Are you looking for a way to support a favorite non-profit organization while also receiving a tax break and a lifetime income stream? If so, it may be time to explore the opportunities offered by charitable gift annuities.
Post-secondary institutions, universities, non-profit service organizations like the Red Cross, and cultural institutions like museums and art galleries may offer charitable gift annuities. These annuities help to fund and support their research, activities or collections. Let's examine how charitable gift annuities work, what to watch for and whether this type of annuity could be right for you.
What Is a Charitable Gift Annuity?
A charitable gift annuity is a tax-preferred fixed-income stream to a donor who has made a financial gift to a non-profit organization. It gets set up as a formal arrangement or contract and is a type of planned giving that may be included as part of an individual or family's financial plan to support their chosen non-profits.
The lifetime regular payments that the donor (annuitant) receives are calculated based on the gift's value.
How Charitable Gift Annuities Work
Charitable gift annuities work in a similar manner to traditional life insurance annuities. They include a charitable donation, a contract created between the donor annuitant and the non-profit, and a partial income tax deduction.
These annuities offer a lifetime income stream for the annuitant based on the American Council of Gift Annuities rates. The payments may begin immediately or at a later date. They're usually made quarterly and, depending on the terms of the annuity, may also provide an income stream for the annuitant's spouse and/or beneficiaries.
Payments from these annuities get calculated based on the annuitant's age, with higher rates for older annuitants. Unlike life insurance annuities, where the insurance company retains the annuity balance on the donor's death, with a charitable gift annuity, the balance goes to the charity.
Taxes and Your Charitable Gift Annuity
Depending on your financial situation and preference, you could gift cash or investments to the organization offering the annuity. This charitable donation would result in a partial federal income tax deduction for the annuitant on the original amount gifted.
The calculation of the deduction depends on how the donation was made (for example, as a lump sum cash donation) or whether stocks or mutual funds were gifted. Some donors choose to donate stocks or mutual funds to avoid selling the investments and triggering capital gains taxation.
You would also receive a tax break on your annuity payments, but the calculation depends on how you made your initial donation. To learn more, contact the organization offering the charitable gift annuity.
What To Watch For
One of the key features of a charitable gift annuity is that any money left in the annuity goes directly to the non-profit organization when the donor passes away.
Also, keep in mind that, unlike traditional annuities, which investors choose for high payments, the primary purpose of charitable gift annuities is to support the chosen non-profit organization. So the payments are lower, and the annuity is usually structured to allow for an expected large balance to remain with the organization on the annuitant's death.
It's also important to note that state laws govern charitable gift annuities, and the annuities must operate in accordance with the laws of both the donor's state and the organization's state.
Is This Right for Me?
Is a charitable gift annuity right for you? It depends on your financial situation and goals. Generally, donors are older, retired investors. In some cases, investors choose this type of annuity because they like the idea of a consistent, fixed payment to their spouse or beneficiary that continues on in a tax-efficient manner after their death.
If you want to support a favorite non-profit and you like the idea of an additional fixed income stream and a tax break, then a charitable gift annuity could be a good choice.