How Do Charitable Gift Annuities Work?

A charitable gift annuity, governed by a simple contract, provides you with a guaranteed, fixed income for life in exchange for your charitable gift to a trust. A charitable gift annuity is similar to commercial annuity in concept, but with one important difference that it is issued by a charitable institution or trust which receives the remainder as a gift. A charitable gift annuity is an extraordinary way to make a gift, increase your income and slice your tax bill. The charitable gift annuity is the most popular life-income gift instrument among donors throughout United States.

A charitable gift annuity is a contract between a donor and a foundation, under which the foundation guarantees payment of an annuity, unlike a trust which pays the annuity from its assets alone. Two features in particular make charitable gift annuities appealing. First is that an individual may specify whether he or she wants an immediate annuity, with payment to begin not later than one year from the date of the gift, or a deferred gift annuity, from which payments will not begin until a specified future date. The rate of return that is generally much higher than those on money market and passbook savings accounts.

With a charitable lead trust, your gift will be placed in a trust. The recipient of the charitable gift draws the income from this trust. Upon annuitant's death, his/her heirs will receive the principal with little or no estate tax or the gift is used by the charitable institution as the donor specifies after the lifetime of the annuitant.

In return for a gift of cash or property, the institution agrees to pay one or two beneficiaries selected by the donor a fixed, life-time amount. The organizations obligation to pay the annuity is secured by its assets. The donor is entitled to an immediate income tax charitable deduction the year the gift is made. That deduction is based on the difference between the current value of the lifetime annuity and the amount transferred to the organization.