Give While You Live

Your bank account may not be as big as Warren Buffett's, but you, too, can make a sizable contribution to a favorite charity while you're still around to savor your good deed. Without the enormous resources of one of the world's richest men, however, you might worry that today's generosity could jeopardize your plans for a comfortable retirement. A charitable-gift annuity lets you live well and give back at the same time.

The multiple advantages of generating a stream of income, claiming a healthy tax deduction and supporting a favorite cause appealed to Chicago-area businessman John Casazza. After a lifetime of hard work and careful investing, Casazza, 89, had amassed a multimillion-dollar nest egg and wanted to share his good fortune.

His first wife, Olive, died of colon cancer nearly 20 years ago, and his second wife, Anita, is a breast-cancer survivor. The Casazzas have supported the American Cancer Society for years but wanted to do more. A charitable-gift annuity was the perfect solution. "Instead of waiting until we pass, they get something now and they give us something back," says John.

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Steady income. The Casazzas have donated a total of $1 million through three charitable-gift annuities over the past few years. They receive quarterly checks of $16,400 that will continue as long as either of them lives. "If I took the money and invested it, I could get a bigger return, but then you don't help anybody but yourself," says John. The Casazzas have also reaped big tax benefits from the arrangement, deducting the estimated portion of each gift that will go to the charity after years of annuity payouts.

Most charities, including the American Cancer Society, use standard rates set by the American Council on Gift Annuities. The annuities currently pay 6% a year for life if you purchase one at age 65. The older you are when you make the purchase, the higher the annual payout. For a 75-year-old, for example, the current payout rate is 7.1% or $7,100 a year on a $100,000 gift annuity. Joint annuities pay a slightly lower rate. After making lifelong payments to you and your spouse, a charity typically retains about half of your original donation, although the percentage varies based on how long you live.

Tax breaks. Because annuity payouts represent a return of principal as well as interest, only a portion is taxable (see below). For example, if a couple, ages 65 and 70, were to contribute $100,000, they'd receive $5,700 per year for as long as either one lived. Almost $1,500 of each year's payment would be tax-free until 2029, by which time they'd have recovered all of their principal. They'd get a tax deduction of $32,381 for their charitable contribution, which could save them $8,095 in the 25% bracket. (However, your tax deduction for all charitable contributions cannot exceed 50% of your adjusted gross income for the year if you donate cash to most organizations, or 30% if you donate other types of assets. Excess deductions can be carried over for up to five years.) Some charities offer gift annuities for as little as $10,000.

Before handing over your money, you can take another page from Buffett's playbook: Scrutinize the charity to make sure your gift will be spent wisely. In the case of a long-term contract, such as a gift annuity, you want to be sure that the organization will be around long enough to fulfill its commitment to you. You can research the charity through the Better Business Bureau's Wise Giving Alliance or Charity Navigator.

How the tax bites

If a couple, ages 65 and 70, make a $100,000 gift of appreciated stock with a $50,000 tax basis, here's how they would be taxed each year on an annuity payout of $5,700.

• $2,770 -- Taxed at their top income-tax rate
• $1,464 -- Taxed at the capital-gains rate
• $1,466 -- Tax-free (until 2009)