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Charitable Gift Annuity: Giving with Peace of Mind


Do you feel a desire to make charitable donations, but are concerned that doing so may put your long term financial needs at risk?  And does an estate provision not quite provide the fulfillment you are looking for, because you cannot see the benefit of your donation?

If so, you may want to look into a Charitable Gift Annuity.

What is a Charitable Gift Annuity?

Under a charitable gift annuity program, you make an irrevocable donation to a charity and, in return, the charity promises to pay you a fixed lifetime income benefit.  This promise becomes a general obligation of the charity, and, as such, is backed by all of the assets of the organization.  The issuing charity must establish a liability on their financial statements equal to the present value of the future income benefits that it expects to pay you.  It is therefore important that you consider the financial strength of the charity and the quality of its management when considering a charitable gift annuity.  Upon your death, any remaining assets are released to the charity for its use.

Unlike other ways of donating to charity, a charitable gift annuity provides a financial lifeline in case you live beyond your life expectancy.

Tax Benefits

It may seem a little odd that an arrangement where you receive a financial benefit can result in a tax deductible donation.  This is accomplished through the price of the charitable gift annuity, which is set so that at least 50% of the initial donation is expected to remain with the charity, thereby providing a charitable benefit.  When purchasing a charitable gift annuity, you can deduct a portion of the donation from your taxable income.  The tax deduction is calculated by first splitting the initial donation into two components: the “estimated annuity value”, which is equal to present value of the future income benefits you expect to receive (the method used to perform this calculation is prescribed in the tax code, and can typically be provided by the charity), and the “estimated charitable value”, which is simply the excess of the initial donation over the annuity value.  The allowable tax deduction is equal to the “estimated charitable value.”

If you encounter the Alternative Minimum Tax, then you may not fully realize the benefit of the tax deduction.

In addition, a portion of the income benefits that is deemed to be a return of the “estimated annuity value” is excluded from taxable income; once the cumulative amount of the these deductions equals the “estimated annuity value”, no further deductions can be made and all subsequent benefits received are therefore fully taxable.  If, upon the death of the annuitant(s), the cumulative deductions are less than the “estimated annuity value” then their final tax return is eligible for a credit for the annuity benefits it did not receive.  This is similar to how you would be taxed on a conventional immediate annuity purchased from a life insurance company.

It is sometimes possible to purchase a charitable gift annuity with an asset other than cash, in which case the calculation of the deductions described become much more complicated.

Available Benefit Structures

Income benefits received under a charitable gift annuity can be received in a number of ways.

Benefit Start Date

First, the income benefits can either start immediately or be deferred for a period of time – similar to Social Security retirement benefits, the longer the deferral period the larger the income benefit for a given donation amount.  Selecting a long deferral period can allow the charitable gift annuity to behave similar to longevity insurance sold by life insurance companies, but at a higher price.  It is also possible to have a flexible benefit start date that can be selected at a later time in case, for example, the donor does not yet know when they will need the income.

Contingent Lives

The income benefit may be contingent upon the lives of one or more individuals.  Under a “single life” annuity benefit, the income benefits are payable so long as a given individual remains alive (and terminating upon his or her death).   A “two lives in succession” annuity benefit structure pays an income benefit to person A and, if person B survives person A, continues the benefit payment to B.  A “joint and survivor” benefit structure is economically equivalent to the “two lives in succession” structure, except that the names of both individual A and individual B appear on the check so long as both are alive.

It is also possible for the donor to assign someone other than himself or herself as the income beneficiary, or “annuitant”, which will have tax implications.

Benefit Mode

Income benefits can be received monthly, quarterly, semi-annually, or annually.

Comparison to Conventional Fixed Immediate Annuities


Charitable gift annuities have many attributes that are similar to a conventional fixed immediate annuity offered by a life insurance company.  Here is a listing of attributes that they share:

  • Fixed, guaranteed lifetime benefits
  • Irrevocable premium/donation to the insurance company/charity
  • Purchase prices that vary by age
  • Can have one or two annuitants
  • Portion of the income benefits received may be tax deductible
  • Both expose the purchaser to credit risk of the issuing entity (i.e. that they can continue to make the promised payments)


  • Conventional immediate annuities rates may vary by gender and health status, while charitable gift annuities generally do not.
  • Charitable gift annuities benefits are fixed and are not adjusted for inflation, while conventional immediate annuities typically offer cost of living adjustments or inflation indexing to their benefits (for a price)
  • Charitable gift annuities are more “vanilla” than conventional fixed immediate annuities, having far fewer “bells and whistles”.
  • Charitable gift annuities are not as cost-effective as a conventional immediate annuity – entering into a charitable gift annuity is more driven by a charitable motive than a financial motive.

If you wish to make a financial comparison between a charitable gift annuity and a conventional fixed immediate annuity, it is important that this be done on an after-tax basis.

Use in Diversified, Gradual Annuitization Strategy

As you may have seen in other content on our website, we believe that a gradual annuitization strategy has many benefits over the alternative of purchasing one immediate annuity at one point in time.  By spreading out purchases of immediate annuities over several years, and purchasing them from different insurance companies, you can better diversify yourself against the risk of default on the insurance company that sold you the annuity.  A charitable gift annuity need not be the only annuity you purchase; in fact, it can very well exist within a broader portfolio of immediate annuities, or perhaps other charitable gift annuities issued by other charitable organizations.

Minimum Donation

Most charitable gift annuities impose a minimum donation requirement.  A limited review of some programs revealed that the minimum donation can be as low as $5,000 or as high as $25,000.


While charitable annuity prices may vary, many institutions follow the pricing guidelines provided by The American Council on Gift Annuities (“ACGA”), a non profit organization that provides services to organizations that offer charitable gift annuities.

The most recent pricing guidelines provided by the ACGA (effective January 1, 2012) for an immediately payable single life annuity for select ages are provided below:

Age Income as % of Donation
50 3.7%
55 4.0%
60 4.4%
65 4.7%
70 5.1%
75 5.8%
80 6.8%
85 7.8%
90+ 9.0%

A complete rate schedule can be found at the ACGA website.

Risk of Repayment

Because a donation under a charitable gift annuity is irrevocable, and the charity is promising to make payments that can extend many years into the future, it is important to carefully consider the financial strength and management quality of the charity to be as sure as possible that they will be able to live up to this obligation.  A few ways of doing this may include:

  • Assessing the stability of the organization, the sources of its revenues, and security of its market position.  For example, an institution such as Harvard University has a strong and formidable brand within the higher education marketplace, and will therefore probably be able to remain financially strong through the donations that it receives, tuition that it charges, returns on its endowment, and many other sources of revenue.
  • Understand how the charity is investing the assets that are backing their repayment obligations.  They significant majority of these should be in high quality fixed income investments; if a substantial amount are in other asset classes, such as stocks, private placements, real estate, or other risky investments, this may be a red flag.
  • Ask whether the portfolio of assets backing the benefit payment obligation is equal to or greater than the liability they have posted on their financial statements for future benefit payments, otherwise known as the “reserve”.  If the assets are less than the liability, this may be another warning sign.
  • Ask if the charity has ever had a problem making charitable gift annuity payments in the past.
  • Check the charities background with such watchdog organizations as,,,, and

In addition to doing some research, another way of protecting yourself against repayment risk is to spread your donations, and other annuity purchases, across several issuing organizations.  This diversification avoids placing all of your eggs in one basket, and will therefore minimize the impact should one of the entities default on their payments.

Another risk factor to consider is whether the charity is “reinsuring” their charitable gift annuities to a life insurance companies.  A reinsurance agreement is the transfer of insurance risk from one entity to another, so in this case it would involve the transfer of the insurance risk of the charitable gift annuities to a life insurance company.  The charity does this by transferring assets to the insurance company, representing the premium for the reinsurance arrangement, and the life insurance company then makes all benefit payments to the charity, who in turn transfers the payments to the donor.  Because the reinsurance premium is often much lower than the price charged to the donor for the charitable gift annuity, the charity can “lock in” this excess donation and put it to work in the charity more quickly.

Reinsurance arrangements can be quite valuable, allowing a charity to benefit from the underwriting and investment expertise of the reinsurer and reducing the volatility of its insurance risk by pooling with the reinsurer.  However, reinsurance can also pose a risk to the donor.  If the reinsurer goes bankrupt, the charity is still responsible for making payments to the donors, but will no longer receive the payments from the reinsurer to cover these obligations.  It is important to understand whether the charity has entered into a reinsurance arrangement, whether it is with just one or multiple reinsurers, and the financial strength of the reinsurer(s).  Finally, you may also want to check and see if you are already exposed to credit risk of the reinsurer – for example, if the reinsurer is New York Life, and you already have a large New York Life annuity, you would be doubly exposed should New York Life experience financial challenges.

Who Issues Charitable Gift Annuities?

There is a wide range of institutions that offer charitable gift annuities, including hospitals, colleges and universities, museums, and an array of charitable institutions.  In fact, if you name a given non-for-profit organization, there is a good chance that it has a charitable gift annuity program.

Posted by

John Bevacqua on December 14, 2011

Filed Under

Income Strategies

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Unlike other ways of donating to charity, a charitable gift annuity provides a financial lifeline in case you live beyond your life expectancy.


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