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If you want to support a charity while receiving income during your lifetime, you might consider a charitable gift annuity (CGA). A CGA allows you to make an irrevocable gift to an eligible charity in exchange for fixed payments for life. You may also receive certain income and capital gains tax benefits, depending on how you fund the CGA.
What is a CGA?
A CGA is a contract between you and an eligible charity. You make a one-time gift of cash, stocks, or other assets to the charity, and the charity agrees to make fixed payments to you or another designated beneficiary for life. When the lifetime payments end, the charity keeps the remaining value of the gift.
Unlike a commercial annuity, the primary purpose of a CGA is to make a charitable gift. Thus, payments may be lower than those available from a noncharitable annuity.
How does a CGA work?
The amount of your lifetime payments generally depends on the amount you contribute and your age when you establish the CGA. Many charities use suggested maximum payout rates established by the American Council on Gift Annuities. Typically, the older you are when payments begin, the higher the payout rate because the charity will likely make fewer payments over your lifetime.
Payments may begin immediately or at a future date. If you establish a deferred CGA, you make the charitable gift now but payments begin at a specified future date. A deferred CGA may be useful if you do not need additional income now but expect to need it later in retirement.
Charities establish their own requirements. Typically, charities require you to be at least age 60, although younger donors may be able to establish a deferred CGA. Many charities also require a minimum contribution, often $10,000.
How is a CGA taxed?
When you establish a CGA, part of your contribution is treated as a charitable gift and part is used to provide your lifetime payments. If you itemize deductions, you may be able to claim an income tax charitable contribution deduction for the charitable portion of your gift, subject to applicable limitations.
Your charitable contribution deduction is limited to the amount you contribute in excess of the present value of the annuity, calculated using IRS rules.
The tax treatment of your annuity payments depends in part on how you fund the CGA. If you fund it with cash, a portion of each payment may be treated as a tax-free return of your investment in the contract, with the remaining portion typically taxable as ordinary income. If you live beyond your life expectancy as determined under IRS rules, subsequent payments are generally fully taxable as ordinary income.
How can you fund a CGA with appreciated property?
You may be able to fund a CGA with appreciated property, such as stocks that have increased in value. If you sell appreciated property, you generally recognize capital gain equal to the difference between your adjusted basis and the amount you receive from the sale. If you instead use appreciated property to fund a CGA, you generally do not recognize all of the capital gain immediately. Depending on the structure of the annuity, part of the gain may be recognized over your life expectancy as you receive payments. Your charitable contribution deduction may also be affected by the type of property you contribute and how long you have held it.
Can IRA assets be used to fund a CGA?
If you are at least age 70Ā½, you may be able to use a qualified charitable distribution (QCD) from an IRA to fund a charitable gift annuity (CGA), subject to special federal tax rules and limits. This option is available through a one-time election and is subject to an inflation-adjusted dollar limit. The CGA normally must be funded exclusively with QCD assets, and annuity payments may be made only to you or your spouse.
A QCD is generally excluded from your gross income, but you cannot also claim an income tax charitable contribution deduction for the amount excluded from income. If the QCD is made before your required minimum distribution (RMD) for the year has been fully satisfied, it may count toward your RMD for that calendar year. If you have already satisfied your full RMD for the year, the QCD will still be distributed tax-free from your IRA, but it will not count toward your RMD or reduce the tax liability associated with RMD amounts already taken.
What factors should you consider before establishing a CGA?
A CGA is irrevocable. Once you transfer assets to the charity, you typically cannot take them back. In addition, you give up control of the assets in exchange for the charity’s obligation to make lifetime payments.
Your annuity payments are also fixed. Thus, inflation may reduce the purchasing power of these payments.
Lifetime payments depend on the charity’s ability to meet its financial obligations. A CGA is an obligation of the charity rather than a commercial annuity issued by an insurance company.
Is a CGA right for you?
A CGA may be appropriate if you want to make a charitable gift while receiving a fixed stream of lifetime income. However, it may not be appropriate if you need continued access to the assets you contribute or want payments that can increase over time.
The income and tax consequences of a CGA depend on your circumstances, the property you contribute, and how the annuity is structured. Consider consulting a qualified tax or financial professional before establishing a CGA.
The charitable donation tax deduction is limited to the
amount contributed to the annuity in excess of its
present value, as calculated using Internal Revenue
Service (IRS) parameters. The money returned to an
annuitant in equal installment payments is considered
a partially tax-free return of the donor’s gift. A
charitable gift annuity continues regular payments until
the death of the annuitant. Payments may be lower
than with a noncharitable annuity because the primary
purpose is to support the nonprofit.