Professional Advisors and Nonprofits
What’s a charitable gift annuity and why is it beneficial to my clients?
The first charitable gift annuity (CGA) reportedly dates back to 1831, when Revolutionary War artist John Trumbull donated several of his original paintings to Yale University in exchange for $1,000 per year for the rest of his life. In the early 1920s, charitable gift annuities gained popularity through a vigorous American Bible Society campaign, culminating in more than 4,000 charitable gift annuities in 10 years.
Gift annuities have become a staple of many portfolios and for good reason. Donors receive numerous financial and tax benefits while supporting the organizations they love. Charitable gift annuities are aptly known as gifts that keep on giving.
How do they work?
Donors are drawn to charitable gift annuities because they are surprisingly straightforward and easy to understand. Unlike commercial annuities, a CGA offers fixed life income to one or two beneficiaries beginning now or later, along with a generous income tax deduction and potential capital gains avoidance when funded using appreciated property.
Payout rates are fixed, vary by age and other factors, and unlike commercial annuities, CGAs are irrevocable gifts. There are no 60-day renewal windows or settlement options. In exchange for the charitable tax benefits, the remainder value of a CGA belongs to the charity after the life/lives of the beneficiaries.
Who sets the rate?
While technically not an insurance product, charitable gift annuities are supervised and regulated by state insurance commissioners.
Most charities adhere to rates published and reviewed by the American Council on Gift Annuities (ACGA), an organization established in 1927 that recommends the proper range of rates, the forms of contracts, the amount and type of reserve funds and more. The ACGA aims to promote and encourage responsible philanthropy. It estimates 97% of charities offering CGAs adhere to its suggested rates.
The ACGA establishes rates targeted to result in a 50% residuum for the charitable organization sponsoring the gift annuity. However, residuum (the money that remains after all payment obligations) varies due to market vagaries and donor longevity.
Example
Willa Paxton, age 85, has supported the American Heart Association since her father died of a massive heart attack in 1993.
When her dad died, she inherited 100 shares of XYZ* stock that have doubled in value several times and are now valued at $10,000. She has always made annual gifts in support the AHA from her current income and learned she could make a gift of that stock instead. In turn, she would receive these lifetime benefits:
- Partial bypass of $7,500 of gains saved Willa $650.
- Income tax deduction of $5,777 saves Willa $1,386 in income taxes at the 24% rate.**
- Income for life of $810 per year, of which $165 is tax-free. Her effective payout rate is 10.7%.
- Satisfaction knowing her gift supports lifesaving research and education.
*Stock ticker has been changed.
**Rates vary based on the age of the income beneficiary(ies) and run as high as 9.1% for annuitants 90 and older (one life) and commence at 4.8% for individuals 65 (one life). Currently, a two-life joint and survivor immediate gift annuity for a couple 80 and 84 is fixed at 6.3%.
What’s in it for the advisor?
While no finders’ fees, commissions or bonuses are paid, advisors with clients seeking partially tax-free income can look to CGAs as a safe, stable source of income that lets clients make a significant gift in the future.
Because CGAs are backed by all the unencumbered assets of the sponsoring charity, advisors can feel assured the institution will continue paying the life income stream over the decades. One popular strategy is to make multiple CGA agreements with several organizations over time, thus “laddering” the payout rate allowing donors to receive increased rates as a bid against inflation as they age.
What can an advisor do?
Knowing about charitable giving options can have a significant pay-off for professional advisors. In a recent study, more than 20% of high net worth and ultra-high net worth clients have a charitable giving plan, more than 30% of U.S. adults volunteer in some way each year and 86% of affluent households maintained or increased their support of charities during the pandemic.
Knowing how charitable giving instruments work can help advisors develop long-term strategies with their clients. Having a charitable gift planner in your contact list can make it easy for advisors to get immediate answers to their clients’ questions and help advisors contemplate tax-advantaged scenarios for their clients.
The AHA offers charitable gift annuities for as little as $5,000. They are commonly funded with cash or appreciated stock, but the AHA can accept other assets, such as real estate (residential and commercial), cash value life insurance policies and even wine collections, in exchange for the benefit of a life income stream.
To discuss charitable gift annuities and compare them to other giving strategies such as charitable remainder trusts, contact me or your American Heart Association Senior Advisor.
About the Author
Senior Advisor, Charitable Estate Planning
American Heart Association
847-721-8010
[email protected]
For more than 25 years, Ed has built trust and support with generous people for the organizations he has represented. He serves AHA in the north east and staffs two AHA volunteer Heart Advisory Councils comprised of diverse professionals. An avid runner, Ed invites you to join him for heart-healthy exercise and philanthropic conversations on the many trails along the east coast.
