Tax benefits and a high level of a steady, reliable stream of payments have long made charitable gift annuities a favorite giving vehicle of older people -- especially those past the so-called "accumulation stage" of life who are not as concerned with increasing assets as with finding ways to ensure an income they can't outlive.
What is a gift annuity?
As the name suggests, it is part gift -- a contribution of money or property to the charity of your choice -- and part annuity -- an arrangement under which the charity agrees to pay your designated annuitant(s) fixed payments for life. These payments are backed by the full assets of the charity. At the death of the last beneficiary, the charity receives the funds remaining in the annuity account.
The gift component is very important because it generates two significant tax benefits:
- Since a portion of the gift is treated as a charitable contribution, the donor gets an immediate income-tax deduction to help offset current income.
- If long-term capital-gain property is used to fund the gift annuity, then part of the gain escapes taxation and the rest is spread over the donor or annuitant's life expectancy.
In addition to the tax benefits, people are often attracted to the gift annuity for other, less obvious, reasons:
- A donor can establish a gift annuity with a relatively small sum of money.
- There is no need to make a new will. The procedure to establish a gift annuity is straightforward and uncomplicated.
- Because a donor can receive payments from his or her gift, the gift annuity enables a person of modest means to make a gift during his or her lifetime without financial sacrifice.
What the gift annuity means to many donors is the security of a generous, regular, non-fluctuating stream of payments -- an end to the dramatic swings the financial marketplace has seen in the last several years.
How are the rates paid for charitable gift annuities determined?
All charitable organizations are free to set the rates they offer, as long as the rates comply with applicable state regulations. The University of Dayton chooses to follow the schedule of recommended maximum rates published by the American Council on Gift Annuities. These rates change from time to time, based on a variety of economic factors.
Can a gift annuity have more than one beneficiary?
Yes. A charitable gift annuity can be created to pay one or two annuitants for life. If you choose a beneficiary other than your spouse, you may need to consider gift-tax consequences.
How is the charitable deduction determined?
The charitable deduction is equal to the difference between the amount of the contribution and the value of payments to the annuitant(s). Deductions are lower for younger persons since they likely will live longer. Similarly, deductions are lower when there are two annuitants rather than one.
How are the gift annuity payments I receive taxed?
For tax purposes, a gift-annuity contribution is treated as part gift and part purchase of an annuity. The part that is treated as a gift is the amount that is deductible the year you create the gift annuity. The balance is treated as the purchase price of the annuity. It is treated as a return of your original investment and comes back to you tax-free over your life expectancy.
Can I give stock in exchange for a gift annuity?
Yes. If you own stock for more than 12 months, any gain you realize on its sale would be treated as long-term capital gain and would be subject to rates in effect for such. If, instead of selling this appreciated stock, you use this stock to fund a gift annuity and retain annual payments for yourself, only a portion of the gain would be taxable and you would be allowed to recognize that portion of the gain in equal amounts over your life expectancy.
If you designate someone other than yourself to receive the annual payments, the amount of the gain you must recognize is still reduced if compared to a sale, but you must recognize all of it in the year you create the gift annuity.
How do returns on gift annuities compare with returns on regular investments?
It is important to remember that a charitable gift annuity is a charitable giving plan. It is not an investment. However, if annual net spendable cash flow is a major objective for you, a charitable gift annuity compares quite favorably with regular investments.
Such charitable gifts are of great long-term benefit to the University of Dayton, as they enable us to plan for the future. They are of immediate benefit to you, however, as they enable you to make a charitable gift now and, at the same time, receive much-needed annual payments for life.
Would you like to receive our complimentary booklet, "Guaranteed Payments for Life: The Charitable Gift Annuity?"
