Monday, 27 May 2024

Estate planning: Charitable gift annuities

Retired persons often wish to enhance their current income. Many even want to make a contribution back to their community. These seemingly opposing wishes can be reconciled through a charitable gift annuity, a form of planned giving.


A charitable gift annuity involves a contribution of assets to a nonprofit organization in exchange for fixed income payments under the terms of an annuity contract.


Let’s examine how the annuity works.


First, how is the income amount determined? The fixed income is calculated using a fixed annuity rate (percentage) multiplied by the initial contribution.


The rate (percentage) depends on the age of the person, or persons (if a couple), receiving the payments, and on the payment start date.


The American Council on Gift Annuities publishes rate tables (available online) that many nonprofits follow. These rates ensure that the charity keeps approximately 50 percent of the value of what was contributed to purchase the charitable gift annuity.


For example, using the current tables, a person age 70 years, seeking an immediate gift annuity for his lifetime only could expect to receive an annual return (annuity) of 5.7 percent on the value of his initial one time contribution.


If he contributes $100,000, then he will receive $5,700 each year for the rest of his life. (Note: The rate would decrease slightly if he received monthly or quarterly payments.)


Moreover, if a couple were to purchase a charitable gift annuity and receive payments over their combined life expectancy – so that the surviving spouse would continue to receive annuity payments –then the rate would reflect the couple’s combined actuarial life expectancy.


Second, what assets can be contributed to “purchase” the annuity? Often these annuities are purchased with cash. Sometimes a charity will accept stocks and bonds or a residence (or ranch) in exchange for the annuity.


Third, what are the tax consequences to a charitable gift annuity? If cash is contributed, then the consequences are as follows: (1) an immediate tax deduction in the year of the gift for the so-called present value of the charitable remainder; which means the excess of the initial cash contribution over the present value over the lifetime annuity income stream; and (2) annual recognition of ordinary income on the annuity interest income.


If appreciated stocks or bonds are contributed, then in addition to ordinary interest income each year, capital gains will incrementally be recognized each year over the term of the annuity. Gradual recognition of the capital gains is usually much better than immediate recognition, as would occur if one were to sell the stock first, and then “purchase” the charitable gift annuity.


Lastly, charitable gift annuities presume a significant charitable intent on the part of the donor. Persons charitably included who wish both to make an immediate gift while alive and increase their income, may be interested.


If so, call the planned giving department of the intended nonprofit organization and request literature; then evaluate this option with your financial planner.


Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 1st St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235.


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