When considering establishing a Charitable Gift Annuity, it is most important to understand that a “charitable gift annuity” and “commercial annuity” are two very separate and distinctive products, the former of which is virtually void of the caveats that are vividly highlighted as concerns surrounding their commercial counterparts.

A charitable gift annuity is a “gift” planning alternative that provides regular, fixed payments to a donor as part of a gift exchange. Payments from charitable gift annuities are normally structured for the lifetime of the donor and, in some cases, another beneficiary. Typically, the gift provided to fund the “straight life” annuity is one of cash or securities, but real estate has also become a popular vehicle due to the tremendous increase in values in recent years.

Unlike most forms of commercial annuities, the charitable gift annuity follows a much more straightforward process. The donor transfers funds to a charity that agrees to make fixed payments for however long that person might live. If the donor dies earlier than his or her life expectancy, the charity receives more than would otherwise be expected. Conversely, if the donor lives past normal life expectancy, payments to him continue. Payments are structured so that, on average, approximately 50% of the amount funding the gift annuity remains as the residuum of the gift at the death of the annuitant(s). As a result of this payment structure, there is usually a greater economic benefit from a commercial annuity.  The amount that is designed to be left to the charity (in the case of a charitable annuity, 50%), is substantially more than the residuum built in for the insurance company, so less of the payments from the commercial annuity is taxable to the recipient, because more of the payment is based on returning a larger amount of the investor’s principal.

There is an effect of tax deduction that enhances the charitable gift annuity that is not available through commercial products. Along with charitable intent, this feature becomes an attractive element for consideration.  If the donor has a taxable estate, the amount used to fund the charitable gift annuity is removed from the taxable assets of their estate, just as it would be in the case of a charitable bequest. The difference is that the donor enjoys increased income that is largely tax free, and income tax savings during their lifetime, in addition to the reduction in estate taxes that may apply at the time of their death. If the donor does not have a taxable estate, there would, of course, be no tax benefits from a charitable bequest. However, if that donor used $100,000 in cash that had been earning 3% in a commercial financial institution to fund the charitable gift annuity, conditions may provide for substantial tax-free lifetime payments – an income stream, as well as the initial 40% tax transfer allowance, which would create a $40,000 charitable tax deduction that can be spread over a period of years.

Ultimately, due to the effect of tax deductions, there is a minimal difference in the rates between a commercial and charitable annuity, and beyond the charitable intent of the donor, it is important for everyone to seek advice from their personal financial and legal advisors to determine which form of annuity is best for their specific situation.

Beyond the tax advantages of a charitable gift annuity, there remain four very important considerations in comparison with a commercial annuity. One: the charitable annuity is designed to provide you with a steady, fixed level of income for the rest of your life. Unlike Social Security, pension funds and some commercial annuity products, charitable gift annuities are guaranteed by the nonprofit. Two: through State regulations, there are reserve requirements that must be maintained by the nonprofit organization to insure that annuity payments will be met, and the offering organization must be in existence for five years or more. Three: credible organizations offering charitable gift annuities will possess considerable tangible assets that can be (and usually are) committed by their Boards to fulfill annuity obligations should conditions necessitate. Four: the offering nonprofit should be a member of the American Council on Gift Annuities, which issues nationwide standardized annuity rates and professional practice guidelines. A charitable gift annuity is not an investment; it is an irrevocable “gift”.

It is important that anyone who has an interest in entering into any form of annuity posses a basic understanding of the economics of charitable gift annuities versus commercial annuities. While the financial benefits of a charitable gift annuity can be vital when a donor is deciding how to best make a gift while securing their future income stream, there are investments broadly available to persons who are only interested in the highest return on their investment dollars. The charitable gift annuity is an exciting and extremely rewarding way to do more than anyone might have thought possible - enjoying the almost identical after-tax yield that would be experienced through a commercial annuity, but without the specter of potential financial risk.

Dennis Miranda
Executive Director
Florida Trail Association, Inc.
5415 SW 13th Street
Gainesville, Florida 32608
1-877-HIKE-FLA
dmiranda@floridatrail.org