The Pros and Cons of Charitable Gift Annuities
In past articles, we’ve discussed the pros and cons of private foundations and donor advised funds, but there are other options that can help people support their favorite charity while also providing income for themselves as well.
One option is a charitable gift annuity, which is essentially a contract between a donor and a charity. As the donor, you’d make a sizable gift to charity using cash, securities or possibly other assets, and in return, you become eligible to take a partial tax deduction for your donation, plus you receive a fixed stream of income from the charity for the rest of your life.
When you make a donation to a single charity, the gift is set aside in a reserve account and invested. Based on your age when you make the gift, or ages if it’s both you and your spouse, you’d receive a fixed monthly or quarterly payout for the rest of your life. Then, at the end of your life (again, as well as your spouse’s, if you’re giving as a couple), the charity receives the remainder of the gift.
There are also many advantages to a Charitable annuity. For example, you receive an income stream for the rest of your life, you receive an immediate partial tax deduction, and there’s also the potential for part of the income stream to be tax free. Another great advantage is you can start the annuity with almost any kind of asset – including securities, property, or cash. You’ll also be able to reduce or even eliminate capital gains tax liability for gifts of appreciated securities and property.
While there are many advantages, it’s important to keep in mind that there are some disadvantages as well. For example, the annuity rates vary from charity to charity and are based on a variety of factors, such as the amount of the gift, and the donor’s age when the gift is made. Charitable annuity rates are generally lower than non-charitable annuities, because the primary purpose of the annuity is to provide funding for the non-profit. Keep in mind that you’re irrevocably parting with the money in order to fund the annuity – there’s no do-over, and the decision is permanent. You’ll also have to pay income tax on the income stream, and payments are fixed – they won’t adjust for inflation, as some non-charitable annuities do.
Charitable annuities may not work for many people because they are charity specific. While this works well for some, many people like to support several different charities. They’re often better tools for older people looking to help leave and establish their legacy. For younger donors, the rates will be so low that it may not work well for them.
We hope that you find this information helpful as you make decisions about your own financial plans. Charitable annuities can be great tools for the right people, and as part of a well thought out long-term financial plan. If you have further questions about charitable annuities, or other long-term investments, we offer a no-obligation consultation with any of our financial advisors. You can schedule yours today by calling us at 216-520-1711, or by sending us an email here.
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