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What is a charitable gift annuity?

Illustration of two hands and a heart

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 retirement income, and we'll walk through a charitable gift annuity example. Ultimately, you may find that you can satisfy seemingly conflicting goals, such as giving to charity while setting yourself up for lifetime income.

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:

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Charitable Strategies: Charitable Gift Annuities

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 easy to budget for the future. And you can link the payments to more than one person's lifetime, providing income for you and your spouse, for example.

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 financial advisor.

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.

Supporting a charity is an essential part of gift annuities. But in many cases, tax and estate strategies are also involved. If you're charitably minded, you might want to give a substantial amount of money during your lifetime, but if you give too much, you could deprive yourself of income in retirement. On the other hand, if you leave money to a charity only at your death, you won't receive any potential tax benefits today.

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 tax deduction for charitable giving. If you can't take full advantage of the deduction in the year you give, you may be able to carry the deduction forward for five years. It's important to note, though, that you generally aren't allowed to deduct the full amount you give. So, you'll subtract the value of any expected payments from the amount you give when attempting to estimate tax considerations. IRS rules could further limit your deduction, so be sure to review your strategy with a tax professional before making any decisions.

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 simplify your estate and help you save money. When you establish and fund an annuity, those assets are no longer part of your estate. As a result, you may be able to reduce or avoid estate taxes. Plus, in some cases, assets that are not part of your probate estate can lead to lower probate costs.

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 financial advisor who can help you weigh the pros and cons of different approaches. You might be able to satisfy competing goals. And with a clear picture of your finances (and a broad range of solutions available), you'll be well-positioned to make an informed decision.

While Thrivent does not provide specific legal or tax advice, we can partner with you and your tax professional or attorney.