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Is a Charitable Gift Annuity Right for You?

If you have a high income, regularly donate to charity, and are currently planning for your retirement, you might want to consider a charitable gift annuity (CGA). A charitable gift annuity is a transaction in which an individual transfers cash or property to a charitable organization in exchange for the charity's promise to make, or arrange for, fixed annuity payments. Like a traditional annuity, charitable gift annuities distribute a set amount of funds (plus the rate of return) to you until you die. In order to provide for a gift component, the rate of return for this type of annuity typically isn't as high as the average rate offered by commercial insurance companies; however, CGAs come with some appealing tax benefits. The right choice for you will depend on how all these figures add up.

Ideal candidate for a CGA

A wealthy candidate is ideal for a CGA for two reasons. One is that the candidate can afford to allot a higher amount to the annuity, thus profiting from interest credited. Another reason is that a wealthier person would reap more of the tax advantages due to their higher tax brackets. So say you put in $100,000 with a standard 4 percent interest rate. Your charitable deduction would roughly add up to $26,548, with an annual payment of $4,000 ($2,576 tax-free). If you invest this at 55 and live until 85, you would theoretically profit $20,000, all while deducting charity donations.

What if you're someone who owns appreciated stocks or mutual fund shares? A charitable gift annuity could be considered for this circumstance, since investors can sell these shares and reinvest the proceeds to increase net gain.

Not-so-ideal candidate for a CGA

A charitable gift annuity isn't for everyone. Someone with less than $20,000 in savings and/or an annual salary lower than $57,000 would be at a much higher risk financially with a CGA. A charitable gift annuity is irrevocable, so it's not like a commercial annuity where you always have the option of withdrawing your money (even though there could be a surrender charge in the early years of the contract). Moreover, earnings would be minimal for amounts less than $20,000. For example, if you were to donate just $15,000, your charitable deduction would approximately amount to $3,892, and you could receive an annual payment of $600 ($386.40 tax-free). In this instance, you'd be better off donating the $4,000 to the charity directly and placing the rest of the money in a more profitable commercial annuity. Since diversification is financial planning 101, first-time planners are also not ideal for a CGA.

Game changers

The proverbial certainties of death and taxes aren’t the only factors that you should take into account. For example, if you want more control over the distribution of your inheritance, a CGA would limit its use to just you and the charity of your choice. However, you also have the option of adding one beneficiary to your policy. If you currently have appreciated assets in a taxable account, moving them to a CGA could further reduce your tax obligations. Since everyone's tax situation is different, we suggest that you consult with your financial advisor, tax advisor, or other financial professional before making any decisions that could impact your tax situation.

According to the American Council on Gift Annuities, CGA regulations vary from state to state. Anyone on the fence about this option would want to ensure their funds aren’t at risk. Though it's smart to begin financial planning earlier in life, younger individuals are most likely better off choosing an alternative. With a charitable gift annuity, payments are divided by the estimated remaining years of the gifter’s life, meaning payments are smaller and security is much less certain.