A Gift That Gives Back
Published: March 18, 2016
If you are interested in donating assets to a favorite charity or other nonprofit organization but would like to receive income from the assets during your retirement years, you might consider funding a gift annuity. This charitable vehicle is popular for giving to colleges and universities, and is also offered by other organizations.
A gift annuity is a contract between you and an organization that generally guarantees a fixed payment in return for the bequest. The payment may begin at the time of the bequest or at a later date as specified in the contract, and it could be paid for a specified number of years, for your lifetime, or for the lifetime of other annuitant(s). Of course, the guarantee is contingent on the financial stability of the organization.
Potential Tax Benefits
Rates of return under a charitable gift annuity may be lower than annuity rates offered by insurance companies and other financial institutions, so that more of the original gift will remain with the charity. However, a number of tax benefits could make this an appealing option, especially if you donate highly appreciated assets, such as stock that has risen in value.
For example, let’s say you purchased stock for $40,000 that is now worth $100,000. If you were to sell the stock after holding it more than one year, you would owe $9,000 to $12,000 in long-term capital gains taxes (15% or 20% depending on your tax bracket) on the $60,000 of appreciation. If you use the stock to fund a gift annuity, a portion of the $100,000 value is considered a direct contribution, for which you may receive a current-year federal income tax deduction.
You are liable for capital gains taxes only on the appreciated portion that is used to fund the annuity, and those taxes are prorated over your lifetime, as defined in IRS tables. During the same period, you also recover, without income tax liability, the portion of your original capital investment used to fund the annuity. Other income from the annuity is taxed as ordinary income, as would be true with a standard (noncharitable) annuity.
A gift annuity is only one of several charitable giving strategies you may want to consider before making a substantial donation. Consult your tax or estate planning professional before taking any specific action that may have tax consequences.