Donor-advised funds and qualified charitable distributions have grabbed the spotlight for charitable giving under the new tax law, and for many people, those giving vehicles may work best. But that doesn’t necessarily mean ruling out other ways to give. For some donors, a charitable gift annuity could be a way to meet charitable goals and ensure a stream of guaranteed income in retirement. “A gift annuity may not be a well-known tool, but it can be a wonderful fit, particularly for seniors,” says Jim Soft, planned giving specialist at the Yellowstone Boys and Girls Ranch Foundation, in Billings, Mont.
A charitable gift annuity is a contract between a donor and a charity. In return for your irrevocable gift to the charity, you get a charitable deduction in the year of the gift, plus a lifetime stream of income. You can donate cash, appreciated securities or other assets. An annuity works well for a retiree who has charitable intent but may be worried about retirement finances, says Anne Bucciarelli, a director in the wealth strategies group at AB Bernstein. You generally don’t pay fees to set a gift annuity up or maintain it.
To benefit tax-wise, you need to itemize. Otherwise, you won’t be able to use your deduction. You get an immediate charitable tax deduction in the year of your gift, usually between 25% and 55% of the amount you transfer to charity. With a cash donation, your annuity income typically will be part ordinary income and part tax-free return of principal. For appreciated securities, you avoid much of the capital-gains liability upfront, and the rest is spread over your payments. Each January, your charity issues you a 1099R form detailing the tax liabilities on the payments, Soft says. You also should check with your individual charity for details.
Retired California lawyer Ron Paul, 86, funded a charitable annuity at the Yellowstone Boys and Girls Ranch Foundation with $325,000 of appreciated assets nearly a decade ago and estimates he avoided $80,000 in upfront capital-gains taxes. He also got a $140,000 charitable deduction. Paul’s family spent summers in Montana, so he had ties to the area, and his gift helped to establish a healing place for troubled youth at the Yellowstone Boys and Girls Ranch in honor of his late son. “For me, it’s a win-win thing,” Paul says. “You get these deductions and tax benefits, and you’re benefiting something you really believe in.”
How a Charitable Gift Annuity Works
Say you want to donate $100,000 to a charity. The charity will spell out in your contract the dollar amount it will pay you per year for the rest of your life. The rate will depend on your age, life expectancy and other factors. Rates currently range from 4.7% annually at age 60 up to 9.5% at age 90, for a single life annuity, Soft says. Most nonprofits use the rates recommended by the American Council on Gift Annuities, a nonprofit association that promotes the use of gift annuities in charitable giving; the council publishes rate tables at acga-web.org. Keep in mind your payments will be at the fixed rate specified in your contract with the charity and not indexed to inflation.
Most charities will hold money or appreciated securities in their annuity pool and won’t spend your assets until the contract matures upon your death. But your annuity payments are guaranteed only by the charity issuing the contract and are not protected by state insurance guarantees. Should your charity become defunct, you won’t get your promised payments. Donors should work with experienced charities and ask for financial statements, Soft says.
Chun Lam, 70, a retiree from Plano, Tex., graduated from Duke University with an engineering degree in 1971 and earned two more advanced degrees there. He’s established two charitable gift annuities at Duke to fund scholarships. By giving to an established institution such as Duke, Lam says he doesn’t ever have to worry about not receiving his payments.
Instead of doing an immediate gift annuity, you could choose a deferred gift annuity, which you fund in your earning years—for instance, you donate a gift at age 50 but delay receiving payments until you are 65 or 70. You take a larger upfront deduction, because you’re not receiving payments immediately.
Another option is a flexible gift annuity, which is a hybrid between a deferred and an immediate annuity. You specify a start date in your contract, but you can defer it indefinitely. Each year you defer, your future payments increase.
Some charities may be too small to offer gift annuities. Your local community foundation may be able to set one up for you, but ask about fees.
Can I Stop Social Security and Restart it Later?
This articles explains what is required to stop and restart Social Security and details how to do it.
By Jacob Wolinsky Published
Six Estate Planning Tips for Younger Generations
Millennials and Gen Zers are taking their estate planning seriously. These tips can help make the process seem less daunting.
By David Weinstock, CFP®, AEP®, CPA Published
Is a Medicare Advantage Plan Right for You?
Medicare Advantage plans can provide additional benefits beneficiaries can't get through original Medicare for no or a low monthly premium. But there are downsides to this insurance too.
By Jackie Stewart Published
What You Must Know About the Different Parts of Medicare
Medicare Medicare can be complicated but we've got you covered. Here is a quick guide to the different benefits provided through each part.
By Jackie Stewart Last updated
Retirees, It's Not Too Late to Buy Life Insurance
life insurance Improvements in underwriting have made it easier to qualify for life insurance, which can be a useful estate-planning tool.
By David Rodeck Published
Best Banks for Retirees
banking Kiplinger's 2023 list of the best banks for retirees.
By Lisa Gerstner Published
Kiplinger's Tax Map for Middle-Class Families: About Our Methodology
state tax The research behind our judgments.
By David Muhlbaum Published
As the Market Falls, New Retirees Need a Plan
retirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
By David Rodeck Published
Retirees: Your Next Companion May Be a Robot
happy retirement Robots may help fill the gap left by a shortage of humans to help older adults live independently.
By Alina Tugend Published
Using Your 401(k) to Delay Getting Social Security and Increase Payments
retirement Your 401(k) can be a bridge from retirement to higher monthly income.
By Elaine Silvestrini Published