Charitable Gift Annuity– Are They For You?

What is a Gift Annuity?

Gift annuities are a contract between you and your favorite charity. You give your favorite charity a one time payment and you receive a lifetime fixed payment, called an annuity. The amount of the annuity is determined at inception. You know what you will be getting before you pay. On your death (or the death of a spouse or other loved one, since you can name up to two people to get the annuity), your favorite charity will receive the funds that remain for its charitable purposes.

Benefits of Gift Annuities

Here are some of the great benefits you can get from this great technique:

• An income tax deduction that can cut the tax bill you would otherwise owe come April.
• A monthly or quarterly cash flow stream for the rest of your life.
• Cash flow payments that are fixed regardless of what happens.
• No worries about asset allocation, monitoring a stock portfolio, market ups or downs (or like recently, downs and downs).
• A return potentially substantially greater then what you can earn on a money market account.
• If you use appreciated property (e.g. real estate, securities) to pay for the gift annuity, you will not have to recognize capital gains immediately (as you would if you simply sold the property and purchased a commercial annuity). Instead, the taxable gain will be recognized over the period the annuity is expected to be paid (your actuarial life expectancy).
• A portion of every annuity payment you receive will be tax free as it will be considered by the IRS as a return of part of your payment for the annuity. The tax rules are complicated, so you should consult with your accountant.
• The mental satisfaction of knowing you are helping your favorite charity.
• Gift annuities are highly regulated so that there is some degree of comfort that you will get what you are promised. Organizations selling gift annuities must register with each state in which they issue them. This means governmental oversight.

Downside of Using Charitable Gift Annuities

There are a number of issues affecting gift annuities that you must understand to make an informed decision. Here are several of them:

• There is no flexibility. You cannot get at the principal you have given away. Your cash flow is higher, but there is an ill-liquidity and lack of flexibility issue. Your annuity is a fixed payment which may not keep pace with inflation. If you live for many years after paying for annuity, inflation might eat into your purchasing power. Part of the solution to these issues is to limit the portion of your investment assets you use to purchase gift annuities.
• The younger you are, the lower the gift annuity rates. Under age 55 it probably doesn’t pay to use a gift annuity. At ages 55-60 it might make sense. Over 60 it makes more sense. From 65-70+ it can be a tremendous deal.
• You can always get a larger annuity from an insurance or brokerage firm. The assumption used in calculating a charitable gift annuity is that about 50% of the value of the annuity should ultimately go to the issuing charity. Since commercial annuities don’t have this requirement, they will always be higher. This is why purchasing a charitable gift annuity requires that you have two goals, benefiting the charity and providing an assured cash flow for yourself or a loved one. You should review with a financial planner how much of your assets you can commit to a gift annuity as part of your overall budget and financial plan. If annuities are right for you, you might be better to buy commercial annuities as well as charitable gift annuities.
• If you die prematurely, you will not realize the returns you anticipated. Your favorite charity will get the benefit. If you have children or other heirs to whom you want to leave assets, gift annuities can still be great, but you should limit the amount of charitable gift annuities you purchase. As noted above, this might be a reason to combine commercial annuities that have features to benefit heirs in the event of premature death, with charitable gift annuities.
• Gift annuities are generally safe. If your favorite charity cannot meet the payments required from the reserve it sets up, it will have to use its general funds to make the payments. If your favorite charity failed, your payments would stop. Thus, while gift annuities are safe, they are not an absolute guarantee. Again, as noted above, buying charitable gift annuities should be part of an overall financial plan, and diversifying between charitable gift and commercial annuities may offer you more of what you need.

Conclusion

Charitable gift annuities can be a tremendous tool to provide an periodic cash flow for life, obtain a current income tax deduction, defer capital gains on appreciated assets, all while helping your favorite charity. As with all complex financial arrangements, you need to understand how a charitable gift annuity works for you, and make the decision as part of an overall financial plan. Finally, as with any legal arrangement, read the agreement carefully to be sure you understand all the nuances. The above is a summary of a radio show on MMFN Money Matters Financial Network on June 30, 2008 with host Gary Goldberg, of Gary Goldberg Planning Services, Inc. in Montebello, New York, and his guest Martin M. Shenkman, Esq., an estate planner in Paramus, New Jersey. Listen to the audio clip of this segment on www.laweasy.com.