What Is a Charitable Gift Annuity?

How you’ll spend your retirement savings will hinge on a careful balance between your financial goals and aspirations. Your top priority is the obvious need to use retirement savings to provide an income that you won’t outlive, but you may also have a desire to do good and leave a legacy.

These two goals don’t need to compete. There are a number of ways that you can secure an income during retirement while still leaving behind a legacy that you can be proud of. A charitable gift annuity is one such option.

Below, we take a closer look at what a charitable gift annuity is, how it works and what rules to be aware of. We also help you weigh the pros and cons as you determine whether a charitable gift annuity is a strategy you want to add to your retirement plan.

What is a charitable gift annuity?

What makes a charitable gift annuity unique and different from other types of nonqualified annuities is that instead of the contract existing between you and an insurance company, a contract exists between you and a charity or nonprofit organization. As with a traditional nonqualified annuity, you’ll give the charity or nonprofit organization an amount of money in exchange for a lifelong stream of income. Here is another added bonus: You may also be eligible to take a tax deduction for a portion of your donation.

How does a charitable gift annuity work?

Whereas a traditional nonqualified annuity is purchased, a charitable gift annuity is technically donated. When you give it to the charity, your money is considered a charitable donation. This is why, depending on how much you donate, you could be eligible to deduct some of this charitable gift on your tax return.

The donation is then put into the organization’s reserve account and invested for future use by the organization. In exchange for this donation, you’ll receive regular payments from the organization for the rest of your life. After you die, the charity will keep the remainder of the assets you used to fund the annuity payments.

Because the organization will likely get to keep some of what you’ve donated, you may be able to deduct a portion of your donation in the year of the charitable gift. The amount you’re able to deduct is based on the amount the charity is projected to retain upon your death. And if your deductible exceeds the maximum which can be deducted in a single year, you may be able to carry that excess forward for up to five years.

Who offers charitable gift annuities?

Charitable gift annuities are offered by many different nonprofit organizations, including (but not limited to) the following:

• Universities

• Hospitals

• Research centers

• Museums

How large are payments from charitable gift annuities?

The payment rate is ultimately set by the charity. However, charitable gift annuity payments are typically lower than you would receive from a traditional annuity issued by an insurance company. This is because charitable gift annuities are designed to ultimately benefit the charity or organization.

The size of the payments you receive from a charitable gift annuity will also depend on:

• The size of your gift: The larger your donation, the larger your payments will likely be.

• Your age when opening the annuity: Older donors will typically receive larger payments, because they will likely receive fewer payments than younger donors will over the course of time.

Many charitable gift annuities make quarterly payments, but payment terms and schedules vary from charity to charity and annuity to annuity.

Charitable gift annuity rules

As with traditional annuities, the rules surrounding charitable gift annuities can change depending on whom you purchase your annuity with and what type of annuity you have, though generally speaking, you usually need to be at least 60 years old to open a charitable gift annuity. Charitable gift annuities also may set a minimum charitable gift amount—anywhere from $5,000 to $50,000 or more. These annuities are also typically funded with a transfer of cash or securities, but there are a number of assets you can use, depending on the charity or nonprofit.

Charitable gift annuities are regulated on a state-by-state basis. Any nonprofit organization that wishes to offer charitable gift annuities must comply with these regulations (dictating how much an annuity issuer must keep as a reserve at any given time to ensure it can make payments and meet its obligations) in the state in which it operates and the state in which a donor is located. Understanding these regulations can help you evaluate charities that you are considering for a charitable gift annuity.

Do you pay taxes on a charitable gift annuity?

Determining the tax impact of a charitable gift annuity can be quite complicated, and it depends on a variety of factors—like how you funded the annuity. Generally, a portion of each annuity payment is treated as taxable income and portion is excluded from income as a return of basis. It’s recommended that you speak with a tax professional to understand the full impact that a charitable gift annuity may have on your tax situation.

Pros and cons of a charitable gift annuity

A charitable gift annuity can be a great way to put your hard-earned money to a good cause while providing you with some benefit in return. But there are some downsides to be aware of, too. Here are some benefits and drawbacks to charitable gift annuities:

Pros of charitable gift annuities

Guaranteed income for life

Your annuity payments are guaranteed by the entity for life, providing you with a regular stream of lifetime income during retirement. Payments are also fixed, so you’ll know exactly how much you’re going to get as long as you live.

Ability to leave a legacy

Charitable gift annuities are designed to ensure that you have an income stream during retirement while also allowing you to donate to a cause that means a lot to you. You can leave a legacy without putting a comfortable retirement in jeopardy.

Tax benefits

Donating to fund a charitable gift annuity comes with a partial tax deduction that can lower your income tax bill for up to five years (depending on how much you donate). If you donate securities instead of cash, it could help you reduce the amount of capital gains taxes owed on those investments. This can be especially beneficial for assets you have held for a long time that have significantly appreciated in value.

Cons of charitable gift annuities

Loss of liquidity

When you fund any annuity, you are giving up funds in exchange for a future regular payment. Some annuities may allow you the option to back out, but charitable gift annuities are typically irrevocable — meaning once you donate the money, you’re unable to change your mind and get it back. This could potentially cause issues if you suddenly found yourself needing cash all at once.

Lower rate of return

Charitable gift annuities are designed to ensure the charity receives a significant portion of the donation. So, they typically provide lower payments as compared to traditional annuities.

Risk that you won’t realize the benefit

Your annuity payments are determined by your projected life expectancy at the time you donate to the charity. But it’s always possible that you’ll pass away before realizing significant benefits (though it does mean the charity is able to keep more of your gift). Your annuity payments are also guaranteed only as long as the charity remains solvent. If the charity were to go bankrupt, you could lose your annuity payments.

Is a charitable annuity a good idea?

A charitable gift annuity can be a great way to incorporate charitable giving into your financial plan while also maintaining an income stream for life (and realizing some tax benefits). Whether or not it makes sense for you will depend on your personal financial situation.

Before deciding to fund a charitable gift annuity, it’s important to make sure you’ve built a financial plan that will support you during retirement. Depending on what you’ve saved, you may be better served putting your money to work in other ways—such as through a nonqualified annuity that has a higher rate of return—and choosing a different way of leaving a legacy upon your death.

A Northwestern Mutual financial advisor can help you understand the options that best align with your financial goals available to you now and in retirement. One of our advisors can also help you understand how an annuity may work with other assets you have, helping you to maximize the benefits of all elements in your plan—and ultimately maximize the impact of your life savings.

This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.