Charitable gift annuity

At its heart, a gift annuity is simply a contract between a donor and a charity, such as the Sisters of Providence. In exchange for a gift of a specified amount, we agree to make specified annual payments for life to one or two beneficiaries (also called annuitants). The Sisters of Providence accept gift annuities beginning at $10,000.

Our obligation to make gift annuity payments is backed by all the assets of the Sisters of Providence, not just the amount contributed for a single annuity. All funds are invested wisely to gain the largest return in the safest way.

All charitable organizations are free to set the rates they offer, but are subject to state regulations. The Sisters of Providence choose to follow the schedule of recommended maximum rates published by the American Council on Gift Annuities (ACGA). These recommended rates change from time to time, based on a variety of economic factors and affect only newly issued annuities.

Abby, age 65, makes a gift of $50,000 to the Sisters of Providence. In return, we promise to pay Abby $2,500 per year for the rest of her life. Payments will be made to Abby quarterly by the Sisters of Providence.

If Abby were married, she may have elected to have the annuity for two. When Abby dies, the annuity passes to her spouse until his death.

A gift annuity can be created to pay one or two annuitants for life. It can pay the donor and his or her spouse jointly and then the survivor after one of them dies.

A gift annuity can also be created with payments to someone other than a spouse (elderly parent, sibling, non-family member, friend or employee) but it may have gift tax consequences.

A gift annuity can be created now to supplement retirement income with payments beginning at age 65. The tax deduction is received at the time the annuity is established.

A gift annuity can be created by contributing stock, transferring ownership of a life insurance policy, savings bonds or IRA assets as well as using cash.

The charitable deduction is equal to the difference between the amount of the contribution and the value of payments to the annuitant(s). Deductions are lower for younger people since they are likely to live longer. Similarly, deductions are lower when there are two annuitants rather than one.

For tax purposes, a gift annuity contribution is treated as part gift and part the purchase of the annuity. The gift portion is the amount deductible the year you create the gift annuity. The balance is treated as the purchase price for the annuity. It is treated as a return of your original “investment” and comes back to you tax-free over your life expectancy.

Assuming an IRS discount rate of 1.6% on a $10,000 Charitable Gift Annuity, the charitable deduction for the year the annuity is created would be $4,101.70. The annual payment to the 79 year old annuitant would be $730 of which $596 would be tax free for 9 years.

Payments to the annuitant in a “regular” gift annuity would begin at the next calendar quarter. In a charitable “deferred” gift annuity, the payment to the annuitant is delayed until a date later than a year after the inception of the annuity. A deferred gift annuity payment could supplement your retirement.