Finding a way to make an impact on a charity that means something to you is a priority for many people as they contemplate their financial legacy. A charitable gift annuity gives you the chance to support an eligible charity while drawing in a steady stream of income for life, but is it the right move for you?
This guide will help you determine whether a charitable gift annuity is going to be the right fit for your giving strategy, your estate planning, and your taxes at the close of the year.
What is a Charitable Gift Annuity?
Being financially generous with the charities that are near and dear to you can be a savvy money move in the long term. Deciding how to give and how to reap the benefits for decades to come is an important piece of a financially successful portfolio.
A charitable gift annuity is one option that allows you to make your mark on the world while creating a sustainable income.
A charitable gift annuity is a contract between donors and eligible charities. It starts when you make a gift to charity, usually something substantial such as a sizable donation of cash or other valuable assets. In the year you donate, you take the partial tax deduction. Looking ahead, you also receive a fixed income for life from the annuity.
How Does a Charitable Gift Annuity Work?
Not every charity offers this type of annuity, but many larger nonprofits will allow you to fund a contract with them. How does this charitable giving benefit both parties, securing a bright future financially for everyone?
Once you find a charity offering annuities, you start by donating a generous sum to them. It can consist of cash donations, but you may also have the option to fund it with securities and even property that holds value. The donation is set aside in a reserve account. A charity will invest the funds or continue to grow the assets indefinitely.
In exchange for your gift, you receive a fixed payment from the investment account until death (yours or the death of a spouse who contributed alongside you).
Upon your passing, the remainder of the funds or the value of the assets held in the reserve transfers to the charity managing it. Depending on how flush that reserve account was, this could be a sizable donation that allows you to make a massive impact on your community.
Pros and Cons of a Charitable Gift Annuity
Why should you consider a charitable gift annuity for your giving this year? There are some advantages to this type of annuity, but the financial benefits are only the tip of the iceberg. Here are some things to consider before you decide.
Pro #1: Steady Income for Life While Supporting Charity
The first and most obvious benefit for donors is the steady stream of income they can cash in with a charitable gift annuity. Once you part with the cash or assets, the charity becomes responsible for paying you annually or quarterly based on investments made from your donation and held in a reserve account. The other benefit is that you actively support a meaningful charity.
Pro #2: Partial Tax Deduction Now
Worried about what Uncle Sam wants to take from your bank account this year? One way to get ahead on your taxes is to give generously. Charitable gift annuities provide an immediate, partial tax deduction. The math is a little complex, based on life expectancy and estimated income you will pull from the annuity, so speak with a tax specialist about what to expect. Better yet, some of the income you pull in may also be tax-free.
Pro #3: Reduce Capital Gains Tax
Selling securities and assets that have appreciated can eat away at earnings when you pause to calculate capital gains tax. By donating appreciated securities and other personal property, you might be able to avoid capital gains taxes or, at the very least, minimize them.
Con #1: Irrevocable Donations
If you are unsure whether you can part with the funds or assets you want to give, now may not be the time to dive in. Once you contribute to a charitable gift annuity, those gifts will no longer belong to you. It is an irrevocable gift, so be sure before you make any major money moves.
Con #2: Fixed Payments
For some people, the idea of a fixed payment for life is appealing. However, you may find that it is not all it is cracked up to be. Payments will not change over time, even as inflation increases and the money no longer stretches as far.
This is one scenario where donating from your heart is essential because it may not be the most financially savvy investment to keep pace with inflation.
Con #3: Support Only One Charity
Deciding which charity to support might be the hardest part of choosing a charitable gift annuity. Unlike other charitable giving vehicles like donor-advised funds, you can only choose one charity to benefit from your gift. Giving to more than one cause requires multiple annuities which can be a logistical headache. Also, remember that your payments are being guaranteed by that charity and no one else.
Other Types of Charitable Vehicles
Before you decide how to give to charity, you should know that charitable gift annuities are far from the only option. Two other vehicles may be a better fit for you: charitable remainder trusts or donor-advised funds. Here is a quick breakdown of the two options.
Charitable Remainder Trust
This is a very similar vehicle to charitable gift annuities. You donate to an irrevocable trust and pull income based on a set percentage of the trust’s value. It applies to you or your beneficiaries, lasting for a lifetime or until ten percent of the fund’s value remains. At either point, a charity collects the remainder of the CRT. You can also have multiple charities, and you retain the right to change them at will.
These are often a smarter move if you want to make a larger donation (in the multiple six figures) compared to charitable gift annuities which can have a smaller basis.
Donor-Advised Fund
As an alternative to the CRT, a donor-advised fund could be the way to give if you want to support more than one charity. You can make a tax-deductible donation right away and allow it to grow. As the charities you care about run new initiatives, you can recommend grants to be made from the DAF whenever the need arises.
In this instance, you do not pull an income from a DAF like you do with a CRT or a charitable gift annuity. A DAF is an actual 501(c)(3) so this would be treated like a direct gift to charity.
Explore Your Options with Magellan
Not sure how you can make the most impact with the financial resources at your disposal? Here at Magellan, we offer the guidance you need to make sound decisions regarding the legacy you want to leave behind for your loved ones and the charities that matter to you.
We provide you with comprehensive estate, tax, legal, and financial planning services with a focus on charitable remainder trusts. Reach out to us today to learn more about our services and see if we might be a good fit!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.