Want to save tax and also wish to contribute towards making the society a better place to live? If the answer to the above question is YES, then this post is specifically for you. The answer is the charitable gift annuity. So what is a charitable gift annuity, and how it can serve both purposes? To get answers to these questions, keep reading the post.
What is a Charitable Gift Annuity?
A charitable annuity is a contract between charity and donor where the donor donates to the charity institute in the form of cash, assets, or security. In return, you will get deduction tax payment along with the fixed amount in return for the rest of your life. Upon the death of the donor, the charity will receive the remaining balance of annuity. The charity organization over here is the non-profit organization. You can set up for charitable gift annuity on an individual as well as a couple of bases.
Organizations that offer charitable gift annuity include
- Arts and social service organizations
- Community foundations
- Environmental groups
- National health organizations
- Religious groups
There are multiple advantages of opting for charitable annuity over the traditional charity method. With the help of charitable annuity, one can build a long term relationship with the donor and vice-versa. The amount of payment received by the donor depends on factors like age at the time of setup of annuity gift; generally, the younger donor will receive more payments in a small amount.
The donor can reap the fruit of partial charitable tax deduction. You might be wondering why only partial charitable tax deduction. According to IRS, one part of your charity is considered as a gift and another part of charity as an investment for the donor as it will ultimately help to generate income. In case the donor donates the non-cash asset directly donor can reduce the capital gain tax burden. If the donor wants to avail the second tax benefit, then it can be done by offering long term appreciated stocks or the other property as the donation.
Annuity rates differ from one charity to another, and several factors are the determiner of these rates. These factors include the age of the donor, the amount of charity, etc. Generally, young donors’ annuity rate is often low as they are meant for the longer term. Take an example: There is a donor of 60 years of age who donate $20,000 may receive a rate of 5.2%(paying 1040 annually), while there is another donor whose age is 75 years getting 7.9%( paying 1580 annually). There might include some charities that are offering a higher rate to donors who get agree to wait for fixed years before starting to receive income.
What are the Advantages and Disadvantages of Charitable Gift Annuity?
Before making any final decision, make sure to read its advantages and disadvantages to make the best of your money and investment plan.
- Stagnant income for the lifetime;
- The benefit of partial tax deduction;
- A donation can be made in many forms include stock, cash, personal property or securities;
- A possibility of tax-free income with the donation in charitable annual annuity;
- A step towards a cause or organization you believe;
- A chance to reduce the capital gain tax liability.
- Even during inflation, payment to be made towards charity is fixed;
- It is subjected to the income tax on the income generated out of the charity;
- The donor cannot support multiple charities without multiple annuities;
- The donor will have not any control over the fund once created for an annuity.
What are the Advantages of Charitable Gift Annuity for Charities?
Even charities have several benefits of charities, curious to know what? Read the following benefits:
- Gift annuities boost the long term relationship with the donor
- CGA attracts the donor to donate by highlighting the fact that it can help to create a channel of additional income for them
- Even if the donor dies, a charity can ask for the pay the remaining balance of promised annuities
What are the Rules and Regulations for Charitable Gift Annuities?
Many organizations can help the potential donor with the charity gift annuities, and one such is the American Council on Gift Annuities. This body was established in the year 1927 with the aim to protect donors and charities. It recommended actuarial rates so that both parties can make most of it.
There are specific rules and regulations related to the American Council on Gift Annuities. Let’s have a glance at them:
- The minimum amount of gift charity is $10,000;
- The minimum age criteria to become eligible to receive payment is 60 years, before that the donor can’t avail the benefit of it;
- Charitable gift annuities must follow state guidelines such as security law and reporting;
- Charities can accept different types of gifts, such as the form of personal property, cash, securities, real estate, and other properties.
Become a part of cause you believe in and start donating with the charitable gift annuity. Before choosing any organization, make sure to do some homework about the same. Even you can hire the services of professionals for a flawless and smooth process. Take the help of your tax consultant or manager to have clarity on whether to donate or not. Till then, keep reading FinanceShed for all financial advice and ideas.