The Annuity That Keeps on Giving

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Charity is usually a one way street. You give; the charity receives. If you’d like to help a charity and receive something in return, donate through a charitable gift annuity. When you sink money into one of these annuities, the charity rewards you with a stream of income for the rest of your life. You receive regular fixed payments (usually quarterly).
If you’re thinking these gift annuities sound remarkably like the immediate annuities you read about in the last chapter, you’re right.

There are some slight differences. With a gift annuity, you receive a tax deduction more on that later and the rates you pocket won’t be quite as good as you’d enjoy with a commercial immediate annuity. Charities don’t want to compete with the private insurers. Charitable gift annuities can look especially attractive to older Americans who want to help out a favorite cause while earning more income than what they can wring out of a certificate of deposit.

These annuities can also be a wonderful alternative for retirees who own appreciated stock that isn’t kicking off income. The stockholder might want to sell the shares and steer the proceeds into an income-producing investment, but he or she doesn’t want to trigger capital gains tax. With a charitable gift annuity, the donor gives the stock to the charity and receives regular payments in return. Part of the payments will be taxed as ordinary income, part as capital gain, and part may be tax free. Consult with the charity to determine the tax consequences of your gift.

Most nonprofits use the annual annuity rates that the American Council on Gift Annuities sets each year. By using identical rates, charities hope that potential donors will focus on which nonprofits to help rather than on capturing the best deal.

If you’ve got a favorite cause, chances are it offers charitable annuities. Thousands of nonprofits promote them, including universities and colleges, environmental groups, cultural and religious organizations, and social service agencies such as the Salvation Army, the American Cancer Society, the Humane Society of the United States, the American Lung Association, and the Nature Conservancy.

Gift annuities tend to be more popular when CD rates are puny. The annuities enjoy an advantage because they’re age sensitive. A bank issuing a CD doesn’t care how old its customers are, but charities do. The older you are, the greater the monthly annuity payments. For example, the annuity rate for a seventy year old was recently 6.1 percent, but it was 7.6 percent for an eighty year old.

Annuity rates improve as you age because you’ll have less time to enjoy the cash flow. The American Council on Gift Annuities establishes the annual rates with the aim of allowing the charity to eventually recoup at least 50 percent of the original donation. Before you get too excited about gift annuity rates, a monumental difference exists between a CD and a gift annuity. When a CD matures, you get your money back, while the cash (or other assets) you hand over for a charitable annuity is an irrevocable gift. Many charities require that a donor be at least sixty. If a donor lives past one hundred, it’s likely the charity will receive nothing. The entry age can drop to fifty if the individual wants to defer the payments. One of these deferred annuities can be an ideal way to capture an upfront tax write off for a charitably inclined person in a high tax bracket who would love steady income in future years.

There is no limit to how many annuities you can accumulate if you can meet a charity’s minimum donation, which is usually $5,000 to $10,000. Staggering your money at different charities could be wise because of the age sensitivity of the rates. If you purchase a charitable gift annuity, you’ll receive a tax deduction, though it won’t be as large as an outright gift. The deduction is equal to the amount of the contribution, less the present value of the payments that will be made to the donor (and/or the beneficiary) during his or her life.

The annuity checks are taxed in the same way as a regular immediate annuity. A portion of each check is taxed as ordinary income, while another part (which declines over time) is treated as a tax-free return of the donor’s principal. The charity issues a Form 1099-R to the donor, which sets forth the tax treatment of the payments.


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