Charitable Gift Annuity

Charities and donors can both benefit from using a form of planned giving called a charitable gift annuity. Charitable gift annuities are similar to other annuities, except charities purchase these annuities on behalf of donors using the donor’s financial gift to the charity. While the donor is living, they receive payments from the charitable gift annuity. Upon their death, the charity receives the remaining annuity balance.

There are several advantages to charitable gift annuities over a traditional cash donation to a charity for both the donor and the charity. Donors benefit from the purchase of a charitable gift annuity because they get an immediate tax deduction as well as future payments. The charity benefits because when the annuitant dies, it receives the remaining amount of the annuity. Charitable gift annuities also allow organizations to build long-term relationships with donors.

Gift annuities are one form of planned giving (a way donors can give major gifts such as cash, property or assets to nonprofits and charities).

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

By the 1920s, churches and other charities used charitable gift annuities as a fundraising strategy.

The leading reason people give for choosing a charitable gift annuity is as a “benefit to charity,” according to wealth management firm, BNY Mellon’s 2022 Charitable Gift Report. Of the donors surveyed, 30% cited that as their reason. Other leading reasons were flexibility (17%) and income for themselves (13%). Other reasons given were income tax benefits, income for a spouse or heirs, simplicity and their legacy — 10% each.

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. There are more than 4,000 organizations that offer charitable gift annuities, according to the ACGA ,

Religious, charitable and educational organizations are all 501(c)(3) organizations that can use CGAs. While not all nonprofit charities accept these gifts, many do.

The Internal Revenue Service defines 501(c)(3) organizations as groups 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.”” By the same definition, 501(c)(3) organizations cannot exist for the primary benefit of private shareholders.

To comply with the tax code, charities send CGA annuitants IRS Form 1099R and designate which contributions (whether cash or property) are taxable, nontaxable or capital gain.

A charitable gift annuity functions as an exchange of a cash gift for a stream of payments for life. It is a permanent and legally binding agreement. The gift may be property that the charity can sell for cash, like publicly traded securities, or a cash sum that amounts to $10,000 or more.

A CGA contract involves two parties — the donor and the charity. Donors can be a person or organization like a trust, or two people, such as spouses, who transfer a large gift to a charity in exchange for an annuity that’s paid out to the donor for the remainder of their life.

The amount of the charitable gift annuity is determined by the size of the donation and the donor’s age. The American Council on Gift Annuities suggests the following payout rates for a single-donor annuity:

Following these rates, a 65-year-old who donates $50,000 will receive a yearly payout of $2,850 ($50,000 x 5.7%) until their death.

With a joint-and-survivor annuity, both annuitants receive payments while both donors live. When one dies, the other continues receiving just their payments until their death, meaning, they do not then receive their usual payment plus the amount of their deceased donor partner’s payment.

A charity that receives a CGA has the option of selling it in some cases. Normally, after a donor passes away, charities receive the remainder of the annuity. In some cases, such as a building project, the individual payments are not sufficient to meet a charity’s needs. When this happens, a charity may consider selling payments from a CGA because of the need for a lump sum payment immediately, rather than smaller, long-term payments.

Donors may not sell their right to future charitable gift annuity payments without approval from the charity, which is the annuity owner. Because both parties must consent – and selling could change the original tax benefit – these transactions rarely occur.

There are several organizations that help regulate charitable gift annuities. The most significant is the American Council on Gift Annuities, which was established in 1927. It publishes recommended actuarial rates, which the IRS endorses, and works to protect donors and charities using charitable gift annuities.

Another influential organization is the Partnership for Philanthropic Planning, originally known as the National Committee on Planned Giving. This nonprofit opened in 1988 and is dedicated to educating professionals in the planned giving community and preventing abuses of charitable gift annuities.