The charitable gift annuity: 10 talking points for donors

It’s that time of year when clients start thinking seriously about making sizable charitable contributions, both because it’s the spirit of the season and because tax planning is beginning to weigh on people’s minds. The primary vehicles that come to mind for this are charitable remainder trusts, but those might not be accessible to clients who still need income, and wouldn’t be comfortably wealthy after making that gift.

For clients who want to make a charitable contribution but are concerned about being able to use the value of assets, a charitable gift annuity makes a lot of sense.

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Like a charitable remainder trust or a pooled income fund, a charitable gift annuity begins with an outright charitable gift, which is combined with the purchase of a fixed income annuity contract. Payments can begin immediately, or they can be deferred for a period determined by the donor and set forth in the annuity contract.

Here are 10 quick talking points for estate planners to use with clients for whom a charitable gift annuity may be well suited:

• Despite the fact that the gift is given with the intention of it being returned via annuity over the years, a portion of the gifted assets’ value is still tax-deductible. That tax advantage is based on the present value of the future benefit. The tax advantages of this strategy are, however, smaller than with other charitable strategies. So if that’s the client’s primary consideration, the charitable annuity is probably not right for them.

• On the other hand, the assets are entirely removed from the client’s estate. If avoiding estate taxation is a primary concern, charitable gift annuities can be very helpful.

• Generally, the older the annuitant, the higher the annuity rate paid. Some rates have been reported to be as high as 12 percent per year. But if the client has his or her heart set on a certain charity, it’s not really possible to shop around for the highest possible returns.

• The contributed property is given irrevocably. It becomes a part of the charity’s assets, so the client can’t reclaim it, or have any direction over its use.

• A charitable gift annuity is considered a general obligation of the issuing charitable organization. The payment obligation is not secured, though; it depends on the continued financial health of the charity issuing the annuity.

• A charitable gift annuity is not issued for a fixed term of years; the payment period is measured by the donor’s life, as long as the donor is the intended recipient of the annuity. The vehicle can also be structured along the life expectations of a husband and wife, if they are the two joint annuitants.

• Annuity payments continue for the lives of the annuitants no matter what investment returns the charity gets for its annuity fund. The annuity is backed by the charity’s assets, not just by the property contributed, and the payments become a general obligation of the charity.

• That means that charities issuing charitable gift annuities basically have to become indistinguishable from financial service companies that issue commercial annuities. Unsurprisingly, they are heavily regulated. Many states require issuing organizations to be licensed and to maintain investment reserves.

• Because of that, the charities offering these vehicles tend to be larger, established institutions. Your clients are not likely to be able to set up a charitable gift annuity with, for example, their local church. But plenty of larger charities pride themselves on offering these annuities, such as the Kennedy Center for the Performing Arts, the American Heart Association or the NAACP.

• Because of extensive state and federal regulations of these annuities there tends to be much information available on how charities handle their annuities. Most states require the charity to supply the state with the charity’s published gift annuity rate chart of the maximum annuity rates the charity offers. If your clients express an interest in setting up one of these plans, it shouldn’t be hard to find each institution’s guidelines, return rates, and other hard figures.

And if they seem interested in finding a charitable vehicle at this time of year that can provide them with a reliable income, the wise estate planner will make sure to mention the charitable gift annuity.