of the gift, never the whole gift. Give because you want the money to do good, and let the tax rules make that generosity go further.

Giving Appreciated Assets

Some people fund a gift annuity with appreciated stock instead of cash. When that happens, the transfer is generally treated as part gift, part purchase. Gain tied to the gift portion is generally not taxed. Gain tied to the annuity portion generally is, but if you are the annuitant (alone or with a survivor annuitant) and the contract cannot be assigned, it can generally be reported over your life expectancy instead of all at once. The rules are specific, and they depend on who the payments go to.

This is one of several reasons to bring your CPA in early. The same gift can produce very different tax results depending on what you give and how the contract is written.

The Honest Risks

A gift annuity is irrevocable. Once you sign, the gift is made. Before you do, sit with these tradeoffs:

• Your payments depend on the charity's financial strength. Ask how it manages its gift annuity reserves.
• The payment is fixed, so it does not rise with inflation.
• You cannot get the gift back if your needs change.
• States regulate gift annuities differently. Ask whether the charity is authorized to issue them where you live.

How It Compares to Other Tools

A gift annuity is a close cousin of the charitable remainder trust. Both give you payments for a period and leave the rest to charity. A trust is its own legal entity, usually costs more to set up, and can be more flexible. A gift annuity is simpler, and you generally deal with just one charity.

A gift annuity is also different from a donor-advised fund. A fund pays nothing back to you. Its whole purpose is grants to charities. You also cannot use a donor-advised fund to buy a gift annuity, because the payments would be a benefit to you.

Counting the cost is not a lack of faith. It is how you make a lasting commitment with your eyes open.

Questions to Ask Before You Sign

If you are considering a gift annuity, these questions will help you talk with the charity and your professionals:

• Is this a ministry I would want to support even with no payments at all?
• What rate is offered, and how does it compare with published suggested rates?
• How are the charity’s annuity reserves held, and what happens if it faces hard times?
• What will my deduction be, and how will my payments be taxed?
• Do I have enough outside this gift to meet my own needs?