EXPERT ADVICE
Charitable Giving
for Retirees
It’s possible, with the help of a charitable gift annuity.
David K. Smucker, CPA, CLU, ChFC
Although Baby Boomers approaching and entering retirement face many dilemmas,
including wondering if their income will last as long as they do,
some would like to continue donating to charity. This creates a
Catch- 22 because they fear that
their generosity might impair their
financial security and that they
will outlive their incomes.
There is a simple solution to this
problem—the charitable gift annuity (CGA), which can help them
make substantial, deductible charitable contributions, resolve many of
their investment-management chal-
lenges, and create an income they
can’t outlive, subject to the claims-paying ability of the chari-
table organization. CONCEPTUALLY, A CGA REQUIRES
THE CHARITY TO HOLD AND
ADMINISTER THE DONATED
PROPERTY THROUGHOUT THE
REMAINING LIFE OF THE DONOR.
purchasing an immediate annuity to
reinsure its obligation to the donor.
Here’s how a CGA works:
• The donor gives property—often highly appreciated common stock of a
publicly traded corporation
—to a charitable organization that offers a CGA.
• The organization may immediately
sell the property so it can be reinvested
for potentially better returns.
• The organization promises to pay
the donor an annuity for life via a single
life insurance policy or a joint and survivor life policy.
• Allowing for the fact that there is
charitable intent, the amount of the annuity payment is less than rates that are
available on annuities from insurance
companies.
• The organization makes the payments to the donor. It then issues a 1099R
to him at the end of the year, reporting
the appropriate income tax information.
• The donor gets an immediate income-tax deduction for the difference
between the value of the property and the
discounted present value, based on IRS
rates and life expectancy tables, of the
promised annuity.
• The organization may receive immediate access to part of the donation by
Benefits of a CGA
A CGA has several advantages for
the donor:
• The donor is permitted to
give away highly appreciated property without having to pay current
capital-gains tax. Instead, the gain
is recognized gradually, during the
life of the annuity, along with a portion of each payment that is subject
to ordinary income tax.
• An income stream is created
that the donor, or the donor and
spouse, cannot outlive.
• The donor doesn’t have to
monitor the income stream or
manage the investments;
the responsibility falls to the
charitable organization.
• A current income-tax
deduction is generated for
the donor, based on the fact
that the rate of return implicit in the CGA is less than
current market rates. Annuity payments are often determined based on rates from the American
Council on Gift Annuities.
• The donor’s estate is reduced by the
amount of the gift.
• The donor has the satisfaction of
supporting a charitable organization that
he deems worthy.
• The donor may receive public recognition for the donation, depending
on the organization’s policies. Recognition may be based on the full value of the
property.
