If you want to donate to charity but are concerned how it might affect your income in retirement, you may want to consider setting up a charitable gift annuity.
A charitable gift annuity is a contract between a donor and a qualified charity in which the donor makes a gift to the charity. In exchange, the charity assumes a legal obligation to provide you and up to 1 additional beneficiary with a fixed amount of monthly income that continues until the last beneficiary dies.
By definition, a charitable gift annuity is what is referred to as a “split gift.” Part of your gift will be used by the charity immediately for its charitable purposes, and part of the gift is set aside in a reserve account to be invested to support your future income payments. These payments include earnings on the reserve account as well as a return of a portion of the principal in the reserve account. The ratio of these payments—the percentage that is treated as a return of principal versus earnings—depends upon your age and the following factors.
Income and tax details
When you set up a charitable gift annuity, you can choose to receive income payments for both beneficiaries at the same time, or you can structure it so that payments to the second beneficiary begin only after the death of the primary beneficiary. After the death of the second income beneficiary, the charity receives the remaining value of the annuity.
You can fund a charitable gift annuity with an irrevocable donation of cash, publicly traded securities, or other assets, such as real estate, art, or collectibles. Your donation may earn you an immediate partial tax deduction. The exact amount of your deduction will be based on several factors: the number of beneficiaries; their ages at the time of the gift and their life expectancies; the anticipated income stream beneficiaries will receive from the annuity; and the prevailing rate at the time of the gift as determined by the IRS, which will be used to value the annuity.
Donating appreciated securities—rather than cash—to a charitable gift annuity can also help you minimize your capital gains liability while securing a future income stream. No matter what type of asset you donate to establish a charitable gift annuity, the income you receive from the annuity will be treated as either a return of capital or be subject to federal and state income tax. Charities will issue a form 1099-R to help determine how the capital gains taxes should be treated.
Key benefits of charitable gift annuities
- Secures a source of lifetime income. This income will continue as long as you and/or your beneficiary survive.
- Preserves the value of highly appreciated assets. A charitable gift annuity allows you to eliminate capital gains tax when you donate long-term appreciated assets, including non-income-producing property. (That is, a portion may be eliminated but the remainder will be deferred.) By donating assets in-kind, you will preserve the full fair market value of the assets, rather than reduce it by selling it and paying capital gains taxes. This increases the amount of money potentially available for your annuity income and your charity.
- Provides income tax deductions. With a charitable gift annuity, you have the potential to take a partial income tax deduction when you fund the annuity. The deduction amount is based on several variables, including the charitable gift annuity yield, which is determined by the charity and the beneficiaries’ life expectancies.
- Provide long-term support to your favorite causes. Unlike what happens with an immediate income annuity, the remaining value of your annuity will not pass to an insurance company after you and your beneficiary die. Instead, those assets will go to a charity, such as your alma mater or another charitable organization.
Is a charitable gift annuity right for you?
Charitable gift annuities, as with all things, have benefits and risks. Fox example, future income payments are subject to the ability of the charity to pay claims, inclusive of all assets, not just those in the reserve account; so if a charity is small or not yet well established, their ability to make payments in the future may be in question. On the other hand, a charitable gift annuity may be a good option if you want an immediate charitable deduction but also want to secure a source of lifetime income for yourself and another beneficiary. It may also be a good option if you want to manage potential capital gains tax and support a charity with a significant donation. Consult a financial professional to help determine what's best for you.
Next steps to consider
Learn more about the Fidelity Charitable Giving Account®
Tips for making charitable giving part of your financial plan
In-depth courses to help you manage your charitable giving