You want to donate to charity, but you also want financial security for the rest of your life. A charitable gift annuity (CGA) can help you accomplish both seemingly conflicting objectives. Here’s how it works.

Understanding the Mechanics

With a CGA, you donate cash, stock, real estate, unneeded life insurance policies and other assets to a charitable organization in exchange for a guaranteed fixed income stream for life. You’ll receive an immediate tax deduction (subject to IRS limits) equal to the amount of your gift minus the present value of the annuity payments.

You may designate up to two “annuitants” to receive the annuity payments. For example, you might name:

• Yourself as sole annuitant,
• Another person as sole annuitant,
• Yourself and another person (your spouse, for example) as joint-and-survivor or consecutive annuitants, or
• Two other people as joint-and-survivor or consecutive annuitants.

For income tax purposes, the annuity payments are treated as a combination of tax-free return of principal, ordinary income and, if you donate appreciated property, capital gain.

Determining the Annuity Payment

The size of the annuity payments depends on several factors, including the value of your contribution, the number and ages of the annuitants, and the gift annuity rate. Charities are free to develop their own rate schedules (subject to applicable legal limits). Most charities use the rates suggested by the American Council on Gift Annuities (ACGA). Naturally, these rates are lower than those offered by commercial annuities, because they’re designed to preserve 50% of the contributed funds for charity.

For example, suppose Beth, age 65, contributes $1 million in marketable securities to a charity in exchange for a single-life CGA, naming herself as annuitant. According to ACGA tables, the current gift annuity rate is 4.7%. So, Beth receives an annuity payment of $47,000 per year for life. If she named herself and her 68-year-old husband as joint-and-survivor annuitants, the rate would be 4.3%. Note that these rates are for annuities that start paying out immediately. Additional calculations are required for annuities with a deferred start date.

Do Your Homework

CGAs allow you to satisfy your philanthropic goals while providing immediate tax benefits and the peace of mind that comes with an income stream you can’t outlive. Of course, these benefits are assured only if the charity offering them has the financial strength and stability to meet its annuity obligations, so be sure to do your due diligence before you invest.

To explore the full range of charitable-giving options, talk to a member of our private client services team. We can help you devise a gifting plan that suits your charitable goals and personal financial needs.