When a charitable gift annuity is smart

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Q. If I want to give to charity when I die, is a charitable gift annuity a good idea?
— Giver

A. A charitable gift annuity can benefit both you and your favorite charity.

Unlike an annuity you buy through an insurance company which is a contract between you and the carrier, a charitable gift annuity is a contract between you and a non-profit organization, such as your alma mater or a favorite charity, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

You on your own or together with a spouse would gift the charity a lump sum of cash, marketable securities, or other assets like real estate. In return, you receive a fixed stream of payments for the rest of your life, DeFelice said.

“A portion of the payments are considered to be a partial tax-free return of the donor’s gift, which are spread in equal payments over your life expectancy,” he said. “The size of your payments depends on how old you are when you set up the annuity.”

If you’re relatively young and likely to collect a lot of payments, they will be smaller, he said. If you’re older, your life expectancy will be less so your payments will be larger.

There’s a lot to understand before you act.

The contributed property — the gift — is irrevocable, becomes a part of the charity’s assets, and the payments are a general obligation of the charity, DeFelice said.

Also, the annuity is backed by the charity’s entire assets, not just by the property contributed. Annuity payments continue for the life/lives of the donor(s) regardless of the investment experience of the gift annuity fund, he said.

You may be able to claim a partial charitable tax deduction for the year in which you set up the annuity, DeFelice said.

“It’s partial because the IRS views part of your gift as being used immediately by the charity for its tax-deductible activities and the other part as an investment for you that will serve to generate your payments,” he said.

Additionally, if you donate appreciated stock, you are reducing your tax bill because you’ll never have to pay any capital gains, DeFelice said.

“You are also removing an asset from your taxable estate by making an irrevocable gift, so there are potential federal and state estate tax advantages here as well,” he said. “Keep in mind that various tax rules can be different depending on your state of residence, so consider consulting a CPA before doing anything.”

Charitable gift annuities are generally not used by someone donating money upon their death, DeFelice said, noting he usually sees them used as a very effective tool when a donor is still alive.

He said you may be a good candidate for a charitable gift annuity if:
• You are in a high tax bracket.
• You are willing and able to leave a large chunk of your assets to a charity instead of your heirs.
• You were already planning to make a gift or bequest to an institution as part of your legacy.
• You are in good health and the probability of receiving a long stream of payments for many years is high.
• You have appreciated assets in a taxable account that you’d prefer to avoid paying taxes on.
• You have a large enough estate that the federal and/or state estate tax savings are worth it.

A charitable gift annuity should be viewed as a way to receive lifetime annuity payments while making a charitable donation, he said.

“It does provide tax benefits, including a federal income tax charitable deduction, partially tax-free annuity payments, and potential future estate tax savings,” he said. “As with any complex gifting/investment strategy with tax consequences, whether or not it is a good idea for you will depend largely on your personal situation. Always check with a qualified tax professional as well as a financial planner before committing.”

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This post was first published in September 2017.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.