Charitable Gift Annuity

California tax lawyers and many of their clients are familiar with the advantages of accelerating charitable bequests into charitable remainder trusts: income for life for beneficiaries of the client’s choosing, capital gains tax savings, generous income tax charitable deductions and eventual support for important charitable causes. CRTs typically involve six-figure funding amounts, however, and come burdened with a variety of complexities and reporting requirements.

On the other hand, it is possible for clients age 60 and older to blend support for their charitable cause with a simple plan that will provide significant payments for life from gifts as small as $3,000 as well as large income tax deductions, potential capital gains tax savings and payments that are partly tax free. The technique that makes these benefits possible is a charitable gift annuity.

A gift annuity is a contract between a donor and a not-for-profit organization in which the donor exchanges cash or securities for an annuity for one or two recipients.

Immediate payment gift annuities have greatest appeal to older clients who are charitably motivated and wish to add a fixed income component to their portfolios. Both payout rates and deductions are high for this age group (the average gift annuity donor is age 77).

Gift annuities seem to have appeal for women. Women continue to live longer than men by roughly 5 years and so may have a greater interest in “an income that a person cannot outlive.”

Gift annuities also can be arranged to make payments for the lifetimes of two people, such as a husband and wife, brothers and sisters, parents and children or close friends.

Investors can use gift annuities to get investment profits and receive annual payments form the charitable organization that range from 5.5% to 10.5% depending on the age or ages of the persons receiving the payments. In general, 30 to 50% of a donor’s capital gain escapes capital gains tax completely. The remaining gain will be reported in small annual installments as part of the donor’s annuity payments and taxed at only 15% or possibly less.

Retirees who are unhappy with low CD returns can increase their spendable income with gift annuities and also enjoy payments that are partly tax-free. Capital gains savings are advantageous to investors who wish to move from equities into a fixed income arrangement.

Deferred payment gift annuities provide higher payout rates and larger charitable deductions, however, tax-free payments are smaller as a percentage of the annuity payment.

For other tax planning opportunities, call your tax lawyer. Call Mitchell A. Port at (310) 559-5259 for a tax consultation.