Charitable Gift Annuities

Charitable gift annuities are an extremely flexible way to make a gift. They can be designed to provide a fixed income for life for you and/or others you choose. They are simple to create and can be funded with gifts of relatively modest amounts.

Here’s how a charitable gift annuity works:

  1. You transfer cash or other assets to the charity you wish to benefit. This involves completion of a simple agreement and can normally be handled conveniently by mail, if you wish.
  2. You’ll receive generous fixed payments annually (or more frequently, if desired) that will never vary in amount. The amount of your payment is a percentage of your gift determined by your age and other factors at the time your gift is funded.
  3. You will be entitled to an immediate income tax charitable deduction. In addition, part of each annual payment is tax free for the period of time equal to your life expectancy.
  4. If desired, you can also choose to name another person (typically a spouse, parent, or sibling) to receive payments with you, instead of you, or following your lifetime for the remainder of his or her life.
  5. The assets used to fund your gift annuity will generally be removed from your estate for tax purposes.
  6. You make a significant charitable gift equal to a portion of the amount used to establish your gift annuity agreement.

Many persons choose to fund a new gift annuity agreement each year. Since payment rates increase with age, each gift annuity generally brings larger annual payments. 

When property such as stock, mutual funds, or other securities that have increased in value is given for a gift annuity, part of the capital gains 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 gains 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.

Click HERE for a current gift annuity rate schedule.

Example

Maureen Davis, 89, decides to give $10,000 for a gift annuity agreement on October 17, 2017. The payment rate at her age is 8.7%. She will thus receive a payment each year of $870 for life and a tax deduction of $6,189 for the year of her gift.

In addition to the income tax deduction, $733 of each annual payment will be received free of tax for the first 5.2 years of her payments.

If Maureen Davis had wished, another loved one could continue to receive annual payments for their lifetime in the event of her death. The payment rate and tax benefits in such a case would be somewhat less since the payments would be made for two persons’ lives.

To summarize, Maureen Davis has:

  • Made a gift to charity in the amount of $10,000 in exchange for an income for life
  • The income will be 8.7% of the gift, which is $870 per year and $733 (about 84%) of that will be tax exempt for the first 5.2 years
  • Maureen Davis will also receive an immediate charitable income tax deduction of $6,189

The assumed date of transfer for this example is October 17, 2017. This example has used the IRC Sec. 7520(a) election to use 9/2017 discount rate of 2.4% to optimize the charitable deduction.

NOTE: This calculation is provided for educational purposes only. The type of assets transferred, the actual date of the gift, and other factors may have a material effect on the amount or use of your deduction. You are advised to seek the advice of your tax advisors before implementing a gift of this type.

Copyright (c) 2014 The Sharpe Group, Inc.