Charitable Gift Annuity Income Strategies
Some people want to have a lifetime income stream and help out a charity or non-profit in the process. This can be accomplished by using a Charitable Gift Annuity (CGA) structure. This type of annuity works like a Single Premium Immediate Annuity (SPIA) by providing a guaranteed income stream but the primary difference is that when you die, the charity keeps all of the unused money.
Single Premium Immediate Annuities and Charitable Gift Annuities Provide Income
Annuities solving for lifetime income can be traced back historically to the Roman Age. Some type of lifetime income annuity has been offered in the United States for over 200 years, and we now call that structure a Single Premium Immediate Annuity (SPIA). Some financial journalists refer to this simplistic strategy as an income annuity or pension annuity, but they are really referring to the SPIA product type. Charitable Gift Annuities are a more recent development but offer similar lifetime income benefits, as well as possible tax benefits.
Annuities Mitigate the Risk You Face of Outliving Your Income
When you decide to buy an annuity to solve for lifetime income needs, you are in essence transferring the risk of outliving your money (aka longevity risk) to the issuing annuity carrier. If you live 20 years past your life expectancy, then that annuity carrier is on the hook to pay you. That’s the unique benefit proposition that sets annuities apart from all other financial products.
Annuity Company Doesn't Keep Your Money Unless You Say it Can
One of the common fallacies about Single Premium Immediate Annuities (SPIAs) is that when you die, the evil annuity company keeps all of your unused money. That describes a “Life Only” SPIA structure but represents only 1 of over 15 different ways to contractually structure the payout. The vast majority of SPIA contracts I recommend have 100% of any unused money going to the listed beneficiaries, not the annuity company.
Benefits of a Charitable Gift Annuity to Consider
Charitable Gift Annuities (CGAs) can provide a lifetime income stream that can start immediately or at a later date. Most large nonprofit organizations like hospitals, charities, universities, colleges, and 501(c)(3) structures offer charitable gift annuity programs.
The main benefit you will receive by using a Charitable Gift Annuity (CGA) is a large tax benefit write off. That’s what separates a CGA from a Single Premium Immediate Annuity (SPIA). Obviously, if you have a heart for your charity of choice, and the guaranteed payout is competitive with a similar commercial annuity, then a Charitable Gift Annuity (CGA) strategy could be a “win-win” for all parties involved.
Limitations of a Charitable Gift Annuity to Consider
The primary downside of a Charitable Gift Annuity (CGA) is that the income is guaranteed by the issuing charity or non-profit. In other words, the claims paying ability of the issuing organization is key in the decision-making process. CGAs are not backed by the State Guaranty Fund like commercial annuities are, so that has to be taken into consideration. Also, most Charitable Gift Annuities (CGAs) do not offer COLA (Cost of Living Adjustment) annual increases to the income stream where commercial Single Premium Immediate Annuities (SPIAs) and Deferred Income Annuities (DIAs – aka: Longevity Annuities) do offer the additional benefit.
Charitable Gift Annuities are Governed by the ACGA
The American Council of Gift Annuities is a governing body that oversees all Charitable Gift Annuity offerings and sets the payout rates so that there is some uniformity among CGA issuers. I encourage you to go to their site through the link above to see the details of the charitable annuity market.
Create Income and Purposefully Support Charities and Non-Profits Too!
I always advise clients that if you are looking for a guaranteed lifetime income stream, look at both commercial annuities and charitable gift annuities for the solution. Both have their specific benefit propositions, and it’s important to buy quality from a claims paying ability standpoint.