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. Among the many ways to give back, charitable gift annuities are a distinctive option that benefits donors and charities alike. If you are contemplating getting one, you need to understand charitable gift annuity pros and cons and how they work.
What is a Charitable Gift Annuity?
A charitable gift annuity is a contract between a donor and a charitable organization. By entering into this contract, donors can make a substantial contribution in the form of cash, securities, stocks, or real estate while ensuring a guaranteed income for life. Not only does this arrangement benefit the charity, but it also 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 get a better understanding of how charitable gift annuities work.
- Donation to Charity: When donating to a charity, you contribute a significant amount of money, securities, or other valuable assets to an organization of your choice.
- Annuity Contract: As part of the 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. A portion of your donation is tax-deductible in the same year it is made. Also, some of the annuity payments you receive may be tax-free as they are considered a return of the principal amount.
- Fixed Income Payments for Life: Annuity payments are typically fixed and determined by factors like your age and the size of your donation. The annuity rate may be higher if you're older when you make the gift.
- Charity Benefit: When you pass away, the charity becomes the rightful owner of the remaining principal since you are the annuitant.
You should also keep in mind that the purpose of a charitable gift annuity is to benefit the charitable organization. Hence, the charitable gift annuity rate tends to be lower than other investments. Charitable annuity rates are provided by the American Council on Gift Annuities (ACGA).
Charitable Gift Annuities Pros and Cons
These are some charitable gift annuities pros and cons you should consider.
- Steady Lifetime Income Stream: One of the primary benefits for donors 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. Additionally, a part of your annuity payment may be considered tax-free since it is a return of the initial amount you contributed.
- Giving Back to Causes: Charitable annuities allow you to support causes you care about and create a positive impact on your community and the world. With a lump-sum donation available for immediate use by charities for their programs, they also have the assurance of long-term financial support from the remaining 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: By funding with appreciated securities or property, you can reduce or distribute capital gains taxes that would typically be owed when selling those assets. This allows for a more strategic approach to managing tax obligations.
- 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: The fixed income from an annuity does not adjust for inflation, which means the purchasing power of the 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.
Give Back Responsibly
Charitable gift annuities have many pros and cons to consider; you need a fiduciary to help you determine the best option for you. 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.
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.
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