How does a charitable gift annuity work?

Many non-profit organizations offer charitable gift annuities, which are financial assets available to donors. Generally, charities purchase these annuities on behalf of donors using the cash and non-cash gifts donated to the charity, and it is designed to benefit both the donor and the charity. 

A charitable gift annuity is a long-term contract where a donor donates cash, securities, real estate, or other assets to a charitable organization, and the organization agrees to pay a guaranteed income stream for the remainder of the donor's life. The annuity payments are fixed, and they are not adjusted for inflation. Donors can choose to receive payments monthly, quarterly, or other specific periods.

What is a charitable gift annuity?

A charitable gift annuity is an annuity contract in which a donor makes a charitable gift to a non-profit organization such as a university or religious organization, and in return receives a fixed income for life based on the value of donated assets. Generally, the donated assets can be cash, securities, or other assets with a value.

Gift annuities are ideal for donors who want to make charitable donations but also receive a stable income over their lifetime. A portion of the annuity payments may be tax-free, while the other portion may be subject to federal and income taxes.

How does a charitable annuity work?

A charitable gift annuity is set up by an agreement between a non-profit organization and a donor. In the agreement, the annuitant agrees to donate cash or non-cash assets to the charitable organization in exchange for a fixed stream of income for life.

The size of the annuity payments is determined by various factors, including the annuitant’s age at the time of the donation. For example, older donors will receive bigger payments over a shorter period, while younger donors will receive smaller payments over a longer time. The payments are fixed, and they are not adjusted for inflation.

The annuity payments are guaranteed by the non-profit organization’s assets, and they will continue regardless of how the annuity investments perform. The payments stop upon the annuitant's death. The remaining assets in the annuity go to the non-profit organization as a gift.

Are charitable gift annuity payments taxable?

When an individual makes a charitable gift annuity, they transfer assets, usually cash, security, real estate, or other assets, to a non-profit organization in exchange for a promise to pay a guaranteed stream of income.

The taxable portion of the annuity payments is determined by the “income tax exclusion ratio”, which considers the gift amount, applicable federal tax rate, and the age of the annuitant at the time the gift annuity is set up. This ratio is used to determine the percentage of the annuity payment that is tax-free and the portion that is taxable. For the taxable portion of income, you will pay federal income taxes and state income taxes (if any).

If you donated long-term appreciating stocks instead of cash, you can reduce the capital gains tax you would have paid if you sold the securities and donated the cash proceeds. You also get this tax benefit if you gift appreciated securities to any public charity that is set up to accept cash and non-cash donations.

What is a charitable gift annuity agreement?

A gift annuity agreement is a formal agreement between a non-profit organization and a donor. The donor makes a gift to the non-profit organization in form of cash, securities, or other assets in exchange for a fixed stream of annuity payments.

The gift annuity agreement locks in the annuity rate, amount of payments, and the timing of all payments the annuitant will receive. The agreement also details the name and contact information of the donor and non-profit organization, the amount of the gift, tax implications of the annuity, any limitations on the use of the gift by the non-profit organization, and the responsibilities of the non-profit organization when administering the annuity.

Who regulates charitable gift annuities?

Charitable gift annuities are regulated at the state level, and each state has its own regulations governing charitable gift annuities. If the non-profit organization operates in one state and the donor comes from a different state, the annuity must be administered based on the regulations of both states.

Apart from state laws, charitable gift annuities are subject to oversight by the Internal Revenue Service (IRS) to ensure they comply with federal tax laws and reserve requirements. Non-profit organizations that issue charitable gift annuities must maintain adequate reserves and limit annuity payments to a certain amount.

Most of the time, non-profit organizations use the gift annuity rates provided by the American Council on Gift Annuities. The state and federal regulations ensure that a significant portion of the charitable gift is available for charitable purposes.

Who offers charitable gift annuities?

Many individuals desire to give away their assets but would like some form of income from these assets during their lifetime. A charitable gift annuity provides investors with an opportunity to donate cash and non-cash assets and still earn an income over their life. On the other hand, non-profit organizations like universities, religious organizations, and charities use charitable gift annuities as a way to raise funds for their charitable programs.

Many non-profit organizations accept donations for charitable gift annuities and use the funds to purchase immediate annuities to fund the annuity payments. These organizations use the remaining funds after purchasing immediate annuities for charity programs. Non-profit organizations may have in-house programs for charitable gift annuities while other organizations may work with third-party annuity providers to manage their gift annuity programs.

Can a charitable gift annuity be sold?

When a donor purchases a charitable gift annuity, the terms of the contract are included in the gift annuity agreement. Once the contract is signed, the terms of the annuity cannot be changed or the annuity sold to another party.

However, there are certain circumstances when the agreement may allow the annuity to be transferred to another party. If the annuity is a flip charitable gift annuity, the donor may be allowed to transfer the annuity to another non-profit organization.

When the annuity is transferred, the original annuity issuer assigns the annuity contract to another entity, and the donor will receive a similar fixed income but from the new organization. However, organizations that allow flip charitable gift annuities may place restrictions on when and how the transfers can be done.

Additionally, when a donor passes away, the charity will receive the remaining payments. Where the periodic payments are insufficient to meet the organization’s needs, the charity may consider selling the annuity payments from the annuity for an immediate lump sum payment.