The Gift That Gives Back…..................    A Charitable Gift Annuity

By Donna Ryan, Tax Principal
May 2012

Tired of low yields on your investments?  Perhaps you have avoided selling an investment because it was purchased many years ago and you want to avoid tax on capital gain to reinvest in something different?  If this describes your situation and you would also like to help your favorite charity, a charitable gift annuity may be a solution that works well for you.

What is a charitable gift annuity?

A gift annuity (also known as a “charitable gift annuity or “CGA”) is an agreement between you and a charity.  In return for your transfer of cash, marketable securities or other property, a charity will agree to pay you a fixed sum of money each year for the rest of your life. 

Why are CGAs attractive?  There are several reasons.  First, they are simple to arrange and typically involve no cost to the donor.  Second, the interest rate used by charities to compute your payments is often higher than the current yield on the investment.  For example, a single 80 year-old person can get a 6.8% CGA rate right now.  That means the gift of stock worth $20,000 to charity in exchange for an annuity could return $1,360 per year.    If that security is only paying a 1.5% dividend right now, that’s an increase of $1,060 per year!

CGAs are also tax-smart.  You get a charitable deduction in the year you start a CGA.  Although the size of that deduction varies based on several factors and is less than the full value of property transferred in exchange for the annuity, the creation of a CGA can result in a significant deduction.  Also, a part of your annual annuity payment is usually non-taxable income to you because it is considered a return of your original investment. 

The contributed property (the gift), given irrevocably, becomes a part of the charity’s assets. Note that your annuity payout is not typically insured and is dependent on the financial health of the organization.  Most larger charities offer CGAs. 

If you’d like more information, please feel free to contact Donna Ryan or Jean McDevitt.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.