Charitable Gift Annuities
A charitable gift annuity is one of the most popular giving arrangements that exist between charitable organizations and their donors, and gift annuities have been in existence for more than 100 years.
Here, a member transfers an asset to MNA during their life. Then, MNA pays the member a fixed percentage during their lifetime, and the remainder of the asset passes to MNA. Part of the initial transfer is tax deductible.
A charitable gift annuity is not, and should not be viewed as, an investment. Rather, it is a way to receive annual payments while making a charitable donation.
What is a charitable gift annuity?
A charitable gift annuity is a contract between the donor and the nonprofit wherein the donor makes an irrevocable gift to the nonprofit, and the nonprofit is legally obligated to pay the donor and/or another beneficiary a fixed income – an annuity - for life, not a term of years. Upon the death of the donor and/or the beneficiary, the nonprofit receives the remaining principal.
What will my income be?
Planned giving software is used to calculate a donor’s annuity rate, which is based on the age of the donor and/or the beneficiary. Like many nonprofits, MNA follows the recommended rates of the American Council on Gift Annuities.
Is this income guaranteed?
Yes. The gift becomes a part of the MNA's assets, and the payments are a general obligation of MNA. The annuity is backed by MNA’s entire assets, not just by the property contributed. Unlike a trust, annuity payments continue for the life/lives of the donor and/or the beneficiary, not only as long as assets remain in the charitable gift annuity.
Can I change my income at any time?
The fixed income is specified in a gift annuity agreement and does not vary over the term of the charitable gift annuity.
Is there a minimum gift amount?
To establish a gift annuity, MNA requires a minimum contribution of $10,000.
What assets can I use to fund a charitable gift annuity?
Charitable gift annuities are typically funded with cash, securities, or bonds.
When is the right time to establish a charitable gift annuity?
Charitable gift annuities are age sensitive and provide the greatest financial benefit to older individuals - the older the donor is at the time of the gift, the greater the fixed income the nonprofit can agree to pay. Charitable gift annuities can be immediate, meaning the payments start right away, or deferred whereby the annuity is set up in advance, but the payments start later (usually when the donor reaches a certain age). MNA will not issue a gift annuity if the donor and/or beneficiary are less than 60 years of age.
How will my income be taxed?
If you use cash to establish your charitable gift annuity, a portion of each annuity payment is excluded from income and deemed to be tax-free for a fixed number of years depending on the donor and/or beneficiary’s age. The remainder of the annuity payment is taxed as ordinary income. If you use appreciated securities, a part of the tax-free portion of each annuity payment is replaced by income taxed at capital gains rates. Each year, you will receive a Form 1099 that tells you how to report the income on your tax return.
Will I receive an income tax deduction when I establish a charitable gift annuity?
Yes. Because the gift is irrevocable, the donor is entitled to an income tax deduction in the year the gift is given. The deduction is the difference between the amount transferred and the value of the annuity, subject to IRS 30%/50% limitations. The deduction must be at least 10% of the funding amount.
Will I have to pay capital gains taxes if I use appreciated securities to fund an annuity?
If appreciated securities are used to fund the annuity, the donor pays capital gains tax on only part of the appreciation. In addition, if the donor is also the sole beneficiary, the capital gains tax is spread out over the donor’s life expectancy. If the donor dies before all the reportable capital gain has been reported, any unreported balance is forgiven. However, if the donor sells the appreciated asset and uses the income to fund a charitable gift annuity, all of the capital gains tax would be due in the year of the sale.
To learn more about how you can contribute to the Michigan Nature Association, please contact Executive Director Garret Johnson at firstname.lastname@example.org or call (866) 223-2231.
Note: This information is intended to provide a basic understanding of the benefits associated with charitable gift annuities. It is not to be construed as legal advice. The Michigan Nature Association encourages you to consult with your tax adviser or attorney.