A Way to Give Back: Charitable Gift Annuities

Charitable giving allows socially minded investors to give back to society, while at the same time saving on taxes. A charitable gift annuity is one way to accomplish these dual goals.

Philanthropy is a long-standing tradition among the nation’s wealthiest households, who often desire to give back to a society that has benefitted them so greatly. Charitable sentiments typically strengthen with age, according to a Millionaire Corner survey of high net worth individuals, who have $5 million to $25 million in investable assets. Half the high net worth investors age 65 and older say it’s important to use their wealth to help others.

Charitable gift annuities are managed by more than 1,000 nonprofit organizations, including colleges and universities, religious organizations, environmental groups and health care centers. Many of the groups, such as the American Red Cross and the American Cancer Society, are household names.

“A charitable gift annuity is perhaps the most popular planned giving option,” said  AARP, a non-profit advocacy group. “It allows you to give a portion of your assets (cash or property) to a cause you care about, while at the same time providing you with a lifetime stream of fixed annual payments.” I

A charitable gift annuity involves a potentially tax deductible gift of cash, properties or appreciated securities to an organization deemed qualified by the IRS. In return the donor receives a fixed payment for life. Payments can begin immediately or be deferred. The payment rate depends on a donor’s age at the time of the gift, long-term interest rates and whether the payments are deferred and for how long. Income from a charitable gift annuity can be taxed as ordinary income, dividends or capital gains, depending on the annuity principal. A portion of the payment is a tax-free return of the donor’s principal. Upon the donor’s death, the remaining principal – usually calculated to be 50 percent of the starting principal - goes to the charity.

Charitable gift annuities may benefit investors who own appreciated stocks or mutual fund shares and would like to reinvest them, but wish to avoid paying taxes on the capital gains, said the American Council on Gift Annuities. The annuities can also assure fixed income in retirement, and may offer higher yields than prevailing interest rates. Charitable gift annuities can also assure continued payments to a surviving spouse.

Annuity payments are guaranteed for life and backed by the charity’s assets, but experts warn that guarantee could be meaningless in the case of a default. Investors who want to give back through a charitable gift annuity should conduct due diligence before committing their funds to a nonprofit group.