Charitable Gift Annuity Rates

by Leslie McClintock

If you want to donate a large sum of money to a charity, but you don't want to endanger your own long-term economic security, you might consider a charitable income annuity. In this arrangement, a donor makes a lump sum donation to a charity. In return, the charity promises to pay the donor --- or the donor and another beneficiary --- a set amount of money each year for the rest of their lives.

Advantages of Charitable Gift Annuities

The charitable gift annuity arrangement allows a charity to receive the benefit of an immediate lump sum contribution, in return for which it pays out benefits gradually, over years. The donor, on the other hand, may receive a large tax deduction in the first year --- assuming he itemizes his deductions. The donor also receives a steady stream of income for the rest of his life, provided the charity remains solvent and able to continue to make the payments.

Charitable Annuity Rates

Each year, the American Council on Gift Annuities, or ACGA, publishes a model payout table, designed to provide charities guidance on what level of annuity payout rate may be sustainable. Although charities are free to enter into any kind of agreement they choose, most simply adopt the ACGA's guidance.

Comparison with Private Annuities

Charitable annuity payout rates are generally lower than annuity rates available through a traditional insurance company. This is because charitable annuities are not designed to maximize the payout to the annuity owner, but to maximize the net benefit to the charity while still attracting assets. Additionally, charities do not have the substantial general funds that insurance companies do. These funds serve to back the promises of the insurance company in hard times. Absent this substantial pool of reserve capital, some charities have had difficulty continuing to make payments on their annuity obligations.

Taxation of Annuity Income

Annuity income is taxable, but you don't pay taxes on an entire annuity payment in many cases. Part of each annuity payment is considered a nontaxable return of your original premium. You are only taxed on that fraction of your annuity payout attributable to earnings rather than interest.

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