The charitable gift annuity (“CGA”) is a simple contract in which the donor makes a gift of cash, securities or other assets (convertible to cash) during his or her lifetime. The donor, in return, receives fixed payments for life. The funds are invested and charity (the “payor”) uses the interest and part of the principal to make guaranteed payments to the individual (the “annuitant”). The portion of each annuity payment that is a return of the original principal is tax-free; the interest portion (lesser of the two) is subject to income tax. The annuity can also be structured for two persons the most common of which is the joint-and-survivor annuity for married spouses. Under this format, payments are made to both annuitants for their joint lifetime; and upon the death of one, the payments are continued for the survivor.
The amount of the annuity depends on the age(s) of the individual(s) receiving the annuity and the amount of the gift. The typical profile of a CGA donor is one who is approaching retirement, is philanthropic, is interested in receiving income from assets, and can take advantage of tax breaks.
The donor can claim a charitable deduction on his or her income tax return in the year the gift is made and each year thereafter. Where the donor’s funding of the CGA takes the form of appreciated securities or real estate, the capital gains tax is minimized and spread out over the donor’s life expectancy; and part of the appreciation escapes the tax entirely.
The CGA can also be done in the form of a “Deferred gift annuity”. This variation can appeal to the younger donor who has high current income, can benefit from a current tax deduction, and is interested in augmenting retirement income on a tax-favored basis. Here, the donor makes the gift in exchange for an annuity starting at a future date--usually the donor’s retirement. An attractive variation of the deferred gift annuity is the “Flexible Gift Annuity”. In this form, the donor is free to select a date in the future for the payments to begin and receive all the tax benefits applicable to the basic CGA.
Where It Works
Charitable Gift Annuity
The charitable gift annuity (“CGA”) is a simple contract in which the donor makes a gift of cash, securities or other assets (convertible to cash) during his or her lifetime.
Donor wants something material in return
Donor wants income payments in return
Donor desires to make a deferred gift
Donor wants an income tax deduction
Charity generally receives an enhanced value at maturity
Donor receives philanthropic recognition