They aren’t for everyone, but this donation could generate income. Getty Images By Eileen Ambrose, Senior Editor From Kiplinger's Personal Finance, November 2017 Q. My alma mater is offering a charitable gift annuity. Is that a good way to generate income?See Also: Are Annuities Right for You? If you want to give money to your school as well as receive an income stream, a charitable gift annuity can make sense. A charitable gift annuity is a contract between you and your alma mater. You donate cash, securities or other assets to the school and get a charitable tax deduction up front. The institution invests the money and returns some of it to you in fixed payments for the rest of your life. Thousands of colleges and charities raise money using gift annuities, and policies vary among institutions. Many require donors to contribute a minimum of $10,000 to $25,000 and to be at least age 65 to begin receiving payments, says Laurie Valentine, of the American Council on Gift Annuities. Payout rates may differ, too, although most institutions use rates set by the American Council. Advertisement You can elect to start payments immediately or later. The older you are, the higher the payout rate. For example, the American Council’s maximum immediate payout rate for someone making a donation at 65 is currently 4.7%; based on the average $50,000 gift, the donor would receive an annual payment of $2,350. The payout rate is 5.1% for those age 70, 6.8% at age 80, and 9% at age 90 and older. You can also choose a reduced payment over two lives instead of one, so the income stream would continue until the second person died. For example, the payout rate for a couple who are both age 65 is 4.2%, or $2,100 a year on a $50,000 donation, instead of 4.7% on a single life. Gift annuities aren’t for everyone. If your goal is to receive as much income as possible, you’re better off buying an immediate annuity from an insurance company. For instance, a 65-year-old man investing $50,000 in an immediate annuity would receive an estimated $3,264 a year, according to www.immediateannuities.com, versus $2,350 from a gift annuity. But with a gift annuity, you also get a tax break. Take a tax deduction. You can deduct the part of your donation that won’t be returned to you in annuity payments. The deduction is calculated by taking the full amount of your gift and subtracting the present value of all the payments you’re expected to receive during your lifetime. So age is a factor in the size of your deduction. For example, the deduction on a $50,000 donation with quarterly payments is $17,449 for a 65-year-old donor, $22,886 for a 75-year-old and $28,300 for an 85-year-old. Advertisement If you’re donating cash, part of your payments each year will be a tax-free return of principal, and the rest will be subject to ordinary income tax. In the example above, $1,636 of the 65-year-old’s $2,350 annual payment would be tax-free each year for the donor’s expected lifetime, which is about 20 more years. If you donate appreciated securities, you won’t owe tax on all of the capital gains because a portion of your gift goes to the charity. You will pay tax on the long-term capital gains income returned to you in annuity payments, but the tax will be spread out over your expected lifetime. Each year, the institution will tell you the portion of your payments that is tax-free and the portion that’s subject to capital gains or regular income taxes. You will continue to receive payments no matter how long you live. But once you pass the age of your life expectancy (based on an annuity mortality table), all payments to you will be subject to ordinary income tax—whether you gave cash or appreciated securities. See Also: Decode Annuities to Find the Best Fit Your payments are only as secure as the financial health of the school or charity, so you should research an institution’s finances before donating. If the institution fails, “as a donor, you’re out of luck,” says John Hook, a trusts and estates attorney with Stradley Ronon in Philadelphia.