Charitable Gift Annuities (CGAs)

A charitable Gift Annuity (CGA), is a contract in which a charity, in return for the transfer of cash, stock, or some other asset, agrees to make specified, fixed payments to the donor for the life of the donor. Charitable Gift Annuities are not insurance contracts, but rather a way to make a donation and to receive part of that donation back. The payments back to the donor are not called income, because that would require them to be taxed. They are instead a partial, tax-free return of the original donation.

How the Payment is Determined

The payment that a donor receives is usually based on the "uniform gift annuity rates" published by the American Council on Gift Annuities. If the charity does not use this rate table then the appopriate state regulator may ask a charity to hire an actuary to test the feasibility of the assumptions.

The rate tables are calculated payments based on age. The older a donor is when he or she starts receiving payments, the higher the payment will be. The tables are designed with the goal of not returning more than 50% of the original donation back to the donor.

Types of Charitable Gift Annuities

• Immediate Gift Annuity - payments begin immediatly following the donation. Payments are usually quarterly. The payment amount is calculated as the fair market value of the gift on the day of the donation times the rate table factor.
• Deferred Gift Annuity - payments begin sometime in the future after the donation has been made. The payment must begin one year after the donation is made for it to classify as a deferred gift annuity.
• Flexible Deferred Payment Gift Annuity - The start date for the payments does not have to be determined at the date the donation is made. The recipient can choose the date based on future events - retirement, other investment considerations, etc. The longer the annuitant waits the larger the fixed payment will be.

Why Use a Charitable Gift Annuity?

The main reason someone may use a charitable gift annuity is to make a donation to a charity while still receiving income from the principle. Thus, if you wanted to make a donation to your alma matta but didn't want to give up the income associated with that donation, the charitable Gift Annuity solves the problem by providing a stream of payments until your death.

Often, the stream of payments from a Gift Annuity are at a much higher interest rate than if the money was in a CD or other cash equivalent investment. So, for someone living on a fixed income, gift annuities may actually provide more immediate cash than putting the money in the bank. But it comes as the cost of donating the principle to a charity.

They can be effective estate planning tools as long as the donor realizes the princple will be kept with the charity.

Downsides of a Charitable Gift Annuity

The main downside of a charitable Gift Annuity is that the money is not protected or FDIC insured. If the charity goes bankrupt, then the donor may lose their payments. Gift Charities are regulated by states and while they can spend a portion of the donation immediately, they must also keep sufficient reserves to meet annuity obligations. But in the case of a bankruptcy, creditors may have a higher priority to the charity's assets and may be made at the expense of charitable donors.

If you plan on making a charitable donation, be sure to understand the financial health and solvency of the charity.