Tax benefits and a steady, reliable, high-level stream of income have long made charitable gift annuities a favorite giving vehicle for many people. This is especially true for those past the so-called accumulation stage of life who are not as concerned with increasing their assets, as with finding ways to ensure an income they can’t outlive.
But charitable gift annuities can also play a significant role in planning by younger donors. Let’s take a look at some annuity basics:
The Annuity Concept
Exactly what is a charitable gift annuity? As the name suggests, it is part gift–a contribution of money or property to the charity of your choice–and part annuity–an arrangement under which the charity agrees to pay your designated annuitant(s) fixed payments for life.
This annuity concept is probably familiar to those who lived through The Great Depression. In those days, the insurance man would stop by weekly to collect the 30-cent payments on a policy taken out to provide for a child’s education, an untimely death or future retirement. Since few had retirement programs in that era, most people could count on a comfortable old age only if they did it themselves. Commercial annuities were sold as a way to accomplish individual retirement programs. People deposited money with a company in exchange for the assurance that they would never run out of income.
In this respect, a gift annuity is not so very different from those old-time commercial annuities or, for that matter, from many modern-day, fixed-benefit retirement programs. In exchange for a sum of money transferred to a charity by a donor, the charity agrees to pay the designated annuitant(s), usually the donor and his or her spouse, a set, guaranteed annuity for life. These payments are backed by the full assets of the charity. As with a commercial annuity, a portion of the annual payment—sometimes a substantial portion—is tax-free over the annuitant’s life expectancy as a return of investment.
But here the similarity with a commercial annuity ends. As the name implies, a gift annuity is also part gift. At the death of the last beneficiary, the charity receives the funds remaining in the annuity account.
This gift component is very important because it generates two significant tax benefits. First, since a portion of the gift is treated as a charitable contribution, the donor gets an immediate income-tax deduction to help offset current income. Second, if long-term capital-gain property is used to fund the gift annuity, part of the gain escapes taxation, and the rest can be spread over the donor/annuitant’s life expectancy.
Tax Benefits: A Concrete Example
Let’s look at this example. Mrs. Williams, 70, decides to use stock with a fair-market value of $10,000, purchased years ago for $6,000, to fund a charitable gift annuity. In return, she receives an immediate charitable income-tax deduction of $3,594 to help offset her current tax bill. She also receives an annual annuity of $650 for life. Of this amount, $247 has to be reported as ordinary income, $242 as tax-free return of principal and $161 as capital gain over her actuarial life expectancy—15.9 years in Mrs. Williams’ case. If she lives beyond her life expectancy, from then on the entire annuity will be treated as ordinary income.
How a Gift Annuity Can Reduce Tax on Social Security
Many Social Security recipients are concerned about the tax status of their benefits. In the past, up to one-half of Social Security benefits were subject to tax if the beneficiary’s income from other sources, including tax-exempt income, exceeded certain base levels: $25,000 for single individuals and $32,000 for a married couple filing jointly. Since 1994, up to 85 percent of benefits can be taxable if provisional income—adjusted gross income [AGI] plus tax-exempt income plus one-half of Social Security benefits—exceeds $34,000 for singles and $44,000 for couples. One characteristic of the gift annuity should be of interest to anyone concerned about this tax provision: Since a portion of each payment is considered a return of principal, that portion is not added to a person’s AGI in determining whether their provisional income has exceeded the base levels.
Exchanging some of your present income-producing investments for a gift annuity can lower your adjusted taxable income and, consequently, reduce the taxable portion of your Social Security benefit. Our office would be pleased to provide a financial illustration showing the benefits of a gift annuity for your personal situation.
In addition to the tax benefits, people are often attracted to the gift annuity for other, less obvious reasons: A donor can establish a gift annuity with a relatively small sum of money; the procedure is straightforward and uncomplicated; there is no need to make a new will; and because a donor can receive payments from his or her gift, the gift annuity enables a person of modest means to make a gift during his or her lifetime without financial sacrifice.
What the gift annuity means to many donors is the security of a generous, regular, non-fluctuating stream of income—an end to the dramatic swings the marketplace has seen in the last several years. It also means that you are free from the burdensome details involved in managing your own investment portfolio, since we arrange for investment of the funds.
We Are Here to Help
There are many ways to apply the advantages of the charitable gift annuity to your individual situation, whether you are retired, preparing for retirement, or concerned about the financial well being of your survivors. If you would like more detailed information on our gift annuity program, simply return the enclosed card to request a complimentary copy of our new booklet, The Charitable Gift Annuity: Guaranteed Payments for Life.