How can you secure money at your retirement and, at the same time, donate money to a charity close to your heart? A Charitable Gift Annuity (CGA) could be the right answer for you.
With a CGA, you can accomplish two things at once: making a charitable gift and securing a fixed-rate income for life. You needn't put your entire savings into the annuity to fund your retirement; instead, simply select one or two highly appreciated assets which would yield unwieldy capital gains taxes if sold. Then use this annuity to both augment your retirement income and make a gift to the charity of your choice. You can't beat the benefits:
How the CGA Works
Basically, you contribute a gift to charity in return for income during all, or part, of your lifetime. The CGA guarantees a fixed, regular income every year, paid in monthly, quarterly, semi-annual, or annual installments. You may structure the annuity to pay out over a certain number of years or for your lifetime - and that of your spouse as well. Fund your gift annuity by donating any number of appreciated assets, including real estate, stocks, bonds, mutual funds, or cash to the charity, and get a bounty of tax advantages in return.
First, you'll get a current income tax deduction for the charitable contribution, which equals the gift's value, minus the expected future annuity payments to be made to you under the CGA.
Note that the tax deduction for gifts of securities or real estate is limited to 30 percent of your adjusted gross income and the deduction is 50 percent of your AGI for cash gifts. However, if the income tax deduction exceeds these limits, you may carry over the excess for five years for a potential six-year deduction. In addition, you must have owned the stock or real estate for at least 12 months prior to the donation in order to claim the full fair-market value deduction for the gift.
A second tax advantage is that, like a commercial annuity, the IRS considers CGA income payouts to be a partial return of principal. Therefore, only half of your payments are taxed as ordinary interest income, while the other half is virtually free from income taxes.
This becomes particularly significant when you use highly appreciated assets to fund your gift annuity. The charity doesn't have to pay capital gains taxes on the profit of the sold asset and partial capital gains are effectively spread out over the donor's life expectancy rather than being reportable as one lump sum.
Finally, the assets used to fund a CGA are eliminated from your estate, so you can save your family from a potentially large estate tax burden in the future and position yourself to qualify for Medicaid at the same time.
Note that you must select a legitimate 501(c)(3) charity to set up your CGA and it's important to choose an established charity with stability and a good reputation, as its assets will secure your income.
The best advantage to the charity is that it can put your gift to use right away, even while your income is being paid out. In this way, you get the pleasure and credit of seeing your donation at work, and the value of the gift can be much larger than if it were donated to the charity after your death.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.