The basics of charitable gift annuities

By Trudy Lee

A charitable gift annuity offers an interesting and beneficial option to the philanthropically-minded individual. Not only does this arrangement allow you to support your favorite charitable organization, but also reap financial benefits from both a fixed annual income and a tax break. The combination results in a true win-win situation.

The concept is fairly simple - you give cash or other asset to a charitable organization and, in return, the organization promises to pay you a fixed dollar amount at regular intervals for your lifetime (the annuity portion). There is a difference between the total value of those payments and the greater value of the asset transferred (the gift portion).

Any asset the charitable organization will accept, including personal property, real estate, stocks, bonds and mutual funds, may be given in exchange for a charitable gift annuity. Giving an appreciated asset rather than cash can add to the already substantial tax benefits of a charitable gift annuity.

How does it benefit you?

With a charitable gift annuity, you receive five benefits:

1. Fixed income for the remainder of your life.

2. A charitable income tax deduction for the gift portion.

3. A portion of the payments as tax-free income for your life expectancy.

4. Minimized capital gains taxes spread out over your life expectancy.

5. Satisfaction that you have made a difference in your community through your gift.

Generally the greater the gift to a charitable organization, the higher the deduction and the higher the payout. Most charities that offer gift annuities follow payout rates recommended by the American Council on Gift Annuities (ACGA).

ACGA rates range from 6 percent for a 55-year-old to 8 percent for a 76-year-old and as high as 12 percent for individuals 90 and older. Rates like this make it very possible for you to substantially increase your income by donating low-yield investments.

These payments will not fluctuate with the market because they are tied to the assets of the charity, not an income portfolio. The organization issuing the annuity must make the annuity payments no matter what happens to the economy, so it is critical that you are as comfortable as possible with the future stability of the charity issuing the annuity to you.

Payments can begin immediately or be deferred to a later date, so a younger donor can make a gift and receive an immediate deduction but defer the payments until a future date when additional income may be needed.

Deferred payment gift annuities provide a greater tax deduction and a higher percentage payout. For example, a 55-year-old may want to defer the first payment until retirement at age 65. Instead of receiving 6 percent for the remainder of his life, as he would if payments started immediately, he would begin receiving more than 14 percent from his gift at age 65.

In addition, payments are not limited to just you as the donor - one or two individuals (called annuitants) can receive the fixed lifetime payments and can be the donor and/or any other individual. However, including a non-donor annuitant may result in possibly undesirable tax consequences to the donor, so your tax adviser should be consulted if you are thinking about benefiting someone else through your gift.

What's your next step?

A charitable gift annuity has many benefits to both the donor and the charitable organization that receives the gift. If you are interested in establishing a gift annuity, call your favorite charity or charities and ask some questions.

You should first ask, "Are you qualified to offer gift annuities?" (Gift annuities are only available from charitable and educational institutions that have been qualified by the IRS to issue them. Missouri also has qualifications that a charity must meet in order to issue gift annuities to Missouri residents).

If the answer is "yes" then ask what rates the charity offers, what the minimum gift amount is, and what type of assets it will accept. Also, because the payments are based on the continuing operation of the organization, you may want to ask for some basic financial information on the charity itself.

In addition to discussing your potential gift with the charity, it will also be helpful to review your financial situation with your accountant and financial adviser to determine if a gift annuity is right for you.

These advisers can look at your specific tax and investment situation and determine if this is a good idea and which assets might be best to give. You may also want to consult an attorney to ask any legal questions you may have about gift annuities.

Ultimately, you must look at your own desires and motivations. A gift annuity is, in a sense, an investment and you will benefit financially. First and foremost, however, it is a charitable gift. Make certain it is going to benefit a cause and purpose that you care about and want to support.

By giving a gift annuity, your generosity will not only make a difference in the lives of others, but also in your own.

Trudy Lee is a certified specialist in planned giving and director of planned giving for Southeast Missouri University Foundation. (651-5935)