Having Your Cake and Eating It Too: Charitable Annuities
Charitable gift annuities are a way to have your cake and eat it too, to some extent. Assume, for instance, that you want to give your alma mater $100,000, but you don’t want to give up the income you earn on it (which these days may not be that much in any case). The answer may be a form of annuity.
By way of background, commercial annuities are contracts with insurance companies through which you pay them a fixed sum in exchange for a monthly income, either for a term of years or for the rest of your life (or for the rest of your life with a guaranteed minimum number of payments to your family in the event you die prematurely). A charitable annuity is similar, except that your deal is with a charity instead of an insurance company and you will receive less than you would in the case of a commercial annuity, the difference being your charitable gift. Based on the value of your retained income stream, you will be able to take a deduction for your gift. The older you are and the lower the monthly payments, the lower the value of your income stream and the higher the amount of deduction you may take.
If, for instance, you were 65 years old when you made your $100,000 gift to your alma mater, it might pay you $7,300 a year for life. If your spouse was the same age and you wanted payments to continue for both of your lives, you would receive a bit less, perhaps $6,800 a year. At these levels of payment, in fact you would not receive a charitable deduction. On the other hadn, if you both were 85 years of age and received $8,400 a year, you would be entitled to a charitable deduction of approximately $16,000.
Another alternative that would increase both your monthly payments and your charitable deduction would entail making your contribution today but postponing your receipt of payments. For instance, contributing at age 65 but beginning payments at age 80 would increase both your income when it begins and your charitable deduction, since you would be foregoing 15 years of income. Some institutions will pay more or less than these numbers which come from Pomona College’s website, which is reported to be more generous than some other charities.
Donors often make use of charitable gift annuities when they have highly-appreciated assets. If, for instance, you had $100,000 in highly-appreciated stock, you might have a tax on capital gains of as much as $20,000 on their sale, reducing the amount you could use to purchase a commercial annuity to $80,000. If, instead, you contributed the stock directly to your alma mater or other charitable organization, it could liquidate the stock at no tax cost and your annuity payments would be based on the entire $100,000 value. While the payments may still be less than what you could receive in payments on an $80,000 commercial annuity, the differential will be less and you will be making a significant gift to your charity of choice. And if you pass away before receiving back the full value of your donation, it’s the institution you value, rather than the commercial insurance company, which gets the windfall of only paying you a few years.