WHAT IS A CHARITABLE GIFT ANNUITY?

One of the main concerns that retirees have about annuities is this simple question: what happens if I die earlier than I expected?

It’s a logical question, and the classic answer you’d hear is that leaving assets to heirs isn’t exactly the point of having an annuity: it’s to help reduce the risk of out-living your assets. There are, of course, benefits that you can add on to an annuity that could mitigate this risk, but another often-overlooked alternative is the charitable gift annuity.

What is a charitable gift annuity and how do they work?

A basic fixed annuity contract works like this: you provide a lump sum payment to an insurance company, and in return you receive regular payments for a predetermined amount of time into the future (usually a lifetime or a specified number of years).

A charitable gift annuity is similar, but instead of entering into a contract with an insurance company, you enter into a contract with a charity.

Donors can find a participating charitable organization of their choice and contribute cash or other assets. The donor can take a charitable tax deduction on their tax return in the same year the donation was made, and at an appointed time thereafter the donor will receive fixed monthly payouts, typically for a lifetime.

Payout rates are generally determined by the age of the donor, the size of the donation, the life expectancy of the donor, and other factors.

When do charitable gift annuities make sense?

Charitable gift annuities have a few features that appeal to certain individuals and families. The two most commonly sought out benefits are the ability to support a cause and the possibility of a tax deduction.

Support Philanthropic Causes

Certain charities may be close to your heart, such as your alma mater, a religious organization, an environmental group, or a local community foundation that has personally impacted your life.

Donating in the form of a charitable gift annuity can provide the gratification of knowing you contributed to a cause that is meaningful to you, while at the same time providing a steady income stream. For some retirees, knowing that whatever isn’t “used up” upon death will go to the organization can be a source of comfort and satisfaction.

Tax Benefits

For those who are looking to itemize deductions or offset a high-income year, it’s useful to keep in mind that you can take charitable tax deduction in the year your donation was made. Further, some portion of your distributions from a charitable gift annuity may be tax-free.

Keep these risk factors in mind

Before deciding on a charitable gift annuity, we strongly recommend speaking to your financial advisor. As with any insurance contract or decision, there are key issues and risk factors that we think need to be thoughtfully considered.

These include:

• The income available from a charitable gift annuity versus other annuities or income sources
• Rules around minimum gift requirements and age minimums for distributions
• The amount of liquid assets you have available outside of your annuity
• Your overall financial profile, situation, risk tolerance, and time horizon
• The usefulness and relevance of a charitable tax deduction in your situation
• The credit rating of the charitable organization providing the annuity contract

These are all factors that should be considered individually and together before making a decision about whether a charitable gift annuity is right for you.

If you’re considering a charitable gift annuity or if you’re looking for some help in making a decision about your retirement plan, we recommend speaking to an advisor who can talk about your unique needs and goals and help you create the retirement income plan you’ve been looking for.

Further Reading:

https://www.annuity.org/annuities/types/charitable-gift/