An annuity is a form of retirement income paid out regularly to an annuitant, typically for the annuitant's lifetime. If an annuitant is philanthropic, they might consider the planned giving of an annuity to charity.
The National Association of Insurance Commissioners regulates annuities and has two models for regulating charitable gift annuities.
Understanding Charitable Gift Annuities
A charitable gift annuity provides financial support for a charitable organization while guaranteeing payments for life to a donor. Donors can use charitable gift annuities to support a favorite charity or a cause by entering into an agreement with the charity.
Typically, people who donate annuities are retired, and the amount of payments is based on the age of the annuitant. The American Council on Gift Annuities recommends charitable gift annuity rates as published in their best practices guide.
There are two types of annuities: fixed and variable. Fixed annuities provide a steady income, while variable annuities allow investors to choose how much of their money they would like to invest. Either type can be gifted, and the donation may reduce tax liability.
A charitable gift annuity is considered planned giving, and full proceeds will go to the charity after the donor passes away. The charity may use the annuity to provide services or to fund projects. Additionally, a donor can decide how much of the annuity to give to the charity.
Benefits of Donating
If a potential donor is considering donating an annuity, there are many who would like to receive it. Annuities can be donated to a favorite charity or given to a family member or friend. Donating an annuity to an exempt organization can make a charitable gift that will also be tax-deductible.
Charitable gift annuities are a type of financial instrument enabling people to support charities through a single investment. Per IRS Publication 526, gift annuities cannot be deducted if the donor will receive a benefit, such as if the organization is expected to pay premiums on the annuity.
A major benefit for many donors is the tax deduction for charitable giving. A charitable gift annuity will be partially tax-deductible as a donation in the year it is gifted. Gifted annuities may also carry capital gains benefits.
A gifted annuity also provides taxable income for the donor. The 1099-R for a gift annuity will reflect which amounts of annuity payments are taxable and which are tax-free.
Another advantage of charity annuities is that they allow donors to give more money than they would be able to otherwise. This means that a charity is able to use the funding to do more good.
How to Donate an Annuity
- Choose one organization. It is important to consider that each annuity can only be gifted to a single organization. It is not possible to donate a single annuity to multiple charities. An annuitant supporting multiple causes should bear this in mind when planning to gift an annuity to charity.
- Contact them for details. Most organizations that accept annuities will be able to help a potential donor with the details around establishing a charitable gift annuity. This includes minimum and maximum dollar amounts and the size of annuity payments to the donor.
- Remember the risks. Keep in mind that a charitable gift annuity will likely pay a lower rate than a typical retirement annuity. Another risk is that the charitable organization becomes insolvent or otherwise unable to deliver payments, and most states do not guarantee annuities gifted to charity.
- Consider working with a professional. Working with a financial planner, tax specialist or wealth advisor for planned giving might be a consideration to maximize the benefits of donating assets such as annuities to charity.
- Donating an annuity during your lifetime reduces total assets considered for Medicare and other assistance programs. Income continues but total assets are reduced.
- Some charities offer an annuity program called a "charitable gift annuity." This is an annuity program funded by the charity. An annuity owner would need to find a list of charities offering the program at the American Council on Gift Annuities. Then he/she would liquidate existing annuities and donate the sum under the gift annuity contract terms with the charity. These annuities may not be backed by an insurance company and should be closely evaluated.
Hashaw Elkins is a financial services and tax professional, as well as a project management consultant. She has led projects across multiple industries and sectors, ranging from the Fortune Global 500 to international nongovernmental organizations. Hashaw holds an MBA in Real Estate and an MSci in Project Management. She is further certified in organizational change management, diversity management, and cross-cultural mediation.