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 (or the annuitant) or your designated beneficiary a fixed amount of money for life.

Key Takeaways

• A charitable gift annuity (CGA) is both a tax-deductible gift and an income-producing annuity.
• In return for the irrevocable transfer of your gift of cash, marketable securities, or other assets, the charitable organization agrees to pay you (or the annuitant) or your designated beneficiary a fixed amount of money at regular intervals for life.
• In general, there are three types of charitable gift annuities: immediate gift annuity, deferred gift annuity, and flexible gift annuity.

Importantly, the annuity payments, which are partially tax-free, are backed by all of the charity’s assets and continue until your death 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 (or 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 they retire, for example). However, there is a range of dates established when the annuity is purchased, and a date must be chosen within that range. 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 their 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

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.

The ACGA recommends that charities do the following: 

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. Many charities require that annuitants be at least a certain age to receive immediate payments, or to have reached a specified age to begin receiving deferred payments. Young donors taking out gift annuities can be problematic for both the charity and the donor. Fixed payments don’t increase with inflation, which over time could seriously eat into their real value. For charities, if a young annuitant were to receive many decades of payments offering the annuity would not be financially worthwhile.
4. Establish minimum gift sizes and rate schedules. The ACGA advises charities to establish a minimum gift for annuities. The ACGA suggested rate schedule 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. Establish procedures to ensure gift designations are honored. If it is agreed with the donor to use the residuum for a specific purpose, ensure this is honored. It is even more preferable if the donor agree’s to let the charity use it as it sees fit. Established guidelines with legal counsel to ensure that the charity meets the standards and requirements.

Put Your Money Where Your Heart Is

An overwhelming majority of charitable organizations reported that they always or usually follow the ACGA suggested rates for annuity payments according to a 2019 survey. 82.7% of these organizations always follow the rates and 15.9% usually follow the ACGA rates. Some organizations do offer higher rates. If the 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 has a search tool of member organizations. They should all be offering charitable gift annuities.

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 sizable tax deduction

The Bottom Line

If you want to make a significant contribution to a charity you care about – but also want the security of a 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.

Read the original article on Investopedia.