What Is a Charitable Gift Annuity?

A charitable gift annuity allows you to donate money to a non-profit, such as your alma mater or another non-profit organization. In return, you’ll get tax benefits and fixed income for the rest of your life. Charitable gift annuities are often part of planned giving, frequently used by retirees who are seeking an additional income stream while getting the benefit of donating to charity. Here’s how to set up a charitable equity annuity and benefit from it.

A financial advisor can help you create a financial plan for your charitable needs and goals.

What Is a Charitable Gift Annuity?

A charitable gift annuity allows a donor to make a donation and, in exchange, receive fixed annuity payments for the rest of their life. Effectively, the charitable gift annuity serves as a contract between the charity and the donor, which can be either an individual or a couple.

The donor makes a large gift to a charity, usually in cash or securities, though some people donate real estate or other large financial assets. In exchange, the charity gives them a fixed stream of income for the rest of their life. The donor also can take a partial tax deduction for their donation.

Charitable gift annuity donors are often older or retired, seeking extra income in retirement while also supporting a charity.

How Charitable Gift Annuities Work

Many large nonprofit organizations offer gift annuities, especially colleges and universities. If you are interested in setting up a charitable gift annuity, your first step is confirming that the group you want to donate to offers them.

Assuming they do, your next step is to make the sizable donation you have planned. The minimum amount you can give to qualify for a charitable gift annuity is usually $5,000 or $10,000. However, many charitable gifts are usually much larger than that.

The charity then sets your gift aside in a reserve account and either invests it or puts it into an account that accrues interest. You will then receive a scheduled, fixed monthly or quarterly payout, usually supported by your original donation, for the rest of your life. After you die, the charity then gets to keep the rest of the gift.

Potential Drawbacks of Charitable Gift Annuities

While charitable annuities allow you togive money to charity and get a steady, albeit small, income for the rest of your life, they do have drawbacks.

For one, most of the time, you don’t get any inflation protection with charitable gift annuities. Typically, with an annuity, you can often pay extra or receive smaller payments at first in exchange for inflation-adjusted payments. This is designed to help make up for the fact that, if you’re going to receive payments for the next 20 or 30 years, the real value of a $100 or $1,000 annuity check will be a lot less than it is today.

Additionally, the amount of money you get each month or quarter from a charitable gift annuity depends on your age when you set it up. If you were relatively young, and therefore likely to collect more payments, those payments will be smaller. However, if you are older, and therefore likely to pass away sooner, the payments will be larger. If a couple sets up a charitable donation, the same process applies, except the charity must wait until both spouses pass away to receive the remainder of the gift.

Charitable Gift Annuities and Taxes

Annuitants can take a tax deduction based on the portion of their gift expected to go to charity after annuity payments.

Annuitants, or those who benefit from the charitable gift annuity, can take a tax deduction when they give the original gift. The deduction depends on the estimated amount that will actually go to charity after all annuity payments are made.

The charity will work with the annuity provider to estimate the donor’s life expectancy. Depending on that estimate, the donor may receive partial annuity payments tax-free for a period of time.

The Internal Revenue Service (IRS) breaks down the charitable gift annuity down into two components. The first is the contribution to the charity, which the IRS views as a charitable donation. The second part, the donor’s investment, generates payouts.

Meanwhile, a charity may let you donate long-term appreciated stocks or other property in place of cash. In that case, you may reduce or eliminate the capital gains tax you’d pay if you sold these assets before donating their proceeds. The same applies if you donate long-term appreciated securities or personal property to any public charity that can accept them.

However, part of your annuity income is taxable at the federal level. It’s also taxable at the state level if the state you live in has an income tax. Consider talking to a financial advisor or tax specialist who has experience with charitable gift annuities before you sign any documents.

Who Should Consider a Charitable Gift Annuity?

Charitable gift annuities are generally suited for older donors, often those in their 60s or above, who want to support a nonprofit while also securing a steady income stream during retirement. Because payouts are based on life expectancy, older donors typically receive higher payments than younger donors.

These annuities may also be attractive to individuals with highly appreciated assets, such as long-term stock holdings or real estate. Donating these items through a charitable gift annuity can reduce or eliminate capital gains taxes while still producing lifetime income.

Additionally, couples who want to secure joint lifetime income and ultimately leave a legacy gift to a favorite institution can also benefit from this arrangement. In these cases, payments continue until both spouses pass away.

On the other hand, charitable gift annuities are typically not a good fit for individuals who need liquidity or want inflation-protected income. Since payouts are fixed and assets are irrevocably donated, these annuities are better suited for people who have other sources of retirement savings and want to combine philanthropy with financial planning.

Here’s how they stack up to alternatives you may consider:

Charitable Gift Annuity vs. Other Options

Option	Income During Life	Tax Benefits	Legacy Impact
Charitable Gift Annuity	Fixed lifetime payments based on age	Partial charitable deduction; reduced capital gains if donating appreciated assets	Remaining balance goes to the nonprofit
Outright Donation to Charity	None	Full charitable deduction in year of donation	Entire gift goes to nonprofit immediately
Keep Assets Invested	Variable, depends on market returns	Possible capital gains taxes if sold; no charitable deduction	Full value remains part of estate unless donated later

Bottom Line

Charitable gift annuities let you support a cause while receiving tax breaks and lifetime income, but payments depend on the charity’s financial stability.

Charitable gift annuities can help you donate to the charity or school of your choice. They also financially benefit you through a tax break and fixed income payments throughout the rest of your life. However, remember that your payments are only as secure as the finances of the school or charity you’re donating to. If the institution goes bankrupt, your annuity disappears, which is why it’s important to do your research beforehand.

Tax Planning Tips

Consider talking to a financial advisor before using a charitable gift annuity. The tax break may not always outweigh what you could earn from the lump sum, but it can be worthwhile if supporting a school or cause is your priority. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re trying to figure out how much you’ll get back or spend on taxes, SmartAsset’s free tax return calculator can help you with your estimate.