Charitable Gift Annuity

Charities can offer donors access to a series of fixed payments using charitable gift annuities. The charity gets to keep remaining payments, some of which may be sold in the secondary market for immediate cash.

When it comes to major fundraising endeavors, charities and donors each can benefit by using something known as a charitable gift annuity. These annuities allow donors to receive a reliable stream of future income yet enable charities to keep remaining funds after the donor passes away.

This is one form of planned giving, which refers to a way that donors can give major gifts, from cash to property and assets, to non-profits and charities. Donors can also choose from these methods of planned giving:

  • Cash donation
  • Appreciated securities
  • Life insurance
  • Remaining balance in retirement accounts
  • Bequests (money given once donor is deceased)
  • Charitable remainder trust
  • Charitable lead trust
  • Pooled income fund
  • Private foundation or donor-advised fund

Organizations choose charitable gift annuities for accepting large gifts and building long-term relationships with donors. Donors benefit from a dependable stream of annuity payments, tax incentives regarding capital gains, and income tax requirements more favorable than charitable remainder trusts.

Popularity of Charitable Gift Annuities

Charitable annuities are hardly a new idea. One of the earliest examples of a charitable gift annuity (CGA) occurred in 1831, when a colonial artist named John Trumbull gave paintings to Yale University in return for a lifetime of annual payments. The American Bible Society also began using CGAs around this time.

CGAs grew in popularity, and by the 1920s churches and other charities used them as a fundraising strategy. Later, universities, community foundations, national health and environmental organizations, religious group, arts and social service organizations and other nonprofits offered these kinds of annuities.

The website for the American Council on Gift Annuities (ACGA), a nonprofit group responsible for overseeing the use of CGAs, provides hundreds of links to organizations offering CGAs. The ACGA completed a survey in 2009 and estimates that there are over 4,000 organizations offering charitable gift annuities CGAs.

In a 2013 survey, the ACGA found charities issued 8,266 annuities in that year equaling a total value of $262 million.

How Charitable Gift Annuities Work

A CGA functions as an exchange of a cash gift for a stream of payments for life. It is an irrevocable commitment, meaning it’s permanent and legally binding. The gift may be property, like publicly traded securities, or a cash sum that amounts to $10,000 or more.

A CGA contract involves two parties, donors and charities. Donors, which can be one person or two people, including a husband and wife, transfer a large gift to a charity in exchange for a fixed amount of money to be paid out to the donor for the duration of the rest of the donor’s life.

This arrangement provides a partial tax-free return for the donor. The difference between the fixed payments and the total given to the charity can be considered for tax write-off purposes.

The charity can take the gift and invest funds, then make payments from earnings. Or it can put some of the gift to immediate use. Charities keep remaining income after the donor passes away.

Organizations Using Charitable Gift Annuities

Religious, charitable and educational organizations are all 501(c)(3) organizations that can utilize CGAs. (Not all non-profit charities accept these gifts, though many do.) Using CGAs supports long-term relationships with donors.

The Internal Revenue Service defines 501(c) (3) organizations as those that are “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.” It goes on to restrict this category of organizations to those that do not exist for the primary benefit of private shareholders.

Charities send annuitants IRS Form 1099R and designate which contributions (whether cash or property) are taxable, nontaxable or capital gain.

Remaining Payments

While donors receive tax advantages and fixed income from these CGA donations, the primary purpose is providing a charity with a more resources. The goal should be benefiting the cause of the charity, rather than avoiding taxes or receiving the best annuity income rates.

After the donor passes away, any remaining payments are left with the charity. According to the American Council on Gift Annuities, the remaining portion is typically at least 50 percent of the original contribution.

Can Charities Sell Gift Annuities?

A charity that receives a CGA has the option of selling it in some cases.

After a donor passes away, charities continue receiving payments. In some cases, the individual payments are not sufficient to meet a charity’s needs. For example, a church might need capital for remodeling or an educational organization might be updating technology or building larger facilities.

In these cases, a charity may consider selling payments from a CGA because it would rather have one lump-sum payment (to help fund the large immediate need) and surrender the long-term payments.

Donors may attempt to sell the fixed payments they are receiving from a charity. Unfortunately, once a donor assigns the ownership of annuity, they have little ability to sell or do anything without the charity’s (new owner) approval. Because both parties must consent – and selling could change the original tax benefit – these transactions rarely occur.

Developing Regulations

As CGAs grew to be commonplace, charities competed with one another by offering different payout rates to donors. Lowered rates diminished gift amounts left with charities.

The American Council on Gift Annuities (ACGA) was established in 1927 to help regulate this kind of fundraising. It publishes recommended actuarial rates, which are endorsed by the IRS, and works to protect donors and charities using CGAs.

“A responsibly managed gift annuity program can be a tremendous benefit to donors and the charitable organization. We are united in our opposition to the abuses of gift annuities and must not allow the actions of a few to condemn this venerable gift plan,” said Clinton A. Schroeder, President of the ACGA, in a response to reports that CGAs were investment schemes.

The Partnership for Philanthropic Planning, originally known as the National Committee on Planned Giving, opened in 1988. This nonprofit is dedicated to educating professionals in the planned giving community and preventing abuses of this giving tool.

Individual states also oversee these contracts through security laws.

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