Charitable Gift Annuities

A charitable gift annuity (CGA) provides a structured way to give to charity while securing your own future. The way this works is that in return for a lump-sum gift contribution, the charity guarantees you a steady income for the rest of your life; options include immediate or deferred. A gift annuity purchaser secures immediate tax relief, in addition to a monthly dependable retirement income stream.

The donor is guaranteed an agreed-upon lifetime income in exchange for a gift to a registered 501(c)(3) tax-deductible non-profit charitable organization. As is the case with insurance companies, the charitable organization's reputation, financial stability, and long-term viability play a big part in helping the donor decide. The American Council on Gift Annuities (ACGA), established in 1927, is primarily responsible for setting standards and maximum rates of return by the recipients of the CGA.

Under normal circumstances, with the donor expiring at or around the actuarial life expectancy, the charity would have paid back a combination of interest and principal, leaving behind a remainder of the principal for the charity to use in their goals.

Once the initial agreement is brought into effect, how the charity chooses to invest the funds is solely the charity's responsibility. Suppose the charity makes direct investments or gets an asset manager. In that case, the charity is liable for a certain amount of risk if the donor outlives life expectancy levels or the value of the investment is reduced due to nonperformance. If the gift amount paid by the donor is no longer sufficient to cover continued payments, then the charity has to continue making payments using other resources.

However, suppose the charity takes the donor's entire amount and purchases an immediate or deferred annuity. In that case, this reinsurance transaction provides significant savings for the charity since the cost of the reinsurance is well below the amount gifted by the donor. This difference represents immediately accessible cash for the charity. Reinsurance with a reputed insurance company also reassures donors about their guaranteed payments.

A prime example where a CGA produces big savings is when capital gains are a significant issue. Consider a physician who purchased a clinic for $100,000 20 years ago, which has now appreciated $500,000. If he plans to sell off the clinic, capital gains for $400,000 would be applicable. If the physician gifted the clinic to his non-profit hospital, he would be assured of a regular income stream and tax deductions based on the current value of the clinic and current IRS regulations.

Ultimately, one has to retain a certain charitable element. Still, in consultation with an educated and experienced financial planner, a CGA is a gift that will keep on giving to both donors and charity.