Charitable Gift Annuities

A Charitable Gift Annuity is a combination of two things: (1) income for the life of the donor and (2) a charitable gift. A Charitable Gift Annuity is a contract made with a charity which provides that in return for a transfer of cash, marketable securities, or other assets, the charity agrees to pay a fixed amount of money annually to the grantor or the grantor and another person for life. The fixed rate is immune to market fluctuations and is guaranteed for the life of the contract.

The annuity pay-out rate is part of the contract between the donor and the charity. The annuity rate is based on your age or, in the case of a deferred annuity, on the start date. All charitable organizations are free to set the rates that they offer as long as they comply with any applicable state regulation. Regulation of gift annuities varies from state to state. Many charities choose to follow the schedule of recommended maximum rates published by the American Council on Gift Annuities(ACGA). The ACGA publishes recommended rates that vary directly with age–the older you are, the higher the rate. At age 55, the return is 5%, at 60 it’s 5.2%, and so on. This means that if you are 55 and you put $10,000 in a gift annuity, you will get $500 per year for your lifetime. A portion of the $500 is tax-free; it is a partial return of principal.

Gift annuities are very popular now since the interest rates are so low. Interest on certificates of deposit purchased now are under 1%! You need to commit to a 5-year treasury to get a rate over 1%. However, you cannot compare a gift annuity directly to a CD or Treasury Bill – that is not an apples to apples comparison.

How is a gift annuity unlike a CD or bond? Keep in mind that first and foremost, a charitable gift annuity is a charitable gift. A gift annuity agreement is irrevocable. The donor cannot get the assets that were contributed to the contract back. Part of the annuity payment received by the donor is a return of principal – it is not just earnings. There is no guarantee of the annuity as there is with an FDIC-insured bank account.

The gift annuity is a contract between the donor and the charity. The payment of the annuity by the charity depends on its financial soundness. The charity may not be obligated to set the annuity money aside. It may use the money for whatever purposes it chooses. If your charity is on shaky ground financially, it may not be able to make the annuity payments. On the other hand, the general assets of the charity are committed to your annuity, not just the property you transferred, which can make the payout more secure.

The ACGA computes the suggested rates on these assumptions: 1) expenses are 1% per year, (2) the entire gift is invested until the termination of the contract at the death of the sole or surviving annuitant, and (3) the portion of the original gift remaining at the termination of the contract is about 50%.

A gift annuity may not be appropriate for younger donors because the payment is a fixed annual amount. There is no inflation protection. Also, an annuity for a younger person may not produce a significant benefit to the charity after considering the longer period of time to administer the annuity and make payments. The ACGA says that 56.7% of charities require a minimum age of 60 or older. Gift annuities can be for any amount although most charities establish a minimum, for example, at least $10,000 or possibly $20,000. There is no upper limit.

The gift annuity provides the donor with an immediate charitable deduction in the year of donation and provides a stream of income to the donor, some of which is tax-free return of capital. The donor can transfer cash or property in exchange for the annuity. If the donor transfers an appreciated asset, like stock, the donor can avoid a portion of the capital gains tax. The gains attributed to the gift portion of the annuity are not taxed. The remaining capital gain is pro-rated over the life of the annuity,

Not every charity offers a gift annuity program. Some may not have unrestricted assets in the proper amount that state regulations require. Others may not be able to devote the staff and resources to establishing and administering gift annuities even though they would receive a substantial benefit from these donors. If your favorite charity does not offer a Charitable Gift Annuity Program, consider establishing one through a third party like the Lancaster County Community Foundation which will administer the annuity and see that the balance of funds is used for the charity of your choice. Or your charity might want to establish a program through the Foundation. Your contact at Lancaster County Community Foundation is Kim Shorter (717) 397-1629.