This month we’re continuing our review of charitable giving strategies that are “split gifts” in which the charity benefits, but the donor also receives benefit from the gift (frequently an income stream) for a period of time. We’re approaching that time of the year when we may be getting solicitations from charitable entities inviting us to establish a Charitable Gift Annuity with them. You can see in our chart above that the Charitable Gift Annuity would be a current gift to the charity. It is relatively simple to establish and may provide income tax as well as transfer tax benefits to the donor.
You may have seen these “offers” to establish a Charitable Gift Annuity in the past – I’ve gotten them regularly through the years. The charity somehow knows my age and sends me a nice, slick illustration showing annual income I could receive for the rest of my life from a Charitable Gift Annuity of a specific amount established with them. This type of gift is essentially a simple contract between the donor and the charity in which the charity promises to pay an income stream for the lifetime of the donor in exchange for a gift now. As this is a split gift and the donor is going to be receiving income from the gift for a period of time, the full amount of the donation cannot be claimed as an income tax charitable deduction. Similar to the Charitable Remainder Trusts we have been reviewing in the last few months, there is a calculation done when the annuity is established that determines the amount of deduction the donor may claim. As time goes by, the donor enjoys the income stream generated by his gift, which may be taxed on a favorable basis; typically a portion of the income received is treated as a tax-free return of the principle that the donor gave.
These gift annuities offered by charities are loosely overseen by the self-regulatory group The American Council on Gift Annuities (ACGA). There is not Federal regulation in the Gift Annuity arena. The various states differ widely on how closely they monitor and/or regulate Gift Annuities. The ACGA establishes “recommended” annuity payment rates from time to time, based on the then-current interest-rate environment. They also monitor the regulatory activities in various states in the Gift Annuity arena and specifically any concerns that arise regarding ethics, accountability and appropriate consumer protection for donors. The ACGA doesn’t have any legal authority, however is a well-respected entity and the vast majority of charities offering Charitable Gift Annuities collaborate with them.
Many years ago there was a particularly egregious incident in Arizona in which an organization had devised a Charitable Gift Annuity that was essentially a scheme to sell commercial annuities to unsuspecting elders. As Arizona has a substantial population of older citizens, after this scheme was uncovered, the state put into place regulations designed to protect consumers regarding Charitable Gift Annuities. Not all states have taken such steps. When considering incorporating a Charitable Gift Annuity into your planned giving strategy, as always, be sure you are consulting competent licensed legal and tax professionals well versed in working in this specific area.
It is also prudent to carefully consider the charity with which you would be entering into this agreement. Remember, the Charitable Gift Annuity is a simple contract between the donor and the charity. You would be giving your gift to the charity in exchange for their promise to pay you an income stream for the remainder of your life. The charity has the responsibility to appropriately and prudently invest the funds it has received from donors. The charity must keep up with proper accounting on each donor’s individual gift, pay the promised income at the rate agreed upon when the arrangement was established and report out to the donors and the IRS the information needed for annual tax preparation. Many larger, well-established charities have the wherewithal to appropriately administer a Charitable Gift Annuity program. Northern Arizona Climate Change Alliance is a smaller, still relatively new charity without the resources to offer such a program.
To recap this month’s topic of Charitable Gift Annuities, it can be relatively simple to establish. It is a split gift that provides benefit to the charity as well as an income stream to the donor. The donor may be able to claim an income tax charitable deduction at the time of the gift and may also enjoy transfer tax savings. Regulation of Charitable Gift Annuities varies widely from one state to another. When contemplating this type of gift, it can be a matter of “buyer beware” and it is important to carefully consider the future viability of the charity and the likelihood they would be able to continue paying the promised income.
Northern AZ Climate Change Alliance is a 501(c)(3) entity and donations can be deductible for income tax purposes. NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate. Donate Here
Bonnie Lane, Verde Volunteer
Member, Board of Directors
NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel