Anyone looking to increase income from investments they know they won’t be leaving to heirs, should consider a charitable gift annuity. A charitable gift annuity is a contract between a charity and a donor. The donor gifts property to the charity in return for a lifetime stream of income payments. This could be on a single life or joint lives. The donor gets to take an immediate charitable deduction for the gift, but not for the full amount. The charity retains the property at the donor’s death, regardless of how many payments the donor has received from the annuity.
The amount of charitable deduction is based on the income stream and the age of the donor. The present value of the income stream expected to be received by the donor is deducted from the value of the property gifted. A portion of each payment will be received as tax-free, because it is considered a return of principal. The tax-free amount is determined by applying the Section 72 exclusion ratio generally used with annuities.
The American Council on Gift Annuities (ACGA) reviews rates periodically and issues recommendations to charities on what should prudently be paid out in this arrangement. The latest rates published recommend a 4.2% rate for a 65-year-old single life and 4.7% for a donor age 70. Covering two lives where both parties are the same age usually reduces the rate by ½%. These rates are significantly more than traditional fixed income investments offer.
Charitable gift annuities are not without risk. If the charitable institution files for bankruptcy, donors can lose their assets and income stream. You always want to check the credit quality of the charity you are considering. It can also be a good idea to diversify the contracts over several charities. Charitable gift annuities usually have minimums as low as $10,000 which makes diversification easier. Issuance of charitable gift annuities is regulated at the state level, so in Pennsylvania, certain criteria must be met but no state registration is required.
Originally published August 2012