What are Charitable Gift Annuities and how do they work?

What is a Charitable Gift Annuity?

Have you ever wondered, “How do Charitable Gift Annuities Work?”

A charitable gift annuity is an excellent tool for charitable giving. Most charities and religious organizations offer gift annuities. Here I will outline some aspects of the gift annuity and I encourage anyone who is interested in pursuing this financial opportunity to contact their local charity.

The basic premise of the charitable gift annuity is the donor gives a gift to the charity and the charity agrees to pay an annual annuity to the beneficiary for the remainder of the beneficiary’s life. Upon the beneficiary’s death, the agreement terminates and the charity is under no further obligation.

Taxes and the Charitable Deduction

The donor is entitled to a charitable deduction in the year of the original gift. This deduction is calculated by determining the present value of the annuity payments and subtracting that value from the gift amount. During the beneficiary’s IRS-determined life expectancy, the beneficiary receives some of the annuity as tax-free income and the rest is ordinary income.

Types of Assets Used for Gift

The most common asset used to fund gift annuities is cash, but other assets are sometimes used. Typically, the asset most used other than cash is equities. Here is where one of the great benefits of the gift annuity comes into play. When a gift annuity is made, all of the capital gains from the stocks are spread over the life of the beneficiary (some limits apply). Other assets may be used, such as real estate, but often complicate the process of the gift enough that most charities try to stick to cash or stock gifts.

Interest Rates

The interest rate given by the charity is a fixed rate, and is often determined by the recommendations of the American Council on Gift Annuities. The council reviews the recommended rates at least once a year and occasionally makes changes based on economic conditions. Individual charities have the option of differing from the recommended rates, but most have policies against it.

All charitable gift annuity interest rates are based on the age of the beneficiary to the annuity. The older the beneficiary, the higher the rate.


A charitable gift annuity can be a one-life or a two-life annuity. Interest rates for two-life annuities are generally lower than for a one-life annuity due to the expectation of a longer joint-life expectancy. Beneficiaries cannot be changed after making the gift.

Deferred Annuities

Many charities also offer deferred annuities, where the donor gives money today but elects to receive payments at least 1 year down the road. This can be a great tool for retirement planning as the interest rate is based on the age at which payments begin (thus the rate on a deferred annuity is higher than the rate on an immediate annuity).

Additionally, a charitable gift annuity can have a flexible payment date. In a flexible deferred annuity, the payout rate changes depending on what year the annuitant eventually decides to draw on the annuity (similar to social security).

Example: One-life Immediate Annuity

Smith, born on June 1, 1950, gives charity a $10,000 gift of cash for a gift annuity on October 31, 2009. Smith decides to receive quarterly payments beginning on December 31, 2009. Smith is entitled to a $2,418.60 charitable deduction today, and receives an interest rate of 5%. The charity puts the $10,000 into their gift annuity reserve fund (standard practice). For the rest of Smith’s life, he receives a quarterly payment of $125. When Smith dies, approximately $5,000 of the original gift is remaining for the charity to use.

Charitable Gift Annuities are an excellent way for charitable individuals to give and still ensure their own financial security. For more information, contact your preferred charity.

This guest post was written by Benjamin Clark who writes for ModernGraham.com.

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  1. Mike

    I think charitable gift annuity is much better than other conventional annuities. It is less expansive, less complicated and more importantly it doesn’t come with hidden charges. If anyone buys a charitable gift annuity, he will secure his future as well as get the pleasure of doing some charity.

  2. SC Green

    I still don’t quite get it. If, from the above example, Smith lives for 30 years at $500 a year, that’s a payout of $15,000 for a $10,000 contribution. How does the charity make up the difference and come out ahead by $5,000? – SC Green