Determining Whether to Invest in Charitable Annuities
An annuity is an investment vehicle that typically includes an insurance component. Because of this, annuities used to be sold only by insurance companies. However, in today's diverse financial marketplace you can purchase annuities through other channels, such as stockbrokers, financial institutions, and mutual fund companies. Annuities also are available via some employer-provided retirement plans.
Annuities generally appeal to investors looking for a less volatile investment option, since the product makes a series of regular payments to the owner. This ongoing income stream can be a nice addition to other retirement income.
Annuities also can be established to provide income not only to you and your heirs, but also to benefit a charitable organization. In such cases, you likely will get more of a tax benefit than with a noncharitable annuity arrangement.
General annuity attributes
Annuities basically come in either fixed or variable forms.
As its name indicates, a fixed annuity earns a guaranteed rate of return for a set time. To make these regular payouts, the annuity is usually invested in government bonds and other low-risk securities. This is analogous to certificates of deposit (CD). However, unlike a CD, an annuity is not guaranteed by the FDIC; rather, its value is related to the financial stability of the insurance company that issued it.
Variable rate annuities, on the other hand, are more risky. As with standard equity investments, a variable annuity is invested in other earning vehicles and your payout depends on the ultimate performance of that portfolio.
Annuities also are divided into two payout categories: immediate versus deferred income. If you're looking for maximum security, you'll likely opt for a fixed-rate, immediate payout; if you don't need the money immediately and want to give it a chance to produce more, a variable rate annuity that defers income will probably be your choice.
Deferred annuities also offer the advantage of not being taxed until distributions are made, either by withdrawal or distributed as payments. The taxable portion of distributions, however, is treated as ordinary income. This could make them less appealing than investments other than annuities that pay dividends or capital gains, which are taxed at a lower rate (15%) than ordinary income (with rates as high as 35%).
When taxes are of particular concern, a charitable gift annuity might make sense.
A gift annuity is an irrevocable contract between you and a qualified organization that has such a giving program in place. In most cases you can use cash or transfer other assets to the annuity in exchange for guaranteed lifelong payments. At the time of death, the payments cease and the charity retains the assets for their benefit. As with regular annuities, you determine whether you want to receive payouts immediately or defer distributions.
By creating a charitable gift annuity, not only does the qualified organization get the investment's benefits, but you are entitled to a tax deduction when it is purchased. In the year the annuity is purchased, you can take a tax deduction for the excess of the amount of cash or value of property transferred to the charitable organization over the fair market value of the annuity. When you purchase the annuity with cash, it is a 50% limit deduction. If you fund it with long-term capital gain assets, a 30% limit deduction is allowed, but even with the lower limit, using securities to fund the annuity might be advisable since a portion of your unrealized gains avoid tax and taxes on the remaining gains are deferred until annuity payments are made. If you find that a charitable gift annuity fits into your overall giving and tax plan, check with the charity to which you wish to donate. Qualified organizations typically offer various types of charitable annuities from which to choose.
Action Idea: If you don't need immediate income, you may wish to consider a deferred charitable annuity.
For example, rather than taking payouts immediately, you might find deferred annuity payments preferable. Here you decide when in the future you want to start the distributions. This option tends to appeal to younger donors who do not need the current income stream.
Also look into a joint gift annuity that could let you simultaneously provide for someone else, such as your spouse or a child. This co-beneficiary will share the annuity's payments with you. When either of you passes away, the payments continue to the survivor.
