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Many people wish to donate generously to charity but are concerned about maintaining their standard of living, particularly during retirement when their incomes tend to be more fixed. Hence, they often don’t make large gifts to charities until their death. One strategy, however, that enables you to enjoy the benefits of gifting while you’re alive, yet ensure that you will receive adequate retirement income, is a charitable gift annuity.
A charitable gift annuity is a contract with a charity authorized by the state to issue such annuities. Gift annuities are especially popular among colleges, hospitals and associations that fight particular diseases. You donate cash, perhaps appreciated securities or real estate to the charity (not all charities accept real estate). In turn, the charity agrees to pay the annuitant (you or someone else you choose), a fixed-payment annuity for the life. The assets left at your death go to the charity, unless you’ve named a surviving annuitant (which diminishes the payout). With an immediate annuity, you begin receiving payments right away. With deferred gift annuities, you make the donation now but receive the annuity payments later. Deferred are popular if you’re still working and have maxed out contributions to your qualified retirement plan.
The benefits are several. You receive income for your life, and even another beneficiary’s life if you contract for a survivor to receive payments. You can see the benefit of your gift while you are alive. You receive tax benefits. And you can sometimes open a gift annuity for as little as $5,000.
The size of the payout depends on your age, your life expectancy (assuming you are the annuitant), whether there is another annuitant and the size of your gift. The older you are, the higher the payout rate. The determining age in the case of immediate annuities is at the time of donation; with deferred, it’s the age when payments begin.
Let’s say you are 65 and you donate $200,000 to your alma mater through a gift annuity, with you as the annuitant. The rate of payout is up to the individual charity, though the majority use rates recommended by the American Council on Gift Annuities (ACGA). You can see the rates used by the ACGA by going to the National Committee on Planned Giving Web site (http://www.ncpg.org) and clicking on the ACGA button.
In this example, the rate used by the charity for a single life for a person age 65 under ACGA guidelines is seven percent, resulting in annual payouts of $14,000 (payments typically are made annually, semi-annually or quarterly). The payout rate would be different if you used someone else as an annuitant, or if you used yourself and your spouse as co-annuitants. For example, for joint and survivor, where both ages are 65, the payout is 6.6 percent, or $13,200 a year. However you set it up, the gift and the annuitant choice are irrevocable.
Not surprisingly, considering it is a donation, payout rates for charitable gift annuities are less than similar annuities offered by commercial insurance companies. However, when the value of the tax deductions are figured into the returns, the payout rates are closer to commercial rates than they first appear.
The tax benefits of a charitable gift annuity are too complex to explain fully here. However, in brief, you receive an immediate tax deduction based on the difference between the fair market value of your donation and the smaller present value of the annuity income stream. Furthermore, each gift annuity payment is partially tax free for the duration of your life expectancy. Payments received after you’ve reached your life expectancy are fully taxable. Donations also escape estate taxes since you’ve removed the assets from your estate, though there are exceptions.
It gets more complicated if you donate appreciated stock. Unlike some forms of charitable donations (for which you’re not being paid an annuity), appreciated stock donated to a gift annuity doesn’t entirely escape capital gains taxes. However, a portion of the gains escape taxes, and the remainder are deferred and paid over the remainder of your lifetime.
CAUTION: One major issue to consider when making a gift annuity. The contract is between you and the charity. As with a commercial annuity, you want to make sure the charity is going to be around to make payments for your lifetime.
March 2001—
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Rich Chambers, CFP, a local member in good standing of the FPA.
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