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Some charities offer donors financial assets called charitable gift annuities, which provide the donor a small return for their gift over their lifetime and benefit the charity following the donor’s death.
What is a 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).
- Cash donations
- 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
Are Charitable Gift Annuities Popular?
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.
- Community foundations
- National health organizations
- Environmental groups
- Religious groups
- Arts and social service organizations
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 that shows more than 4,000 organizations offer charitable gift annuities.
In a 2013 survey, the ACGA found charities issued 8,266 annuities that year at a total value of $262 million.
Organizations Using Charitable Gift Annuities
Religious, charitable and educational organizations are all 501(c)(3) organizations that can use CGAs. While not all nonprofit charities accept these gift, 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.
How Charitable Gift Annuities Work
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.
Charitable Gift Annuities for Donors
- Donors can support a philanthropic cause while also receiving a financial benefit in return.
- There are several tax advantages, including tax credits for charitable donations, which results in a lower income tax the year the donation was made.
- Portions of each gift annuity payment are also tax-free because they are considered a return on the original principal.
- Annuities offer reliable, fixed income until a donor’s death.
Charitable Gift Annuities for Charities
- CGAs entice hesitant donors to make a donation because they will receive something in return.
- Gift annuities promote long-term relationships with donors.
- Charities have some flexibility with the donation, such as using the gift immediately or investing the gift and making payments on the annuity from the earnings.
- Unlike traditional annuities, where an insurance company receives the balance of the annuity after an annuitant dies, the charity keeps the balance of the annuity when the donor dies.
Can Donors or Charities Sell Gift Annuities?
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.
Regulations & Agreement Guidelines
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.
"A responsibly managed gift annuity program can be a tremendous benefit to donors and the charitable organization."
- Charities can accept many types of gifts in exchange for a charitable gift annuity, such as cash, appreciated securities, real estate, personal property and other property interests.
- The minimum required gift for a charitable gift annuity is $10,000.
- Charitable gift annuitants must be at least 60 years old before they are eligible to receive payments.
- Charities must use the gift for a specific initiative if the donor specified one when they made the donation.
- Charitable gift annuities must meet state regulations, including reporting regulations and security laws
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.
2 Cited Research Articles
- Probasco, J. (2015, September 9). Retirement tips: Choose the best charitable gift annuity. Retrieved from https://www.investopedia.com/articles/personal-finance/090915/retirement-tips-choose-best-charitable-gift-annuity.asp
- Southwestern Foundation. (n.d.). The charitable gift annuity: Guaranteed income for life. Retrieved from http://www.sagu.edu/documents/Advancement/Resource%20Articles/Charitable%20Gift%20Annuity.pdf