If you're looking for ways to help your favorite charities, a charitable gift annuity may be a great choice. While any cash gifts are always appreciated, this type of gift allows you to make a difference while also reaping benefits for yourself and your loved ones. But, what is a charitable gift annuity, exactly?
To illustrate those opportunities, we'll explore gift annuities that can also provide
A way to give and receive
What is a charitable gift annuity? It's an arrangement that involves giving assets to charity in exchange for a stream of income payments. You may give cash, stocks or mutual funds to a charity that you value, and in return, you receive a lifelong stream of income. At your death, the charity receives any remaining assets, which can be used to fund the charity's mission. There are numerous variations on the theme, and you can add complexity or customize the strategy to the extent allowed by law.
How charitable gift annuities work
You can establish a charitable gift annuity with cash, publicly traded securities or mutual funds. Then you receive payments that last for the rest of your life regardless of how long you live. After the death of all named income recipients, the remaining funds go to charity via a donor-advised fund, which can make ongoing payments to the charity. This short video walks through how both you and your chosen charity can benefit from this particular kind of investing:
The amount you receive depends primarily on the size of your gift and your age. The older you are, the larger the payments may be (because you have a shorter life expectancy and fewer expected payments). You can also defer payments, having them begin later in life, which may result in bigger payments. But even if you hold off on taking income, you could be eligible for an immediate tax deduction.
Payments are fixed—they do not change based on investment performance—so it's
A charitable gift annuity example
Ann, a 77-year-old woman who loves animals, decides to cash in a maturing certificate of deposit. She establishes a charitable gift annuity of $25,000. Given her age and other factors, the payout she receives might be 5.8% of the amount she funded the arrangement with—or $1,450 per year for life. Roughly $1,071.55 of that amount will be tax-free during her life expectancy, although the entire amount could become taxable if she outlives her life expectancy. She also would qualify for a tax deduction of $11,890.25 in the year she establishes the annuity.
After Ann's death, the balance of the invested funds will go to her favorite qualifying charities, including a local animal shelter.
Note that this example is for illustration purposes only. In order to receive exact numbers for your situation, reach out to a Thrivent
What are the pros of charitable gift annuities?
Aside from the good feelings of giving, the benefits of charitable giving are that they may provide tax deductions, help manage capital gains taxes, and potentially save you money by simplifying your estate.
Note that while Thrivent does not provide specific legal, tax, or estate advice, we can partner with you and your tax professional or attorney.
Charitable gift annuities can help you save on taxes
Charitable gift annuities can potentially help you manage taxes. When you establish this type of annuity, you may qualify for an immediate
How charitable gift annuities can help manage capital gains taxes
In addition to offering a potential deduction, charitable gift annuities might help you manage capital gains taxes. If you own investments that have gained value substantially, you can give those holdings in-kind instead of donating cash. That way, you avoid selling for a gain.
You might have to pay some capital gains taxes on the annuity payments you receive, but you can potentially spread out those tax costs over numerous years. A portion of each payment you receive is typically a tax-free return of principal while the remainder might be taxable.
That said, you can always just give appreciated securities directly to a charity without using a gift annuity. Doing so could offer a bigger deduction but would not offer lifetime income.
Charitable gift annuities can help with estate planning
Charitable gift annuities can potentially
There are various ways to accomplish legacy planning. Be sure to review your situation with an attorney and a tax professional and explore all of the options available to you. You might find that these gift annuities help you accomplish your goals while being more accessible than strategies like charitable remainder trusts.
What are the cons of charitable gift annuities?
The cons of charitable gift annuities involve losing liquidity, reduction of payment if you pass away, having to itemize deductions and the risk of loss as payments aren't guaranteed by the government.
- You lose liquidity when you fund an annuity, which could be problematic if you need cash in the future.
- If you pass away shortly after starting the annuity, you won't receive a meaningful amount in payments (but more will be left to charity).
- A standard lifetime annuity might offer higher income payments, although those arrangements lack the charitable giving component.
- You generally need to itemize deductions to take advantage of charitable giving deductions.
- Payments are not guaranteed by any government agency, so there is some risk of loss. Choose carefully, and consider favoring well-established organizations as you evaluate your options.
It's one option to help you meet your goals
If supporting charitable causes is important to you, a charitable gift annuity might help you accomplish those goals. Meanwhile, you may improve the chances of meeting your own financial goals and living comfortably. That said, these strategies are ultimately about making a difference, so they might make the most sense when you have a little bit extra to give.
As you explore your options, speak with a