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Charitable Gift Annuities Offer Win-Win for Many Retirees


Under the new tax law, many investors are finding that donor-advised funds and qualified charitable distributions are the best option for charitable giving, but there’s another choice that might work best for you. A charitable gift annuity could allow you to to meet philanthropic goals while providing a stream of guaranteed retirement income.

“A gift annuity may not be a well-known tool, but it can be a wonderful fit, particularly for seniors,” said Jim Soft, planned giving specialist at the Yellowstone Boys and Girls Rand Foundation, in a recent Kiplinger article.

A contract between a donor and a charity, a charitable gift annuity provides a deduction in the year of donation with the added bonus of a lifetime stream of income. Allowable donations include cash, appreciated securities or other assets, and it can work well for the retiree with a charitable heart but who may also be worried about retirement finances. In general, donors don’t typically pay fees when setting up a gift annuity or maintaining it.

In order to take advantage of the tax benefits, it is necessary to itemise, otherwise you won’t be able to use the deduction. In the year of the gift, donors usually receive an immediate charitable tax deduction between 25 and 55% of the amount transferred to charity. With a cash gift, the annuity income typically will be part ordinary income and part tax-free return of principal. When dealing with appreciated securities, much of the capital-gains liability is avoided upfront with the rest spread over remaining payments. Every January, the charity of choice issues a 1099R form which details the tax liabilities on the payments.

One example of effectively using a charitable gift annuity can be seen from retired California lawyer, Ron Paul, who funded a charitable annuity at the Yellowstone Boys and Girls Ranch Foundation with $325,000 of appreciated assets almost 10 years ago. He estimates that he avoided approximately $80,000 in upfront capital-gains taxes while earning a $140,000 charitable deduction. Paul’s family has ties to the Montana area where the foundation is located, where his donation helped to establish a healing place for troubled youth at the ranch in honor of his late son.

“For me, it’s a win-win thing,” Paul said. “You get these deductions and tax benefits, and you’re benefiting something you really believe in.”

How does a charitable gift annuity work, you ask? Let’s say that you want to donate $100,000 to a charity. The charity commits to a dollar amount it will pay you per year for the rest of your life in your contract. The rate will depend on your age, life expectancy and a variety of other factors. Currently, rates range from 4.7% annually at age 60 to 9.5% at age 90, for a single life annuity, according to Soft. Most nonprofits use the recommended rates from the American Council on Gift Annuities, a nonprofit association that promotes this type of charitable giving. It’s important to realize that rates, which are specified in your contract, are fixed and are not indexed to inflation.

Annuity payments are only guaranteed by the charity issuing the contract and are not protected by state insurance guarantees. However, most charities hold money or appreciated securities in their annuity pool until the contract matures upon your death. In the unlikely event that your charity becomes defunct, you won’t get your promised payments. It is always recommended to work with experienced charities, asking for financial statements before signing on the dotted line.

Deferred gift annuities are also on option, where you fund your donation in your earning years. For example, you could donate a gift at age 50 but opt to not receive payments until you are 65 or 70. This scenario would provide a larger upfront deduction. Yet another option is a flexible gift annuity, which is a hybrid between a deferred and an immediate annuity. A start date is specified in the contract, with the option to defer it indefinitely. Each year it is deferred, the future payments increase.

As always, it is recommended to discuss any retirement income strategy with a trusted financial advisor before committing to a product.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

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