In a low interest-rate environment, a charitable gift annuity offers an attractive solution if you seek steady income, an attractive return and low risk. A CGA gives the added satisfaction of doing well by doing good.
With a CGA, a charitable organization promises to pay a fixed annual income for life in exchange for an irrevocable contribution of cash or marketable securities, e.g., publicly traded stock). The annual income payments go to the donor or a designated beneficiary. The amount of the payments depends in part on the age of the beneficiary at the time of the contribution: the older the beneficiary, the greater the annual payment. Deferring the receipt of payments also increases their amount. The charity keeps any funds that remain unpaid from the CGA at the death of the beneficiary.
A CGA has several financial benefits. First, it provides immediate and guaranteed income. Because the CGA is sponsored by a charity, the donor may receive a charitable income tax deduction. Also, a portion of the annual income payments are tax-free. There also may be savings on capital gains if the donor uses appreciated securities for the CGA.
Here is an example of how a CGA can simultaneously increase cash flow and support a charity:
Janet, age 76, loyally gives to a local food bank. However, on a fixed income, she worries whether she can continue giving at the same level. Janet owns 200 shares of a publicly traded stock that she bought several years ago for $8,000. The shares are currently worth $10,000 and pay Janet an annual dividend of $250. Janet decides to contribute the shares to the food bank to fund a 6% CGA. The food bank will pay Janet $600 annually for life, which is $350 more than the annual dividends she earned from the stock shares. Moreover, $370 of each annuity payment will be tax-free for 16 years. Assuming a 15 percent tax rate, Janet can claim a current tax deduction of $4,690; over time she can save $140 in capital gains taxes. Per Janet’s request, the food bank will use any remaining CGA funds for an endowment in Janet’s memory after her death.
Janet achieved her twin goals of increasing cash flow and supporting her favorite charity. She even created a permanent philanthropic legacy.
When considering a CGA, be sure that the sponsoring charity has the resources to guarantee uninterrupted annuity payments. Compare CGA rates among different charities. Most follow the standard rate set by the American Council on Gift Annuities. The sponsoring charity should provide a complete, personalized illustration of how the CGA will work based on your circumstances. As with any important financial decision, consult with your legal or financial advisor. For many people, a CGA can lead to a rewarding win-win outcome.
Matt Kaliff is assistant director of endowment development at the Jewish Federation of Cleveland in Beachwood.
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