Throughout the year, in our Women, Money, and Mindset columns, we have tackled some of life’s most pressing financial challenges.
Every month, we have delved into a financial issue that touches the lives of our readers, offering, each week, a distinct insight from the differing viewpoints of a Certified Financial Planner, an attorney, a CPA, and an executive business coach.
From navigating the financial markets and business strategies to estate planning and tools to cut taxes, our goal has always been to provide clear, practical, actionable advice to take to your trusted professionals so you take the next steps to grow your wealth and increase your financial security.
In this final installment of the year, the issue is giving, and the topic this week is Charitable Gift Annuities. It is a strategy that can address multiple financial and tax planning issues while supporting the causes that matter most to you.
Unlike giving away cash or assets and not receiving anything in return, with a CGA, if you donate to a 501(c)(3) qualified charity, in return, you receive two powerful benefits. First, you can qualify for an immediate tax deduction for part of the contribution. Second, you receive a dependable, fixed income from the charity for the rest of your life.
The minimum contribution is usually only $5,000, so it is an accessible planning tool for most people.
Before diving into more specifics, let’s see how a CGA can help with some specific financial and tax planning concerns you might have:
—You want to give more to your house of worship or favorite charity but are concerned about not having enough income in the future. With a CGA, you can receive guaranteed income for life.
—You need a last-minute tax deduction and have maxed out on your IRA or 401k plan contribution for the year. A CGA can act as an alternate retirement plan if you itemize deductions on your return.
—You are interested in giving away more to charity but do not want the complications of setting up a charitable trust or naming a trustee. A CGA can be set up in days directly with the charity at no cost to you.
—You intend to leave some or all of your estate to charity and would like to have all of your estate planning finalized now. CGAs are especially helpful if you would like to leave your estate to several charities because you can set up annuities with each charity.
—You have adequate income now or are not yet retired, but you are concerned about costs later in life, like long-term care. You can receive a larger monthly payment later if you choose a deferred annuity and start the payments at a later date.
—If you are concerned about paying capital gains taxes on assets you want to sell, you can avoid or defer taxes if you contribute the asset to the CGA.
—If you would prefer your church or favorite charity to have access to some of your contribution now, a CGA is preferable to a charitable remainder trust or bequest that funds after you have died.
—If you want to secure the financial future of your spouse, child, or another loved one, CGAs can be set up for the lives of two individuals. This could be especially helpful if you have a child in their 50s or older, and you are concerned about them not having enough guaranteed retirement income.
—If you keep most of your funds in the bank but would like to earn a higher return, the charity invests your CGA funds (and generally considered safe) with usually a fixed rate of return that is higher than you would receive on a CD.
—You would like to avoid paying taxes on a required minimum distribution, so you are planning on doing a Qualified Charitable Rollover (QCR). New rules will allow you to fund your CGA with a one-time $53,000 QCR. The QCR amount to your CGA will not be included as income on your return, but you can still receive the monthly income benefit from the CGA, and you can defer income further if you choose a deferred CGA.
As you can see, a charitable gift annuity checks many financial and tax planning boxes, and it is easy and cost-effective to set up.
Now to the specifics. First, you set up the CGA and donate the asset to the charity. The gift is set aside and invested by the charity. You (and also your spouse or other person if you choose a two-person annuity) will receive fixed monthly or quarterly payments for the rest of your lives. The charity can utilize the remaining funds after your death.
How much is the tax deduction? The income tax deduction is equal to the amount of the contribution minus the present value of the payments that will be made to the donors during their lives. The charity will handle these calculations for you.
How much income will you receive? Current suggested annuity rates range from 4.6-10.1% for those 50 and older, dependent primarily on your age. (In other words, you would receive $4,600 to $10,100 a year on a $100,000 contribution.) For recommended rates and how they are calculated, go to acga-web.org/current-gift-annuity-rates.
The amount you would receive is generally fixed and will never fluctuate or adjust for inflation. But it’s also secured by the charity’s entire assets and will continue regardless of how the investments of the annuity perform.
Here is an example. Dennis, 75, and Mary, 73, fund a $50,000 charitable gift annuity with appreciated stock that they originally bought for $20,000. They are eligible for an income tax charitable deduction of $17,584. They will then receive a payment rate of 6%, or $3,000 each year for the remainder of their lives.
If you contact your church or charity, they will provide you with information regarding the minimum age, contribution requirements, and rates for their annuities.
As you can see, a charitable gift annuity is more than just a financial tool-it’s a way to make a lasting difference while providing for yourself and your loved ones. As you plan for the year ahead, I hope this inspires you to take the next step. Wishing you and your family a Happy New Year filled with peace and purpose!
Michelle C. Herting is a CPA, accredited in business valuations, and an accredited estate planner specializing in succession planning and estate, gift, and trust taxes. She is also the past president of the Charitable Gift Planners of Inland Southern California.