The idea of a charitable gift annuity is nothing new, but its advantages and benefits to the donor will never grow old. The concept of the charitable gift annuity in America dates back to 1843, when a Boston merchant donated money to the American Bible Society in exchange for a flow of payments. Today, the concept includes valuable tax benefits for donors. But perhaps more valuable than the financial advantages is the satisfaction of helping continue the mission and good works of a charitable organization such as The Alliance of Baptists.
Gift Annuities Defined
A gift annuity is a contractual agreement between a donor and a charitable organization in which the donor transfers assets in exchange for the organization's promise to pay an annuity. By donating through a gift annuity, you can accomplish two things: (1) contract for fixed payments for yourself, or yourself and another individual, and (2) make a gift to a charitable organization of your choosing. Therefore, your donation is divided into two parts: the amount of the donation attributable to the gift portion, and the amount attributable to your annuity payments.
If you itemize deductions on your tax return, savings from the charitable deduction of the gift portion reduce your gift's net cost. For a period of years, based on a government table of life expectancies, a portion of each payment received is considered a nontaxable return of your contribution. This further increases your after tax dollars available for spending or investing.
In addition to the annuity payments you receive, an annuity funded with appreciated property results in these advantages: (1) the gain allocated to the gift portion completely avoids the capital gains tax and (2) the portion of gain to be recognized can be spread over the life expectancy of the person(s) receiving the annuity payments (provided that the donor is the primary annuitant and the annuity interest is assignable only to the charitable organization).
Understanding Annuity Rates
Based on life expectancy, older annuitants have higher annuity payment rates. As a result, gift annuity contracts are generally more appealing to older donors because the purchasing power of a fixed dollar amount can shrink over any long period of time. Rates are also adjusted according to the number of annuitants, with rates for two-life contracts often lower because of extended life expectancy. The age of a recipient is the age reached at the nearest birthday, and rates are the same for men and women. A specific annuity rate is a matter of agreement between the donor and the issuing charitable organization. In the chart you will see rates recommended by the American Council on Gift Annuities. Check with your financial advisor or The Planned Giving Department for current rates.
A Case Study of Benefits
Linda, aged 75, plans to donate a maturing $10,000 certificate of deposit. Because she needs continuing income, she decides to use the cash for a one-life charitable gift annuity that we will issue at the suggested rate of 6.7 percent, or $670 per year, a portion of which she will receive quarterly. At the time of the gift, the charitable midterm federal rate of interest (a figure used in calculating the charitable deduction) is 3.4 percent. Because Linda itemizes her tax deductions, she earns a federal income tax charitable deduction of $4,197 (the amount of the $10,000 donation attributable to the gift portion). With a marginal income tax bracket of 28 percent, the tax savings of $1,175 will reduce the net cost of her gift to $8,825. The second advantage she will enjoy is that for the next 12.4 years, her life expectancy, $468 of her $670 payment will be considered a return of her contribution and will not be subject to tax. Her after tax, spendable dollars received over this significant length of time are calculated in the chart. For comparison, we have determined that Linda would need a 9.7 percent return on the net cost of a fully taxable investment to produce the same $613 of after-tax income, based on the net cost of the gift.
For More Information
Charitable gift annuities are an excellent way to achieve your philanthropic goals and gain substantial tax benefits. As with most contract agreements, however, it is best to consult knowledgeable professionals before establishing a charitable gift annuity. The Planned Giving Department is available to answer any questions and provide projected results for your specific situation, in confidence and with no obligation.
Copyright: The Stelter Company, All rights reserved. The information in this publication is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are for hypothetical purposes only and are subject to change. References to estate and income tax include federal taxes only. Individual state taxes and/or state law may impact your results.
