What is a Charitable Gift Annuity and How is it Used in Planned Giving?

A charitable gift annuity (CGA) is a financial arrangement in which a donor makes a gift of money or other assets to a charitable organization and in return the organization makes payments back to the donor for the remainder of his or her life. In addition to the payments, the donor usually also receives income tax and estate tax breaks from the government.

A CGA is usually part of estate planning and planned giving. An attorney will often recommend gift annuities as a way to increase retirement income and save taxes while supporting worthwhile charities. In Ohio, charitable planning attorneys have many high-quality charities and community foundations to recommend, or they can recommend nationally recognized organizations.

The Charitable Gift Annuity as Retirement Income

As a source of retirement income, a charitable gift annuity works much like an insurance annuity. The donor transfers money or other assets to the sponsoring organization and the organization makes monthly, quarterly or annual payments back to the donor or another designated recipient (known as an annuitant). The key here is that the total payments back to the donor total less than the total value of the donation, usually around half, and the charitable organization keeps the remaining assets after the donor’s death.

Returns on a CGA are usually significantly less than those available from an insurance annuity, but that’s what makes it a gift and justifies the associated tax benefits. The annuity payments can be scheduled to begin as soon as the donation is complete, or they can begin at a future date that is determined up front. Most often payments are scheduled so they will support the donor during his or her retirement years.

The amount of each annuity payment is determined by the size of the gift, the age and life expectancy of the donor or other recipients, and other factors. Most organizations use the recommended annuity rates established by The American Council on Gift Annuities. When using a CGA as part of your planned giving, an attorney or other qualified advisor can help you determine how much of a gift you’ll have to give in order to meet your income goals.

Using the Charitable Gift Annuity to Reduce Taxes

Because a portion of the donation is a gift and will never be returned to the donor, a charitable gift annuity affords several tax benefits to the donor:

  1. An immediate income tax deduction — The donor receives an immediate income tax deduction for the year in which the asset transfer occurs. The amount of the deduction is based on the value of the assets that the charitable organization will keep, i.e. the total value of the assets minus the total value of annuity payments.
  2. Reduction in estate taxes due to reduced size of the estate — Since the assets will leave the estate permanently, the total value of the estate and, thus, the amount of estate taxes assessed will be reduced.
  3. Tax-free annuity income — A portion of each annuity payment is considered a tax-free return of the donor’s principal. The rest of the payment is taxed like any other income. How much is tax free depends on several factors, including the donor’s age and contract arrangements.

A lot of options are available with a charitable gift annuity, so it’s a good idea to do your planned giving with an attorney’s assistance. An attorney can ensure you get the terms that will benefit you and your heirs the most while still achieving your philanthropic goals.

In Ohio, the charitable planning attorneys at Gudorf Law Group, LLC, can assist in helping you find qualified charities to establish a charitable gift annuity with and assist with other aspects of planned giving. Our attorneys are available for a free consultation by calling 1-877-483-6730.