The Charitable Gift Annuity:
Simple, Flexible and Secure
Charitable Gift Annuities (CGAs) have been issued in the United
States for over 160 years. They continue to be very popular with
donors — for good reasons. They are easy to understand and pre
pare. A simple CGA agreement (not a trust) is all that is involved.
Moreover, unlike a charitable remainder trust, all of the assets of
the charity (not just the assets in the trust) back up the CGA pay
ments. The CGA is a “general and full recourse” obligation of the
charity. This provides security.
The CGA also provides tax advantages, particularly if funded with
appreciated property, which if sold, would result in a tax on capital
gain. The CGA allows the capital gain allocated to the investment
in the CGA to be reported over the life expectancy of the donor
(so long as the donor is the initial annuitant). This avoids incurring
capital gains tax in a lump sum. Part of each annuity payment is
taxed as ordinary income, part as capital gain, and part is taxfree.
What is a CGA?
A CGA is part charitable contribution and part investment.
The donor makes a payment to the charity that exceeds the pre
mium he or she would pay to an insurance company for an annuity
with the same payout. This is the charitable element that produces
an income tax deduction. For example, John Donor contributes
$100,000 to his favorite charity in return for a gift annuity that
will pay him $6,000 per year (in quarterly installments) for life.
Taking into account John’s age and using the Charitable Midterm
Federal Rate published monthly by the IRS, the present value of the
annuity payments for the remaining years of John’s life is $60,000.
John’s deduction is $40,000.
Most charities base their CGA rates on rates recommended by the
American Council on Gift Annuities (ACGA), organized in 1927.
ACGA rates are based on assumptions about the percentage of the
contribution that should remain with the charity when the annu
ity terminates, projected rate of investment returns, administration
costs, and, of course, age of the annuitant. For example, the July
2011 ACGA rate for a singlelife annuity for a 60 year old annui
tant is 4. 8 percent, slightly down from the 5. 2 percent rate for July
2010. The older the annuitant, the higher the recommended rate.
The CGA can be for one life or two lives (jointandsurvivor or
successive lives). The CGA can have an immediate start date or a
deferred start date that can result in a larger payout and tax deduc
tion. You can also create a CGA through a provision in your will.
The venerable CGA is a flexible, cost-effective
(no legal fees for drafting) way to make a gift
to a charity and enjoy secure income for life.
no wonder the CGA has been so popular with
donors for so many years!
If the CGA is in the jointandsurvivor format and the annuitants
are spouses, there is no gift tax. If, on the other hand, John is the
donor and names Jane, his sister, as the joint and survivor annui
tant, he has made a gift to Jane. But he can prevent a taxable gift by
reserving the right to revoke her right to annuity payments. And if
John doesn’t want to include this provision, he can take advantage
of the current annual gift tax exclusion of $13,000.
This article is not intended, nor is it provided, as specific legal
advice but, rather, only as a general discussion of concepts and
principles as news items. Please consult with your attorney before
utilizing any techniques stated herein. This material has not
addressed all issues, principles, exceptions, and exclusions that
may apply to a specific transaction. Only your attorney with knowledge of the unique facts of your specific situation is qualified to
provide advice in regard to tax and estate planning.