A Win-Win Gift to Charity

Question:  You wrote a column in June about Charitable Remainder Trusts and how they can provide a donor with an annual income and a tax deduction while also helping a charity. I would like to increase my annual income. With interest rates so low, my savings is generating next to nothing.  My tax advisor suggested that I look into a Charitable Gift Annuity.  The charity I have in mind says they are not licensed for gift annuities. What can I do?

Answer.  A CGA is a contract between you and a bona fide charity (i.e., non-profit organization) in which you agree to give money or property to the charity in exchange for income for one or two lives.   CGAs are particularly popular today due to the low yields on savings accounts, bonds, money market funds, and CDs.  Because a CGA contract is a form of life insurance, California charities that offer them must receive a Certificate of Authority from the California Department of Insurance.  The annuity is backed by the charitable organization’s total assets and unlike commercial annuities is not protected by the California Life and Health Insurance Guarantee Association. 

Most national non-profit organizations and some local ones offer CGAs.   Local organizations offering CGAs include Montage Health (formerly Community Hospital Foundation), the Hospice Giving Foundation, and the Community Foundation for Monterey County (CFMC).  Because the Community Foundation’s mission is to support local philanthropy and serve as stewards for other agency’s funds, their gift annuity program is set up to allow you to donate cash or marketable securities, receive a tax deduction along with income for life, and establish an endowment for your favorite local charity even though that charity itself does not offer CGAs.   (Disclosure:  I am on their Board). 

Here is an example of how a CGA might work. Marie, a 75-year-old widow, volunteers at MusicKids, a local charity that does not offer CGAs.  Marie owns a $100,000 CD that is about to mature.  She can renew the CD at 1.5% and receive $1,500 of income per year.    She asks CFMC about an annuity and is told she could receive $5,800 per year for the rest of her life and that $4,819 of that payment would be tax-free.  Furthermore she will receive an immediate income tax deduction of $42,161.  MusicKids can expect an endowment of as much as $100,000 upon Marie’s death. (Marie has the flexibility to change the beneficiary later on.)

If you are thinking about a CGA then consider the following: 

  1.  You can transfer cash and appreciated property in exchange for the gift annuity;
  2.  You can contribute now and defer your annuity payments until a future date, allowing you to get the tax deduction now and bigger annuity payments later; 
  3.  CGAs are relatively economical and convenient to implement when compared to some other life-income gift techniques, such as the Charitable Remainder Trust; 
  4.  In some cases, you will have to file a gift tax return; 
  5.  The Charity should demonstrate their financial strength and explain to you how your annuity is protected; 
  6.  You should consult with a trusted, impartial advisor.  This could be your attorney, tax accountant, or wealth manager.     

 

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to ken@montereypw.com.