July 24, 2024

Helping Clients Understand Charitable Gift Annuities

Charitable gift annuities can allow your clients to make gifts to a nonprofit while retaining a lifetime stream of income.

If you’re not familiar with CGAs, here is an overview of how they work, what assets can be used to fund them, and how you can determine whether they may be a good fit for your clients.

How Do CGAs Work?

CGAs are an arrangement between a donor and a charitable organization. They typically can be established in just a few simple steps:

1. A donor transfers assets to a qualifying charitable organization and signs a CGA agreement.
2. Based on the donor’s age and applicable IRS guidance, the charitable organization calculates the portion of the assets that will be treated as a legacy gift, and the portion of the assets that will be used to fund the donor’s lifetime annuity payments.
3. The donor is eligible to receive an immediate income tax deduction for the portion of the assets that will be treated as a legacy gift.
4. During the donor’s lifetime, they will receive annuity payments from the charitable organization based on a pre-determined payment rate, which is a percentage of the value of the assets used to fund the CGA. (Find MCF’s current payment rates for CGAs here.)
5. The tax a donor pays on their annuity payments is based on the tax attributes of the assets they initially used to fund the CGA. (This can sometimes result in part of each payment being treated as a tax-free return of principal, another part being treated as a capital gain and yet another part being treated as ordinary income.)
6. After the donor’s lifetime, the CGA’s remaining assets are donated to the charitable organization (or, in the case of community foundations like MCF, the remainder will create or add to an endowment supporting the donor’s selected charitable organization(s)).

While most CGAs function like this, your clients can further customize their CGAs. Instead of setting up a CGA for the term of their life, a donor could establish a CGA to make payments during their life and the life of another person (e.g., their spouse). A donor may also be able to defer the start date of their annuity payments to better align with their future income needs.

What Assets Can Be Used to Establish a CGA?

Donors most frequently fund their CGAs with cash or publicly traded stock. However, they can use other types of assets, if those assets are acceptable to the charitable organization administering the CGA. If your client plans to use assets other than cash, publicly traded stocks or qualified charitable distributions to establish their CGA, contact your client’s selected charitable organization in advance to confirm it can accept those assets. (See MCF’s gift acceptance policy.)

How Can You Help Your Client Decide if CGAs Are the Right Fit?

CGAs, like any other giving option, may not be the perfect fit for every client. To determine if a CGA is right for your clients:

• Review Your Client’s Financial Goals and Income Sources: Determine whether your client’s current assets will be sufficient to support their lifetime income needs and, if not, whether creating a CGA could help supplement their lifetime income.
• Review Your Client’s Asset Mix: Consider whether your client has any appreciated assets, such as publicly traded stock, that may be beneficial to use in funding the CGA for tax purposes.
• Explain Tax Implications: As noted above, the income tax treatment of annuity payments will vary depending on the tax attributes of the assets used to fund a CGA. Additionally, if a client funds a CGA with qualified charitable distributions, they will not receive any tax deduction and be required to recognize their annuity payments as ordinary income.
• Review Eligibility Requirements: The charitable organization administering the CGA may have certain eligibility requirements your client will need to satisfy. (See MCF's eligibility requirements for a CGA.)

If you or your clients have additional questions about establishing a CGA at MCF, we would be happy to help! Alison Helland, Director of Donor and Advisor Engagement, can assist you or refer you to another member of our Donor Engagement team to serve as a resource for your specific situation. You can reach Alison via e-mail at ahelland@madisongives.org or via phone at 608-446-5937.

Please note that this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.