Investing in a Charitable Gift Annuity – ‘Tis Better to Give and Receive

Most people know that giving to charities or churches results in a tax benefit. The amount of money that you give to charities in a calendar year is tax deductible, or is not counted as taxable income. That is why so many people give in the month of December. By getting in donations before December 31st, taxpayers can lessen the burden of taxation for that year. Some can even give their way into a different tax bracket, compounding the benefits. However, perhaps not as many people know about charitable giving vehicle with benefits that are far more far reaching. Investing in a charitable gift annuity benefits a charity, gets the donor an immediate tax benefit, and provides the named beneficiary (can be the donor) with a lifetime annuity.

Not every nonprofit organization allows investing in a charitable gift annuity through their charity because it does pose a certain amount of risk to the organization. Because the charity promises to pay one or two annuitants a set amount for the rest of their lifetimes regardless of the performance of their investments, the charity could lose money on this deal. The whole of the charity’s holdings are used as backing for the annuity, so they also risk not only the original gift, but also other donations. However, nonprofit organizations typically keep most of their excess funds in fairly safe investment vehicles to protect against insufficient funds.

Investing in a charitable gift annuity is basically establishing a contract between yourself and the not for profit company. In essence, your part of the contract is the original lump sum donation. The year that this lump sum is given to the charity, you can claim it on your tax forms, deducting it from your income. This gives you a large initial savings on income tax. In addition, the contract lays out a start date and set amount to be paid to one, or possibly two, annuitants (also called beneficiaries).

Starting on the agreed upon date, an annuity will be paid to those beneficiaries for the remainder of their lives. If you subtract the amount you saved on taxes and the amounts paid out to the annuitants, you have really given away a much smaller amount, but with tax benefits that few investments can offer. Rates and percentages when investing in a charitable gift annuity are often based on age of the annuitant. They are usually lower than commercial annuity rates because part of the donation is intended as a gift for the organization.

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