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Charitable Annuities: Share, and You'll Receive

Bernice, a retiree in Washington State, has donated thousands of dollars to her three favorite charities. She likes helping their work—and she's getting paid for it. Bernice has made her donations by creating charitable gift annuities (CGAs) in which donors and recipients basically split the gift.

"There are double reasons for doing this," said the 96-year-old former public relations executive. "It's a very good thing for me, and the entities to which I give [donations] interest me from a philanthropic standpoint."

The two hospitals and technical school through which Bernice receives her charitable gift annuities are among more than 4,000 non-profits that offer such products.

What is a Charitable Gift Annuity (CGA)?
To create a CGA, a giver agrees to donate cash, stock, or other assets—usually at least $5,000 to $10,000 worth—to a charity. In return, the donor receives a fixed payment, called an annuity, for life plus tax benefits. Caution: The donation is irreversible and can never be retrieved from the charity, even if there's a personal emergency or the charity goes bankrupt. Also, if the giver dies, his or her heirs have no claim to the donation.

While some people consider CGAs to be investments, they aren't. Annuity payments are tax-free partial returns of the donor's gift based on actuarial tables of life expectancy. The older the donor, the higher the annuity payment the donor can lock in: the American Council on Gift Annuities suggests yearly annuity payments that range from 5.3 percent of the donation at age 50 to 11.3 percent at age 90 and over. Most charities follow the council's schedule of uniform gift annuity rates. These rates generally are lower than what a person could receive by purchasing a commercial annuity, but the tax deduction partially offsets that.

Ideally, a charity structures each deal so that it can manage donations, make annuity payments, and still end up with half of the initial donation to further its work when the donor dies. Larger charities do not impose any additional management or purchase fees when creating CGAs.

Smaller charities with limited resources and staff sometimes encourage financial planners or insurance agents to suggest that their clients purchase commercial annuities and make the charities the beneficiaries. In these cases, the planners or agents may receive commissions, but the commissions typically do not reduce the size of the gifts. But the vast majority of people creating CGAs do so directly with their charity of choice.

"One of the things I like about CGAs is they're very simple for the charity to administer and very simple for the donor," said Kevin Thompson, director of development and alumni relations for Dickinson State University in Dickinson, N.D. "A page-and-a-half legal document—that's basically it. It's very streamlined and efficient."

Typical Donors
CGAs have grown in popularity in recent years due to low interest rates for investment products such as CDs and a volatile stock market. Thompson said he worked with a donor last year who turned a mature CD earning 2 percent interest into a gift annuity with an annuity payment of 5 percent. For this donor, the "pro" of receiving fixed annuity payments during her lifetime—while helping Dickinson—outweighed the "con" of giving up the amount she donated.

Even though interest rates have begun to creep up, CGAs remain attractive to people with a philanthropic bent, said Frank Minton, chair of the American Council on Gift Annuities. Through its studies and surveys, the council strives to maintain competitive rates, reviewing commercial rates yearly and raising annuity rates if justified.

Typical donors of CGAs are 77 or 78 years old, retired, female, and of moderate means. Many want to support their favorite charities, but don't believe they can give up the income they currently receive from their assets until they learn more about CGAs. Then they realize they can often benefit from a gift annuity. Most CGAs are created for one person, but they can be set up for husbands and wives or other pairs of people.

Many charities set a minimum age of 60 for CGAs, but that doesn't close the door for younger donors, said Neil Myerberg, principle in Myerberg Shain & Associates, a consulting firm to philanthropists, charities, and foundations. He's seen growing interest in gift annuities among younger people.

These people, often in their 50s, set up CGAs that defer annuity payments until a specific retirement age, Myerberg explained. "They lock in a fixed, higher rate—while they have the income to make a donation," he said. In some cases, these types of CGAs are structured to let donors decide when to start receiving annuities—and again, the longer they wait, the higher the amount they receive.

Risks and Rewards
Compared to commercial annuities, which can be complex investments for older people, CGAs are relatively straightforward. Still, donors should consider these pros and cons:

Gift annuity payments are fixed—while they never go down, they also never go up, so there is no inflation protection. "That's why most people who give gift annuities are older, where fixed payments are more important to them than a hedge against inflation," Minton said.

CGAs are not insuredlike most bank accounts and many investments. A charity could become insolvent and be unable to make annuity payments. It is important to research the organization you are interested in donating to, including its short-term and long-term financial situation, and the structure of its annuity reserve fund. Also examine how much of a charity's donations go to overhead and how much actually goes to charitable work. The Council of Better Business Bureaus' Standards calls for at least half a charity's total income to be spent on programs.

Myerberg pointed out that a growing number of states, including Hawaii, New York, California, and Washington regulate CGAs. Hawaii, for example, requires a charity to create an annuity reserve fund of at least $100,000; to carry a 10 percent surplus in the fund over what actuarial standards call for; and to inform donors that most gift annuities are not protected by any state guarantee fund.

CGAs can be valuable estate-planning tools. Donors can give a charity assets that have grown in value, but bring in little income. On top of receiving annuity payments, donors have reduced the size of their estates.

Additional Resources

More information about charitable gift annuities can be found at the American Council on Gift Annuities' Web

This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.

Note: The content areas in this material are believed to be current as of this printing, but, over time, legislative and regulatory changes, as well as new developments, may date this material.

©2005 National Endowment for Financial Education. All rights reserved.

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