Understanding Charitable Gift Annuities
Presented by Ben Murphy, CPA, PFS™, CPFA® :
Charitable gift annuities (CGAs) are an arrangement between a donor and a nonprofit organization where the donor receives a regular payment for life based on the value of assets transferred to the organization. This allows donors to make a gift to their favorite charity, and, in return, they receive fixed payments for life. After the donor’s death, the assets are kept by the organization.
Many donors use CGAs as an inexpensive alternative to a charitable remainder trust (CRT) when drafting and maintaining those trusts would be too expensive based on the size of the donation. CGAs can be funded with as little as $5,000, whereas a CRT is generally appropriate for donations in excess of $200,000 to $300,000.
CGAs are set up by an agreement between the charity and the individual annuitant or couple. Most gift annuity donors are retired, wish to increase their cash flow, solicit the security of fixed payments, and would like to save taxes. When the payments stop in a CGA, the balance of the assets in the account is kept by the charitable organization as a gift. CGAs concurrently provide a charitable donation, a partial income tax deduction for the donation, and a lifetime income stream to the annuitant(s).
CGAs can begin paying income immediately, or payments can be deferred to a specific date in the future—perhaps the client’s expected retirement date or the date a client’s child reaches a certain age.
How Do CGAs Work?
Many large charitable organizations’ donor-advised fund providers offer CGAs as part of their planned charitable giving programs. Once you have found a suitable organization, you can fund your CGA with cash, securities, or a variety of other assets. If you are donating appreciated assets (e.g., securities), you may be able to spread the capital gains taxation over a number of years.
An individual can establish a gift annuity for themselves or on behalf of someone else, such as a spouse. The total number of annuitants associated with any one gift cannot exceed two. Payment amounts will depend on several factors, starting with the age of the annuitant. The younger the annuitant is, the smaller the monthly payments will be, as the total amount is spread over a lifetime.
CGA rates are lower than those offered through commercial annuities. If one wants to maximize the amount of income received over a lifetime, purchasing a commercial annuity—rather than entering into a gift annuity contract—would likely be the best course of action. Most charities use the rates provided by the American Council on Gift Annuities, which publishes current rates on its website.
If donors itemize their deductions, they can claim a federal income tax charitable deduction for a portion of the amount transferred to the charity in exchange for a gift annuity. The deduction is equal to the amount of the contribution minus the present value of the payments that will be made to the annuitant(s).
The taxation of the income paid to an annuitant will vary based on how the CGA was funded. For CGAs funded with cash, part of the income payments will be taxed as ordinary income and part will be a tax-free return of principal. If the CGA is funded with appreciated assets, part of the income payments will be taxed as capital gain, part will be taxed as ordinary income, and part will be a tax-free return of principal. In most cases, the entire income payment will eventually be taxed as ordinary income.
Finding Your Best Fit
If you are looking to make a charitable gift but want to retain an income payment to support you or your beneficiaries, a CGA may be an option to consider. To start, check out the list of CGA providers on the American Council on Gift Annuities website, and together, we can discuss which ones may be a good fit.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Ben Murphy is a financial advisor located at Global Wealth Advisors 601 N. Marienfeld, Suite 322, Midland, TX 79701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA / SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (325) 207-5772 or at email@example.com.
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