Charitable Gift Annuities

With a Charitable Gift Annuity in Place You Can Have Some Cake and Share Some Too
With a Charitable Gift Annuity in Place You Can Have Some Cake and Share Some Too. By: Demitri Vernitsiotis / Digital Vision / Getty Images

Who Issues Charitable Gift Annuities?

Charitable gift annuities (CGAs) are income strategies issued by colleges, hospitals, and non-profit type organizations. CGAs function similarly to single premium immediate annuities (SPIAs) and deferred income annuities (DIAs) by guaranteeing an income stream that can start immediately or in the future.

How Is a CGA Different from Other Guaranteed Annuity Income Streams?

The main distinction of the CGA strategy is that when you pass away, the income stream stops and the remaining money is kept by the issuing organization.

With SPIAs and DIAs, you can structure the contracts so the policy goes to your listed beneficiaries, which is not the case with a charitable gift annuity (CGA).

What Exactly Is a Charitable Gift Annuity?

The following definition of a Charitable Gift Annuity (CGA) comes directly from the American Council of Gift Annuities(http://www.acga-web.org/) which is the governing body of all Charitable Gift Annuities:[A gift annuity is a contract under which a charity, in return for a transfer of cash or other property, agrees to pay a fixed sum of money for a period measured by one or two lives. A person who receives payments is called an "annuitant" or "beneficiary". The contributed property becomes part of the charity's assets, and the payments are a general obligation of the charity. The annuity is backed by all of the charity's assets, not just by the property contributed.]

Good Elements of Charitable Gift Annuities

Charitable gift annuities (CGAs) offer a significant tax benefit that other annuities don’t offer.

The American Council of Gift Annuities was formed in 1927 to provide national and statewide guidelines and to oversee charitable gift annuities and other planned gifts. They also provide the suggested benchmark rates for CGAs that are typically used by charities and nonprofits in addition to their donors.

The American Council of Gift Annuities also work with the IRS and state insurance departments to ensure that not only the end consumer’s best interests are at the forefront, but all parties involved as well.

If there ever was an annuity example of “having your cake and eating it too”, CGAs are as close as you are going to get, because you can secure a lifetime income stream while donating money to your charity of choice.

Are There Any Bad Elements of CGAs?

I always tell people that annuity guarantees are only as good as the carrier backing them up.  With CGAs, the income guarantees are backed by the issuing organization or non-profit, so it’s very important that you do your homework on their claims paying ability.

In addition, the limitations to the CGA contract depends on the specific organization offering the charitable annuity guaranteed. Even though the American Council of Gift Annuities has done a good job establishing guidelines, every CGA issuing organization is different and you should do your due diligence before placing any money. A charity guarantees the payments, even though it might have to pull from its general funds so you need to know the solvency and size of those funds before transferring that risk to your chosen organization.

Weigh the Benefits of a CGA Against SPIA and DIA Guarantees

CGA payments are fixed, and will not increase. They will also not decrease, but it’s important to know that the contractual income stream will not increase with rising rates or inflation.

When you need to solve for income now or income later needs, I encourage people to compare charitable gift annuity (CGA) payouts to corresponding single premium (SPIA) and deferred income (DIA) guarantees. It’s a pretty good apples to apples comparison of guaranteed income products, but you also have to factor in the tax benefits that only CGAs can provide.

If you need a guaranteed lifetime income stream and want to save on taxes, then a CGA might be a suitable and appropriate solution. In addition, you can donate appreciated stock or other investments and receive tax benefits in exchange for an annuity income stream.

You can also set up the guaranteed payments joint with your spouse in order to provide guaranteed income for both lives while circumventing any probate issues. In addition, CGAs can provide income guarantees to parents, siblings, or anyone you choose in a tax advantaged strategy.