The Charitable Gift Annuity

Additional articles on giving from Vision, Pattie A. Clay Regional Medical Center's quarterly newsletter:

Memorial Giving

The Giving Tree:  Giving that Endures

Legacy Giving

Contact Pattie A. Clay Foundation:

859-625-3602
By e-mail:  mareitadaugherty@pattieaclay.org

Alison Lobb Emmons, Attorney-at-Law

(Reprinted from Summer, 2003  issue of Vision)

If you are looking for a way to increase your retirement income, limit your investment risk and benefit the Hospital Foundation, all at the same time, you may find the Charitable Gift Annuity to be a helpful planning technique. The Charitable Gift Annuity is not a new technique. Donors and charities have used the technique for many years to their mutual benefit. However, today’s low interest rate environment makes the technique especially attractive to donors who are interested in a fixed stable return that exceeds the two to three percent being offered for short-term certificates of deposit.

What is a Charitable Gift Annuity?

The charitable Gift Annuity is established by a simple written contract between the donor and the charity. Under the terms of the contract, the donor agrees to transfer cash or securities to the charity. In return, the charity agrees to pay a fixed amount for a period measured by one or two lives. The fixed amount is paid monthly, quarterly, semi-annually or annually, as directed by the donor in the contract. The fixed payments are called the “annuity”. The person or persons who are to receive the fixed payments are sometimes called the “annuitants”. The annuity can be paid to the donor, or to the donor and the donor’s spouse, or to one or two other people designated by the donor.

The annuity can begin immediately or it can be deferred. With a deferred Charitable Gift Annuity, the payments do not begin in the year that the gift annuity contract is established, but at some future date, chosen by the donor. For example, a donor might defer annuity payments until he or she reaches retirement, or a donor might establish a gift annuity contract to make annuity payments to a grandchild when the grandchild reaches college age.

What is the payout rate on the Charitable Gift Annuity?

The payout rate depends on the age of the annuitant or annuitants. The older the annuitants, the more charities can agree to pay. Many charities use the payout rates published by the American Council on Gift Annuities. Currently the Council recommends a payout rate of 6.5 percent to an annuitant who is 70 years of age when the Charitable Gift Annuity is established, and a payout rate of 7.1 percent to an annuitant who is 75.

Is there any investment risk?

The annuity is a fixed amount and is not tied to the investment return of the charity. The charity’s promise to pay the annuity is unsecured, but the general assets of the charity stand good for the payments.

 Are there any Tax Considerations?

A donor who itemizes deductions gets an income tax deduction in the year that the cash or securities are transferred to the charity. The deduction is not for the full value of the cash or securities transferred, because the donor (or his or her designated annuitant) is receiving something back from the charity in the form of the annuity payments. The IRS publishes tables from which the amount of the gift, and thus the amount of the income tax deduction, can be determined. For example, a donor age 70 who transfers $10,000 to a charity in September, 2003, and who receives a lifetime annuity of $650.00 annually (6.5%), could take a charitable income tax deduction in 2003 of approximately $3,700.00.

Until the annuitant reaches the age representing his or her life expectancy, a portion of each annuity payment will be a tax-free return of principal. In the example cited in the foregoing paragraph of the donor age 7p, $406.90 of each $650.00 payment will be non-taxable. If the donor had transferred appreciated securities to the charity, instead of cash, then a portion of each annuity payment would be subject to long-term capital gain, reducing the tax-free portion of each payment. But some of the capital gain would never be recognized, because it is attributed to the gift portion of the transaction.

What’s the bottom line?

For donors who wish to live well while doing good, the Charitable Gift Annuity offers a unique opportunity. Without the fees sometimes associated with sophisticated charitable planning techniques, a donor can make a gift to the Pattie A. Clay Foundation, and receive fixed payments for life that are partially non-taxable. If you have questions about this technique or need additional information, contact Florence Tandy at 859-625-3602.

Alison Lobb Emmons practices law in the Richmond firm of Emmons, Luxon, Puckett & Shannon, PSC. Emmons is an active speaker and writer on estate planning issues. She currently serves on the Board of Directors of Pattie A. Clay Foundation, the Kentucky Bar Foundation and the Madison County Community Foundation.

8/03

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