The holiday season is upon us, though COVID-19 will dim the lights: Macy’s
world-famous Thanksgiving Day parade proceeded without spectators and Santa Claus, who has appeared there every Christmas since the Civil War, did not greet children in person at the flagship Herald Square store.
This year, Santa may not come for many charities, either, because they are struggling financially during the pandemic as donors cut back while needs grow. If you have extra money laying around (a big “if” these days) and are considering making a gift to your favorite charity, this would be a good year to do it, and charitable gift annuities (CGAs) are one way to go. These vehicles allow you to make a sizable charitable contribution, get a good tax break and collect a stream of income every year. They have their drawbacks and aren’t for everyone (what is?), but they can be very beneficial to the right people.
CGAs have been around for decades and major charities use them as an integral part of their fundraising. Just as a regular annuity is a contract between a purchaser and the insurance company that sells it, a CGA is a contract between the purchaser and the charity to which he or she donates. For a one-time contribution of, say, $10,000 to $20,000 in cash or securities, the donor receives an annuity-like stream of payments until the last beneficiary dies.
Virtually all charities that issue CGAs follow the guidelines of the trade association the American Council of Gift Annuities (ACGA) which sets rates periodically. Currently Doctors Without Borders (a charity to which I contribute) is paying out anywhere from 4.2% a year for someone who starts a CGA at 65 to 8.6% for someone who’s 90+.
Lately, charities have been imposing some restrictions on CGAs. “We’re now hearing people say they’ve raised their minimum from $10,000 to $15,000 or even $20,000,” said Rebecca Locke, president of the Board of Directors at ACGA and executive director of gift planning for the American Red Cross. “We’ve also seen some charities who’ve increased the minimum age for current gift annuities.”
Obviously the earlier you buy one, the longer the charity will have to make annuity payments, assuming average longevity. “If you do a gift annuity for a donor who’s 60, the time horizon on that gift is fairly long,” she said in a telephone interview. Some charities, she noted, are even imposing maximum contribution limits to keep CGAs from becoming too big a part of their endowments.
The $10,000 to $20,000 range is where most contributions lie, she told me, and CGAs are most popular among older seniors. “Between 74 and 78 is often the age where you see people doing charitable gift annuities,” said Locke. “At the Red Cross, we see mid-70s as the sweet spot.” She added that charities “are increasing their outreach to younger donors, meaning baby boomers.” Baby boomers? Younger? That’s reassuring.
What do you get for your contribution? First of all, the stream of payments any annuity offers. Doctors Without Borders, a charity I support, is paying out 5.4% annually, or $1,080 a year, to a 75-year-old who buys one of its $20,000 CGAs. Purchasers lock in these payments for the rest of their lives. You can also buy a joint policy, especially with a spouse, so the payments will continue until the second policyholder passes away, at which point what’s left of the gift goes to the charity.
If you itemize, you can get a tax deduction for charitable contributions, but here it gets a bit tricky. The portion of the money that covers your annuity payments is not tax deductible, though the rest is. If you pay with cash, you may get to deduct 25% to 55% of the gift in the year you make the donation, determined by the schedule of payments, the ages of the beneficiaries and a discount rate designated by the IRS. (The 75-year old who bought a $20,000 CGA from Doctors Without Borders would get an estimated tax deduction of $8,523.60.) Every year you’ll receive payments that include taxable ordinary income and tax-free return of principal.
You can also buy CGAs with appreciated stock or mutual fund shares, which will help avoid a lot of capital-gains taxes on accumulated gains. Please consult your accountant or tax adviser.
Three drawbacks: Contributions are irrevocable, CGAs pay lower rates than regular annuities and there are no inflation adjustments, which can make them less desirable when inflation is high.
Ultimately, though, said Locke, “we do not view this as an investment; this is a gift. If they’re not charitably inclined, this is probably not the vehicle for them.” But for those of you who are, it’s worth considering, especially as the holidays bring this annus horribilis to a close.