Charitable Gift Annuities: Giving and Getting

TL;DR: Charitable gift annuities allow you to support causes while receiving lifetime income and tax benefits. They involve donating assets to a charity in exchange for fixed payments. Though beneficial, they come with limitations like irrevocability and inflation risk. Evaluate the pros and cons before proceeding with this philanthropic financial tool.

‍

Main points:

• What It Is: A contract where you donate assets to a charity in exchange for lifetime fixed income.
• How It Works: Donate cash, stocks, or property; receive fixed payments and tax benefits; charity keeps the remainder after death.
• Pros:
  • Steady income for life
  • Tax deductions and partial tax-free payments
  • Support causes you care about
  • Flexible asset options
  • Lower capital gains tax
• Cons:
  • Irrevocable decision
  • Lower returns than other investments
  • No inflation adjustment
  • Limited say in how funds are used
• New Rule: Fund with up to $50K from an IRA via a one-time QCD (age 70½+).
• Tax Tip: Some income is taxable; part may be tax-free.
• Good Fit For: Donors wanting reliable income and charitable impact.
• Advice: Talk to a financial advisor to weigh options.

‍

Charitable giving is not merely a noble act; it is an indispensable component of our social fabric. As you get older, you might want to contribute to causes that uphold your values and beliefs. Charitable gift annuities are a special way to give back. They help both the donor and the charity.

If you’re contemplating getting one, you should understand charitable gift annuity pros and cons and how they work.

‍

What is a Charitable Gift Annuity?

So, what is a charitable gift annuity? A charitable gift annuity is a contract between a donor and a charitable organization. When donors sign this contract, they can give a large gift using:

• Cash
• Stocks
• Securities
• Real estate

In return, they get guaranteed income for life. This arrangement benefits the charity, and it offers significant financial and tax advantages to the donor.

With a charitable gift annuity, you can positively impact society while securing your financial future. As with any financial strategy, charitable gift annuities have pros and cons.

‍

How Does a Charitable Gift Annuity Work?

Before you weigh charitable gift annuities' pros and cons, you should better understand how charitable gift annuities work.

• Donation to Charity: You contribute a significant funds, securities, or other valuable assets to an organization of your choice.
• Annuity Contract: The charity agrees to pay a fixed income for life to the donor or another designated individual. Sometimes, the donor could be a couple receiving charitable gift annuity payments.
• Tax Benefits: When you donate, you can enjoy immediate tax benefits. You can receive a charitable gift annuity tax deduction and deduct part of your donation in the same year you make it. Some of the payments you get may be tax-free. That’s because the IRS considers part of the money a return of your original gift.
• Fixed Income Payments for Life: Annuity payments usually stay the same. They depend on your age and how much you donate. The annuity rate may be higher if you're older when you make the gift. These are known as charitable gift annuity rates by age, and they play a big role in how much you receive.
• Charity Benefit: When you pass away, the charity keeps the remainder of the original gift. This happens because you are the annuitant.‍

Remember, the main goal of a charitable gift annuity is to support the charity. Hence, the charitable gift annuity rate tends to be lower than other investments. The American Council on Gift Annuities (ACGA) provides the charitable gift annuity rates.

‍

‍

Charitable Gift Annuities Pros and Cons

These are some charitable gift annuities pros and cons you should consider.

‍

Pros

• Steady Lifetime Income Stream: One big benefit is the regular, fixed income they receive for life. This can be particularly appealing for retirees seeking a stable source of income. Charitable gift annuities offer a secure and reliable income.
• Tax Advantages: Donating to a charitable annuity can bring valuable tax benefits. You can receive an instant income tax deduction for a portion of your donation. This is a charitable gift annuity tax deduction; part of your annuity payment may be tax-free. This is because it returns some of the money you originally gave.
• Giving Back to Causes: Charitable annuities lets you support causes you care about. You can create a positive impact on your community and the world. Charities get a lump-sum donation they can use right away for their programs. They also know they’ll receive long-term support from what’s left of the annuity.
• Flexibility in Donations: You can donate various assets, including cash, securities, and personal property, to an organization with a charitable annuity.
• Less Capital Gains Tax: Funding annuities with appreciated stocks or property could reduce the capital gains taxes you'd usually pay if you sold them. This allows for a more strategic approach to managing tax obligations.

‍

Cons

• Irrevocability: Setting up a charitable gift annuity is a permanent decision. As a donor, you should carefully consider the implications, as it involves giving up control over the donated assets.
• Lower Fixed Income: Other investment options may offer higher potential returns. But charitable gift annuities may come with comparatively lower fixed payments.
• Inflation Risk: Fixed income doesn’t adjust for inflation, so purchasing power of annuity payments could decrease over time.
• Less Control Over Funds: Charities may have discretion over using your donated funds. Consider this before making contributions, especially if you have specific programs or uses in mind for your donation.

‍

What Are the New Charitable Gift Annuity Rules?

New rules allow you to fund a charitable gift annuity using a Qualified Charitable Distribution (QCD) from your IRA. This became possible under the SECURE Act 2.0. You can make a one-time QCD of up to $50,000 to a charitable gift annuity, but only if you're age 70½ or older.

You must follow specific rules, and the payment can only go to you and/or your spouse. Also, the annuity must follow strict payout guidelines. While it’s a great way to give and get income, it’s best to talk to a financial advisor before jumping in.

‍

Are Payments from a Charitable Gift Annuity Taxable?

Yes, some of the payments you receive are taxable, but not all. A portion is often tax-free because it's treated as a return of your original contribution. You may be taxed on the rest, especially any income earned from investment growth.

Your exact tax treatment depends on how you funded the annuity (cash vs. appreciated assets) and your age. You’ll get a detailed breakdown in your first tax year, so hang on to those records. You could also let your tax advisor help you sort it out.

‍

Can I Do a QCD from an Annuity?

You can do this, but not directly from an annuity you already own. But thanks to recent changes, you can now use a QCD from your IRA to create a charitable gift annuity. That means you take a one-time transfer, up to $50,000, from your IRA and use it to fund a charitable gift annuity.

This counts toward your required minimum distribution (RMD), and you won’t have to include it in your taxable income. Remember, this QCD-to-annuity move can only be done once in your lifetime, so plan wisely.

‍

Do Charitable Gift Annuities Make Sense?

Charitable gift annuities make sense for some people, but not everyone. They work best if you want to support a charity you believe in and want steady income for life. You won’t get high returns like some other investments, but you’ll enjoy peace of mind, possible tax savings, and the joy of giving back. Like anything else in your financial plan, it’s smart to weigh the charitable gift annuities pros and cons before making a move.

‍

Give Back Responsibly

Charitable gift annuities have both pros and cons. A fiduciary can help you decide if this option fits your needs. There may be other investment vehicles like donor-advised funds with better advantages while giving back.

With the financial advisors at Asset Preservation Wealth & Tax, you’ll receive guidance that considers your tax circumstances. We look at the whole picture to give you a holistic view of your financial plans.

‍

Get a free portfolio review today!

‍

‍

Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not refer in any way to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims paying ability of the issuing company; not guaranteed by any bank or the FDIC.‍

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

A Qualified Charitable Distribution ("QCD") is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met. Some charities may not qualify for QCDs. First consult your tax advisor or the charity for its applicability.

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.