Charitable gift annuities have long been a popular way for older
retirees with philanthropic intent to create a lifetime income
stream while getting a nice tax deduction. Today, a new twist on
the gift annuity is attracting younger people who have yet to
Most charitable gift annuities provide monthly payouts that
start immediately after a donor makes the contribution. About 75%
of donors who set up immediate annuities are older than age 75 when
they make the gift, according to a 2013 survey of charities by the
American Council on Gift Annuities.
Meanwhile, the council notes a growing interest in "deferred
payment" annuities. A donor, say age 55, makes a gift but defers
payment until a specific later date, perhaps five or ten years
away. Half of these donors are 65 or younger. Charities are also
offering "flexible start date" annuities, which allow donors to
turn on payments at any time down the road.
With all three approaches, you get a charitable tax deduction in
the year you make the donation. Your deduction is based on how much
leftover cash is expected to go to the charity after your death (or
the death of your survivor if you choose a joint annuity).
Do Well by Doing Good
While older donors may be better off choosing a gift annuity
that starts payments right away, workers who don't need the income
now could consider the deferred or flexible options. "You may be
still working, but you're thinking of retirement," says Jeremy
Arkin, director of gift planning at Duke University. "You will know
to the penny how much income you will get each year." (See the
If you opt for the deferred or flexible annuity, you'll get a
bigger payout the longer you postpone the income stream. That's
partly because there will be fewer payments before you die.
Before you sign a contract, understand that you can't get the
money back, says Bryan Clontz, president of consulting group
Charitable Solutions. And if your only goal with an annuity is
income and not philanthropy, you're better off buying a commercial
annuity, which, Clontz says, offers payments that are about 50%
higher than those offered by charities. (Most charities use payout
rates set by the gift annuities council.)
The lower gift rates don't concern Steve Willey, 70, and his
wife, Elizabeth, 67. They bought two commercial annuities soon
after they sold their home solar-power business ten years ago. They
started buying gift annuities as their bonds matured, and now they
own nine of them. "The commercial annuities have a higher rate, but
we realized that they were only benefiting the insurance company,"
The Willeys, who live in Sandpoint, Idaho, sank about $200,000
into the joint-life gift annuities and draw $16,000 in annual
payouts--about 20% of their total income. They chose their favorite
charities, including Greenpeace, the American Civil Liberties Union
and a local animal shelter.
Steve Willey intends to buy more gift annuities, and he expects
larger payouts. The older you are when you make the donation, the
larger the annual payment and deduction. A 75-year-old who donates
$100,000 would get a lifetime annual payment of $5,800 and a
$45,772 deduction. That compares with a $28,518 deduction and
$4,200 annual payment for a 58-year-old.
By using appreciated stock to fund your gift annuity, your
deduction will be based on the current value of the shares. Part of
each payment will be taxed as a long-term capital gain, part as
ordinary income and part as a tax-free return of principal.
Time the charitable write-off "to minimize taxes in a big tax
year," says Rick Rodgers, a financial planner in Lancaster, Pa.
Also, because the annuity "becomes part of your fixed-income
portfolio, you will need to adjust your asset allocation," he