- A charitable gift annuity provides a relatively easy way to give a donation to a nonprofit and receive lifetime fixed income in exchange.
- You also get an upfront tax deduction (if you itemize your deductions) for the gift portion of the annuity.
- Here are key aspects to consider before entering into this type of annuity contract.
For retirees who want to put their charitable dollars to work right away but worry about giving away a large sum all at once, there's a relatively easy strategy that may be a good fit.
It's called a charitable gift annuity.
This type of annuity is basically a contract with a nonprofit that starts with a sizable gift (cash or another asset) to an organization that in return provides you a fixed income stream for the rest of your life as well as an upfront partial tax deduction. And when you die, whatever is left in the annuity remains with the charitable group.
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"The reason it's attractive for some donors is they want to support their favorite charity but don't really think they can afford to lose cash flow," said certified financial planner Larry Harris, director of tax services for Parsec Financial in Asheville, North Carolina.
These annuities are similar to charitable remainder trusts, although they are less complex and generally come with no cost to set up.
Here's what to know.
Many nonprofits — especially larger ones — offer these annuities as an option for individuals (or spouses) to make donations. They may come with relatively small minimums (say, $5,000) or much larger ($50,000) and a minimum age (i.e., 60).
When you give the gift to the nonprofit, the annuity contract shows what your fixed payout will be going forward (perhaps made monthly or quarterly), based on factors including your age and life expectancy and typically derived from payout guidelines issued by the American Council of Gift Annuities.
For example: A 60-year-old donating $10,000 may get a payout rate of 4.4% ($440 annually) while someone who is age 85 would get 7.8% ($780 each year) for the same gift, according to Fidelity Charitable. Some nonprofits also offer higher rates if you defer your payment start date for a number of years.
And, of course, the larger the donation, the bigger the payout.
You also can take a tax deduction for the gift portion of the annuity in the year you set it up (assuming you itemize your deductions instead of taking the standard deduction).
The deductible amount is the difference between the present value of your annuitized payments and the amount estimated to end up with the charity upon your death, based on IRS calculations, said CFP Philip Herzberg, a lead financial advisor for Team Hewins in Miami.
You can also expect your payments to be partially taxable, although the specifics depend on the nature of your donation (i.e., cash versus securities or other assets).
If you are interested only (or mostly) in maximizing guaranteed income for life, you may not want to go with this type of annuity.
"Income rates are generally lower than standard insurance annuities, which can make this choice less attractive if the donor doesn't have a strong wish to make a charitable bequest," Herzberg said.
Additionally, as with any annuity, your fixed income for life is a guarantee only as long as the issuer remains solvent. In other words, the charity you're giving to should have a strong financial standing. Also, once you make the gift, you generally can't get it back (other than the agreed-upon payments).
Be aware, too, that the payments are fixed — which means there is no inflation adjustment as there may be with some other types of annuities.
Also, if you want to support multiple charities, keep in mind that the gift annuity contract is with only one nonprofit.
"It's a great tool if you want to benefit your charity, but don't feel comfortable letting all that cash flow go at once," Harris said.