July 20, 2022

Rising Rates Make Charitable Gift Annuities Even More Attractive

Rising interest rates may make a charitable gift annuity (CGA) an even more attractive option for your charitable giving. If you’ve been considering a CGA, now may be a good time to talk to your advisor about how it may fit into your overall financial and giving plan.

CGAs are a popular way to make a charitable gift for two main reasons: you receive an immediate charitable deduction for gifts (such as cash or stock) used to establish the CGA, and you continue to receive income from it during your lifetime. After your death, the remainder of the CGA goes to the nonprofit organization you chose to support. (You also can establish a joint CGA, which would extend the terms over your life and that of a second person.)

Rising interest rates have led the American Council on Gift Annuities (ACGA) to increase the charitable gift rates Madison Community Foundation (MCF) and other nonprofits use when establishing CGAs, meaning a CGA established now may provide you with a higher annual income stream than in the past.

How Does a CGA Work at MCF?

When you create a CGA at MCF, you make a gift to a nonprofit organization. MCF agrees to pay a stream of income back to you during your lifetime.

When you pass away, the annuity payments cease. The remainder is either used to create a new endowment at MCF, or to supplement an existing endowment fund at MCF, depending on what you specified when you established the CGA.

How Are CGAs Taxed?

You can claim an immediate charitable deduction equal to the approximate value of the gift that will be given to the nonprofit following your death (or following the death of second person in a joint-life CGA).

Typically, a portion of the annual payment you receive from the CGA is a tax-free return of principal; the remainder of the payment is subject to tax as ordinary income or capital gains, depending on the types of assets you used to fund the CGA.

How do Rising Interest Rates Make CGAs More Attractive?

When you create a CGA, MCF calculates the stream of payments available to you during your lifetime based on the gift annuity rates suggested by the ACGA. (These rates represent the percentage of the gift’s value that is distributed to you each year). The ACGA’s new rates will increase the annual amounts of income you will receive for a CGA established on or after July 1, 2022.

The tables below show the increases, which range from 0.4% to 0.6% depending on the donor’s age.

  One Life       Two Lives  
Age Old Rate New Rate   Ages Old Rate New Rate
60 3.9% 4.5%   60/65 3.7% 4.1%
70 4.7% 5.3%   65/70 4.0% 4.5%
80 6.5% 7.0%   75/80 4.9% 5.5%
90 8.6% 9.1%   85/90 7.1% 7.5%

How Do I Establish a CGA With MCF?

Setting up a CGA with MCF is relatively simple. We recommend that you do the following:

    1. Consult with your financial and/or tax advisors. CGAs can be very effective planning tools, but you should make sure to understand the impact establishing a CGA may have on your overall giving plan.
    2. Contact MCF to begin the process. To establish your CGA, MCF will need your full name, birth date, the amount of your gift, the organization it is to benefit, and the type of assets you will use to fund the gift (i.e., cash, stock, etc.). MCF currently requires a minimum gift of $30,000 for a CGA that will establish a new endowment and $10,000 for a CGA that will fund an existing endowment with MCF.
    3. Execute your CGA agreement. MCF will provide you with an agreement to sign, as well as a calculation showing the amount of the gift reportable as an immediate charitable deduction and the annual annuity payment you will receive. MCF also will provide you with a document confirming how much of your annual annuity payments will be taxed as ordinary income or capital gains.

If you have any further questions regarding CGAs, of if you are interested in establishing a CGA with MCF, please feel free to contact Carmen Jeschke at 608.446.5932 or by e-mail at cjeschke@madisongives.org.

Download the CGA Fact Sheet to learn more.