A gift annuity is a form of bequest made in a contract between a living donor and a charitable institution. The donor transfers assets to a designated charity, such as a university or foundation. The receiving organization agrees to make regular annuity payments to the donor or a designee. The gift annuity can be a savvy tax hedge, and you can use an individual retirement account (IRA) to fund one.
Methods of Funding
As a donor, you can fund a gift annuity with cash, stocks and bonds, or other assets, including real estate or an IRA. Some charitable organizations set a minimum donation value for their gift annuity programs. Depending upon the method of funding, you can realize a significant tax deduction from establishing a gift annuity. Another option is transferring your IRA upon death to a testamentary unitrust set up by a charity. When the transfer takes place, the IRA converts to a tax-exempt charitable trust that makes payments to your designated heirs according to a contractual agreement.
Benefits of Funding with an IRA
When you transfer funds from an IRA to a charitable annuity, you can deduct the amount as a charitable contribution, using the tax benefit to offset tax penalties you would otherwise pay on an early IRA withdrawal. You might also consider using your annuity income to purchase life insurance to benefit your heirs as an additional tax hedge. You can also put excess funds into a charitable annuity when your IRA's annual allowable contribution limit has been met. This converts taxable income into a tax-deductible contribution. You could also convert your IRA to a gift annuity upon reaching retirement age, allowing you to avoid IRS penalties for early IRA withdrawals.
Deferred Gift Annuity
You can structure a gift annuity to defer payments, which works similarly to a retirement account. You submit the donation prior to retirement, and take the charitable contribution deduction at that time. You would defer annuity payments until you retire, when your reduced income needs supplementation. The payments you receive upon retirement would reflect the original donation amount, plus any appreciation or interest that the asset has accumulated in the intervening years.
When you contract with a charity to set up a gift annuity, the charity must have the financial solvency to carry through on annuity payments to fulfill its contractual obligations. Consult a professional investment adviser prior to signing a gift annuity contract to help ensure that your designees and the charity of your choice will be provided for.
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