Charitable Gift Annuity
A gift annuity is similar to the charitable remainder trust idea except that no trust is involved. Instead of a trust however, a contractual agreement is drawn up in which you agree to make an irrevocable gift of assets to FAIR. In return, FAIR agrees to pay you (or a donor-designated beneficiary) a yearly income during his or her lifetime.
For example, you transfer assets now, receiving a charitable deduction on your taxes for a portion of the transfer, and you or a beneficiary receives income for the rest of your life or a fixed period of time. In addition, you have the option to defer receiving income for a period of time if you are a younger donor and are looking to add to your retirement planning.
The income received each year is equal to a fixed percentage of the original gift. This percentage is dependent upon the age of the beneficiary (or beneficiaries) at the time the CGA begins to pay out income.
Upon the passing of the last surviving beneficiary, FAIR will use any remaining annuity assets to support the program you designated when you established the CGA.
| Example Mr. Swain, 68, transfers $20,000 to FAIR for a CGA. Mr. Swain receives guaranteed payments of $1,400 each year, based upon the 7% annuity rate for his age (this rate is set by the government). The $1,400 may be paid in one sum each year, or in several installments throughout the year. Over $700 of the income would be tax-free each year, for the next 17.5 years. (After that time, the full $1,400 would be taxable.) In addition, Mr. Swain would be entitled to an immediate charitable deduction of approximately $7,100. |
Understanding Annuity Rates
Annuity rates are higher for older donors and lower for younger donors, based on life expectancy. As a result, gift annuity contracts are generally more appealing to older donors because the purchasing power of a fixed dollar return can shrink over any long period, even with modest inflation.
Rates are also adjusted according to the number of beneficiaries, with rates for two-life contracts often lower due to the extended life expectancy. The age of a beneficiary is the age reached at the nearest birthday when the contract is made, and rates are the same for men and women.
A specific annuity rate is a matter of agreement between the donor and FAIR. Below you'll see how one-life annuity rates increase with age. These rates are recommended by the American Council on Gift Annuities and are re-determined periodically.
Tax Benefits
Regardless of your age or the timing of the income, you can take the charitable deduction for a portion of the gift in the year you make the gift. A portion of the payments you receive each year may also be exempt from certain income taxes. You may even be able to reduce your capital gains tax by using long-term appreciated securities to make your gift.
For a period of years, based on a government table of life expectancies, a portion of each payment you receive from FAIR is considered a nontaxable return of your investment in the gift. This further increases your after-tax dollars available for spending or investing.
When property, such as stock, that has increased in value is given for a gift annuity, part of the capital gain tax that would normally be due on its sale can be avoided at the time of the gift, and a portion of the gain can be reported over the annuitant's life expectancy. The charitable deduction is typically based on the current value of the property, not its lower original cost. The use of appreciated, low-yielding assets to fund a gift annuity can thus be an excellent way to completely bypass capital gain tax at the time of your gift, enjoy a current income tax charitable deduction, and gain the advantage of reporting a portion of each payment at lower, more favorable capital gain tax rates for a number of years.
With a deferred payment gift annuity, the start of payments is delayed until a specific date, initially determined by the donor. Deferral of payments increases the initial income tax charitable deduction, tax savings and the annuity rate. However, it also reduces the nontaxable amounts to be received. This option is appealing to younger donors who wish to improve future income, such as at retirement.
Charitable gift annuities are an excellent method of achieving your philanthropic goals and gaining substantial tax benefits.