A Way to Give—and Receive
By: Source: AARP Bulletin Today Date Posted: October 2003
Can financially squeezed investors get better returns than those offered by certificates of deposit (CDs) while, surprisingly enough, making life a little better for others?
Absolutely, says Jean Godfrey, a 70-year-old homemaker in Cary, N.C. Last year, when interest rates on the CDs she was accustomed to buying hit rock bottom, she found herself dipping into other savings to pay the bills.
But today, thanks to an arrangement with her favorite charity, Godfrey is getting a higher rate of return (7.3 percent), a predictable stream of income for life and some tax benefits that she wouldn't have otherwise enjoyed.
When one of her CDs matured recently, Godfrey donated $10,000 to the American Cancer Society under a gift annuity agreement that guarantees her fixed, regular payments for the rest of her life.
Gift annuities, which are designed for older persons, are exploding in popularity. Thousands of charities, from the biggest marquee names to strictly local groups, now offer them.
Organizations as diverse as the American Red Cross, Nature Conservancy, American Lung Association, Humane Society of the United States and the AARP Andrus Foundation sponsor gift annuities as a way for older supporters to simultaneously give and receive. So do many public and private universities.
"I think gift annuities are very helpful to older individuals who are looking for a safe, secure place to put their money and get an attractive interest rate, while at the same time satisfying a desire to support a cause," says Gary Streit, an estate planning attorney in Cedar Rapids, Iowa, and vice chair of the American Cancer Society's board of directors.
A case in point is Godfrey, who lost a brother to lung cancer. She told the AARP Bulletin that she always intended to leave the American Cancer Society something in her will. But the gift annuity allowed her to make the contribution sooner rather than later. "The Cancer Society is already benefiting, and I benefit from the income," she says. "I'm just thrilled about it." So thrilled, in fact, that she recently turned another maturing CD into a gift annuity.
What Are the Rules?
In exchange for their contribution of cash, stock or other property, donors are promised a lifetime of fixed payments that typically are made quarterly or semiannually. Most charitable gift annuities are established for one person, but they can be issued for husband and wife or other pairs of people.
In addition to the stream of fixed payments, donors enjoy certain tax advantages. When gift annuities are established with cash, donors who itemize may deduct the charitable gift portion of the annuity up to 50 percent of their adjusted gross income (AGI); a portion of gifts of stock or other appreciated property is deductible up to 30 percent of AGI.
Part of each check a donor receives is also considered a tax-free return of principal—another plus for itemizers.
The size of the payments depends on the size of the contribution, the donor's age at the time the gift annuity is established and whether the annuity covers one or two people. (See What a Gift Annuity Gives You for examples.)
Most charities and other issuers of gift annuities require a gift of at least $5,000, while others have a minimum of $10,000. The American Council on Gift Annuities recommends new rates every July. The vast majority of the nation's charities use the council's suggested uniform rates. The council sets the rates with the aim of preserving for the charity about 50 percent of the donor's original gift. When payments end at the donor's death, ideally at least half of the contribution is left for charitable purposes.
Gift annuities are not available to young people. The usual minimum age for what's called an "immediate gift annuity" is 60. With this type of annuity, payments begin right away.
The minimum age typically drops to 50 for a "deferred gift annuity." With a deferred annuity, contributors often donate cash while they're still working, says Karen Browning, associate director of gift and legacy planning for the Nature Conservancy. The ideal candidate for this type of annuity wants an immediate tax deduction but doesn't need the income flow until some time in the future.
"We are working with a lot of members in their late 40s and early 50s who are looking at how they can supplement some of their retirement income with a secure fixed stream of income in the future," Browning says. "They can make a gift now, when they're in a higher income tax bracket, and take advantage of the deduction. They will receive a higher annuity rate and a higher deduction than if they were 65 and started receiving payments immediately after donating."
The Fine Print
Do charitable gift annuities have any drawbacks? Yes, experts say.
First, gift annuities are irrevocable. When a donor dies, any money left belongs to the charity; heirs have absolutely no legal right to it.
Another important point: Because a charitable contribution is involved, rates on gift annuities are lower than those available on the commercial annuities sold by insurance firms and other financial institutions. Experts say that if you have doubts about whether a gift annuity is right for you, consult a financial adviser.
For those who choose to give through a gift annuity, the process is usually very simple. The American Cancer Society's Streit says that because the charity handles the details, the paperwork is often just a single page that can be read and signed in a few minutes.
Gift annuities date all the way back to 1843, when the American Bible Society created the first one. Most charities that issue them today began doing so only in the last decade.
While gift annuities have proven to be enormously safe, experts point out that they are not federally insured, as are CDs and other bank deposits. But Frank Minton, the president of Planned Giving Services, a Seattle-based consulting firm, says that donors who stick with well-known charities aren't likely to encounter any problems.
"The charities," Minton told the Bulletin, "have a much better record than the financial institutions."
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