Interested in making a sizable gift to charity but at the same time setting up a lifetime income for the remainder of your retirement years? That's what Charitable Annuities are all about. And the American Council on Gift Annuities (ACGA) has been helping donors find charities for these gift annuities since 1927. Let's see how charitable annuities work.
First, charitable annuities (also called gift annuities) are contracts under which a charity, in return for a transfer of cash, marketable securities, real property or other assets from you, agrees to pay a fixed annuity to one or two individuals for their lifetimes.
The charitable annuities deduction
But clearly, if you're making a gift and expect an income tax deduction for it, you need to give more to the charity than they give back to you in the form of a lifetime payment. That's handled by the charity offering rates on charitable annuities that are lower than those offered by insurance companies to purchasers of commercial annuities. That difference leaves a significant portion of your contribution available for charitable purposes, i.e. the charitable gift.
The actual gift deduction is equal to the amount of the contribution less the present value of the annuity payments that will be made to the donors during their lives. The annuity present value is determined using IRS tables regarding life expectancy, assumed earnings, the amount contributed, and the gift annuity rate.
The payment rates for charitable annuities recommended by the ACGA are in full compliance with the IRS and computed to produce an average gift to the organization at the expiration of the agreement of approximately 50% of the amount originally donated under the charitable annuity agreement.
Taxation of charitable annuities
If the gift annuity is funded with cash, part of the payments from the charity will be taxed as ordinary income and part will be tax-free. When charitable annuities are funded with appreciated securities or real estate owned more than one year, part of the payments will be taxed as ordinary income, part as capital gain, and part may be tax-free. The charity issues you a Form 1099-R specifying how much is taxed.
The size of payments from charitable annuities depends on:
- The gift annuity rate offered by the charity
- The value of the contribution.
- The number of annuitants.
- The age(s) of the annuitant(s).
Most charities follow rates recommended by the American Council on Gift Annuities.
So if you can afford to make a charitable donation and would like to count on lifetime payments offered by charitable annuities, your next step is to find a charity you'd like to donate to.