Charitable Gift Annuities - Uses, Selling & Regulations (2024)

What Is a Charitable Gift Annuity?

Charities and donors can both benefit from using a form of planned giving called a charitable gift annuity. Charitable gift annuities are similar toother annuities in that a lump sum is exchanged in return for a series of payments.

However, instead of involving an insurance company there is a contractual agreement between the donor and nonprofit that manages the charitable gift annuity. The funds are invested, and while the donor is living they receive payments from the charitable organization where they established the charitable gift annuity. Upon their death, their chosen charity receives the remaining annuity balance.

There are some potential advantages to charitable giftannuitiesover a more traditional donation.

• Donors benefit from the purchase of a charitable gift annuity because they receive a stream of payments that can supplement their income. With a standard donation, the donor does not receive any payments in return.
• Charitable gift annuities also allow organizations to build long-term relationships with donors.
• However, there are some potential downsides as well. The biggest drawback vs a standard donation is that CGA donations are only partially deductible, whereas regular donations may be fully deductible. This is because, with a CGA, a portion of your donation generates a return in the form of payments for you.

Gift annuities are one form of planned giving (a way donors can give major gifts such as cash, property or assets to nonprofits and charities).

Other forms of planned giving are:

• Cash donations
• Appreciated securities
• Life insurance
• Remaining balance in retirement accounts
• Bequests (money given once donor is deceased)
• Charitable remainder trust
• Charitable lead trust
• Pooled income fund
• Private foundation or donor-advised fund

CGAs could be very beneficial to closely held businesses owners. Generally, the owners have significant capital appreciation in their business, and selling could create a sizable capital gain.

Chip StapletonFINRA Series 7 and Series 66 License Holder

Chip Stapleton is a financial advisor who has spent the past several years of his career working primarily in financial planning and wealth management. He is a FINRA Series 7 and Series 66 license holder and passed the CFA Level II exam in 2022.

Are Charitable Gift Annuities Popular?

Charitable annuities are hardly a new idea. One of the earliest examples of a charitable gift annuity (CGA) occurred in 1831, when John Trumbull, a colonial artist, gave paintings to Yale University in return for a lifetime of annual payments. The American Bible Society also began using CGAs around this time.

By the 1920s, churches and other charities used charitable gift annuities as a fundraising strategy.

Other groups known for offering charitable gift annuities include:

• Universities
• Community foundations
• National health organizations
• Environmental groups
• Religious groups
• Arts and social service organizations
• Nonprofits

The leading reason people give for choosing a charitable gift annuity is as a “benefit to charity,” according to wealth management firm, BNY Mellon’s 2022 Charitable Gift Report. Of the donors surveyed, 30% cited that as their reason. Other leading reasons were flexibility (17%) and income for themselves (13%). Other reasons given were income tax benefits, income for a spouse or heirs, simplicity and their legacy — 10% each.

The website for the American Council on Gift Annuities (ACGA), a nonprofit group responsible for overseeing the use of CGAs, provides hundreds of links to organizations offering CGAs. There are more than 4,000 organizations that offer charitable gift annuities, according to the ACGA.

Organizations Using Charitable Gift Annuities

Religious, charitable and educational organizations are all501(c)(3)organizations that can use CGAs. While not all nonprofit charities accept these gifts, many do.

The Internal Revenue Service defines 501(c)(3) organizations as groups that are “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition and preventing cruelty to children or animals.” By the same definition, 501(c)(3) organizations cannot exist for the primary benefit of private shareholders. To comply with the tax code, charities send CGA annuitantsIRS Form 1099-Rand designate which contributions (whether cash or property) are taxable, nontaxable or capital gain.

How Charitable Gift Annuities Work

A charitable gift annuity functions as an agreement consisting of a charitable gift of cash, securities or other assets for a stream of payments for life. It is a permanent and legally binding contract. The gift may be made with nearly any type of asset. Examples include:

• Real estate property
• Publicly traded securities
• Cash

Although there are no minimum value amounts required by law to fund a CGA, each organization may impose its own minimums. Minimums typically fall between $5,000 and $20,000 but could be any amount.

A CGA contract involves two parties — the donor, also called the annuitant, and the charity. Donors can be a single person or up to two people, such as spouses, who transfer a large gift to a charity in exchange for an annuity that’s paid out to the donor for the remainder of their life.

The payment on a charitable gift annuity is determined by the size of the donation, donor’s age and rate. Rate quotes fluctuate along with the general level of interest rates in the economy. As of January 2024, The American Council on Gift Annuities suggests the following maximum rates for a single-life annuity:

Following these rates, a 65-year-old who donates $50,000 will receive a yearly payout of $2,700 ($50,000 x 5.4%) until their death.

With a joint-and-survivor annuity, the joint annuitants receive a combined payment while both donors live. When one dies, the other continues receiving a percentage of the payments until their death. The joint annuitants have some flexibility in choosing the amount the surviving annuitant will receive. Choosing a higher remainder percentage results in a reduced initial payment, but a smaller cut when the first annuitant passes.

Charitable Gift Annuity Benefits for Donors

Charitable gift annuities offer many benefits for donors:

• Donors can support aphilanthropic causewhile also receiving a financial benefit in return.
• There are several tax advantages, including tax credits for charitable donations, which results in a lower income tax the year the donation was made.
• Portions of each gift annuity payment are also tax-free because they are considered a return on the original principal.
• Annuities offer reliable, fixed income until a donor’s death.

Charitable Gift Annuity Benefits for Charities

Charitable gift annuities also have many benefits for charities:

• CGAs may entice hesitant donors to make a donation because they will receive something in return. It could also make donation a possibility for those that couldn’t afford to otherwise.
• Gift annuities promote long-term relationships with donors.
• Charities have some flexibility with the donation, such as using the gift immediately or investing the gift and making payments on the annuity from the earnings.
• Unlike traditional annuities, where an insurance company receives the balance of the annuity after an annuitant dies, the charity keeps the balance of the annuity when the donor dies.

Can Donors or Charities Sell Gift Annuities?

A charity that receives a CGA has the option of selling it in some cases. Normally, after a donor passes away, charities receive the remainder of the annuity. In some cases, such as a building project, the individual payments are not sufficient to meet a charity’s needs. When this happens, a charity may consider selling payments from a CGA because of the need for a lump sum payment immediately, rather than smaller, long-term payments.

Donors may not sell their right to future charitable gift annuity payments without approval from the charity, which is the annuity owner. Because both parties must consent – and selling could change the original tax benefit – these transactions rarely occur.

Regulations & Agreement Guidelines

There are several organizations that help regulate charitable gift annuities. The most significant is the American Council on Gift Annuities, which was established in 1927. It publishes recommended actuarial rates, which the IRS endorses, and works to protect donors and charities using charitable gift annuities.

“A responsibly managed gift annuity program can be a tremendous benefit to donors and the charitable organization.”

Clinton Schroeder President of the ACGA

The ACGA has created significant regulations surrounding CGAs, such as:

• Charities can accept many types of gifts in exchange for a charitable gift annuity, such as cash, appreciated securities, real estate, personal property and other property interests.
• The minimum required gift for a charitable gift annuity is established by each charitable organization.
• Charitable gift annuitants must be at least 60 years old before they are eligible to receive payments.
• Charities must use the gift for a specific initiative if the donor specified one when they made the donation.
• Charitable gift annuities must meet state regulations, including reporting regulations and security laws.

Another influential organization is the Partnership for Philanthropic Planning, originally known as the National Committee on Planned Giving. This nonprofit opened in 1988 and is dedicated to educating professionals in the planned giving community and preventing abuses of charitable gift annuities.