Legacy gifts are a meaningful part of many estate plans. A lump-sum gift can be made via a bequest in your will, but there are also several tools available that allow donors to maximize the benefits of charitable contributions. Charitable gift annuities are one such option. This blog, the seventh in a series about charitable estate planning, discusses charitable gift annuity pros and cons.
Understanding Charitable Gift Annuity Pros and Cons
The different financial and legal vehicles that donors use to convey assets to one or more charitable organizations each have advantages and disadvantages. It is important for donors to understand the pros and cons for each method of giving and to evaluate the role a giving vehicle will play in the overall estate plan. For individuals and couples living in West Virginia (WV), Kentucky (KY), and Ohio (OH), a WV wealth planning attorney at Jenkins Fenstermaker, PLLC can assist you in identifying your goals and understanding which tool or tools best meet your needs. Read on to learn if charitable gift annuities might be right for you.
The Overview: What Is a Charitable Gift Annuity?
Before you can weigh charitable gift annuity pros and cons, you must first be familiar with the basic setup of this giving option. A charitable gift annuity is an agreement formalized as a contract between the donor and a charitable organization that establishes and maintains the annuity. The donor makes a lump-sum donation of cash, securities, or other assets. In return, the organization agrees to pay the donor fixed income payments for the remainder of his or her life. At the end of the donor’s life, the charitable organization receives the remaining assets.
Two individuals can be included in the agreement as income beneficiaries, jointly or successively, so charitable gift annuities allow a structure that creates joint and survivor benefits, whether for a married couple or otherwise.
There are several charitable giving vehicles that allow donors to make a lump-sum contribution, receive income throughout their lives, and then donate the remainder to a charitable organization upon death or expiration of the terms of the agreement. These tools include charitable gift annuities, charitable remainder trusts, and pooled income funds. Despite this similarity, these tools provide different advantages and disadvantages. Each of these, and the other available options for planned giving, should be carefully evaluated based on your specific situation under the guidance of an experienced wealth planning attorney.
The Details: Charitable Gift Annuity Pros and Cons
Charitable gift annuities are one option for donors who wish to make a significant donation to charity and would benefit from a charitable tax deduction in the present, but also have concerns that giving away too much too soon could impact their quality of life in later years. A charitable gift annuity can allay these fears by ensuring a fixed, regular income for the donor, also referred to as the annuitant.
The American Council on Gift Annuities (ACGA) provides recommendations to charitable organizations regarding charitable annuity income rates. According to the Council, 97 percent of organizations nationwide follow these recommendations when assigning rates for the annuities they offer. The suggested rates vary based on the number of annuitants and the annuitants’ ages. The ACGA’s goal in calculating these rates is to preserve 50 percent of the original gift for the charitable organization.
When it comes to assigning charitable gift annuity pros and cons, the fact that the amount of income provided annually is fixed will be in the pros column for some individuals and the cons column for others. On one hand, the amount is known, reliable, and will not decrease (except under extreme circumstances such as the financial collapse of the nonprofit that holds the assets). On the other hand, if the assets in the account grow, the donor does not receive an increased share.
Charitable Gift Annuity Pros
The initial donation to a charitable gift annuity is taxed in part as a gift and in part as an investment. The gift portion, determined by the Internal Revenue Service (IRS), qualifies for an immediate tax deduction in the year the gift is made. Charitable gift annuities can also reduce capital gains taxes on appreciated assets, though the annuitant may be responsible for capital gains that are included in income payments. For some high-wealth individuals, a charitable gift annuity can also reduce estate taxes.
The option to receive a tax deduction during the primary income-earning years but defer income payments to a time when more income security will be beneficial, such as retirement, is an appealing aspect of charitable gift annuities for some. Additional benefits include little or no fee for account management and ease of administration for donors.
Charitable Gift Annuity Cons
Contributions made to charitable gift annuities are irrevocable and under the control of the organization that maintains the annuity. Income rates on charitable gift annuities are generally lower than standard insurance annuities, which can make this choice less appealing if the donor does not have a strong wish to make a charitable bequest.
The options of organizations to support through a charitable gift annuity are more limited than other giving options because many smaller nonprofits do not have the capacity to manage these accounts. And, because the accounts are held by a single charity, a donor cannot support multiple organizations through this tool. Some donors might also be deterred or eliminated from participation by higher minimum gift amounts than other giving vehicles or higher minimum ages required by some organizations.
Is Charitable Gift Annuity Income Taxable?
Like a standard annuity, income payments to charitable gift annuitants that are made from the principal are not taxable as income. However, income paid to the donor from funds that are invested and grown from the initial principal or assets sold for a profit are taxable as income or, potentially, as capital gains. Donors are more likely to draw more from the non-principal portion of the account if they live beyond the age expectancy used to calculate income payments. The charitable organization that holds a charitable gift annuity is responsible for sending the contributor an IRS 1099-R form that details how income payments were made and the tax implications for the annuitant each year.
A WV Wealth Planning Attorney for Your Charitable Estate Planning
If you are interested in a form of legacy giving that ensures your financial security throughout your lifetime, a charitable gift annuity could be a good solution. The best course of action is to discuss charitable gift annuity pros and cons, along with other options, with a wills and estates attorney as part of your broader charitable estate planning. Anna M. Price at Jenkins Fenstermaker, PLLC is a WV wealth planning attorney who helps residents of WV, KY, and OH determine which giving options will best serve the needs of the donor, the donor’s estate, and the organization receiving the donation. Contact Anna by calling (304) 523-2100 or by completing the firm’s online contact form.