What a charitable gift annuity is and how the money flows

A charitable gift annuity is a contract between you and a charity where you give the charity a lump sum of money or securities, and in return the charity pays you a fixed income for the rest of your life. The charity keeps whatever money remains after you die. Unlike a commercial annuity you buy from an insurance company, this arrangement lets you support an organization you care about while receiving predictable payments.

The mechanics are straightforward. You transfer cash or stock to the charity. The charity invests that money. Each month or quarter, the charity sends you a payment based on a percentage of what you gave them and your age when you started. The older you are, the higher your payment rate, because the charity expects to pay you for fewer years. When you pass away, the remaining balance stays with the charity — that is the charitable part.

The charity does not have to be a large national organization. Many mid-sized nonprofits, universities, and religious institutions offer these contracts. The charity must be registered as a tax-exempt organization under IRS rules, and it must be willing to set aside your money in a reserve fund separate from its operating budget.

Key Takeaways

  • You give a charity a lump sum, and the charity pays you a fixed percentage of that amount each year for your lifetime.
  • Payment rates vary by age and by charity, but typically range from 4 percent to 8 percent annually depending on how old you are when you start.
  • Part of your payment is treated as a return of your own money (not taxed), part as ordinary income (taxed), and part may be taxed as capital gains if you donated appreciated stock.
  • You receive a charitable deduction in the year you fund the annuity, but the deduction is reduced by the present value of the payments you will receive.
  • The charity keeps the remaining balance after you die, so this works best if you want to support an organization and do not need to leave the full amount to heirs.

How payment rates are set and what you actually receive

The payment rate — the percentage of your initial gift you receive each year — is not set by the charity alone. The American Council on Gift Annuities publishes recommended rates that most charities follow. These rates change annually and depend on your age and whether you are the only person receiving payments or if payments continue to a spouse or other beneficiary after you die.

A 65-year-old might receive 5.1 percent annually. An 80-year-old might receive 7.4 percent. A 55-year-old might receive 4.3 percent. The older you are, the higher the rate, because statistically you have fewer years left to receive payments. Some charities offer rates slightly higher or lower than the recommended amounts, so it is worth asking what rate they offer before you commit.

If you give $100,000 at age 70 and the rate is 6.2 percent, you receive $6,200 per year. That payment stays the same for life — it does not increase with inflation, and it does not decrease if the market drops. This predictability is one reason people choose annuities over other giving methods.

Tax treatment of your payments and the charitable deduction

The tax picture has three parts. First, you get a charitable income tax deduction in the year you fund the annuity. The deduction is not the full amount you gave — it is reduced by the present value of all the payments the charity will owe you over your lifetime. The IRS publishes tables to calculate this. If you give $100,000 and the present value of your lifetime payments is $60,000, your deduction is $40,000.

Second, each payment you receive is split into three components. Part is a return of your own principal (not taxed). Part is ordinary income from the charity's investment earnings (taxed at your ordinary income rate). Part may be capital gains if you donated appreciated stock instead of cash (taxed at capital gains rates). The charity sends you a statement each year showing how much of your payment falls into each category.

Third, if you are over 59½ and you funded the annuity with cash, the tax-free portion of your payment is usually larger, which is favorable. If you are under 59½, the rules are stricter. If you funded it with appreciated stock, you may owe capital gains tax on part of the gain in the year you make the gift, even though you have not received any payments yet. This is a significant detail — talk to a tax professional before donating appreciated securities.

Who offers charitable gift annuities and what to check before you commit

Universities, hospitals, religious organizations, and large nonprofits commonly offer these contracts. Smaller charities sometimes do too, but they must have the financial stability to may provide payments for decades. The charity typically works with a third-party administrator or insurance company to manage the annuity fund and may support payments are made reliably.

Before you fund an annuity, ask the charity three things. First, what is their payment rate and how does it compare to the American Council on Gift Annuities recommended rate for your age? Second, who administers the fund — is it the charity itself, an insurance company, or a third party — and what happens if that administrator fails? Third, does the charity have a reserve fund policy that protects annuitants if the charity faces financial trouble?

You can also check whether the charity is rated by charity watchdog organizations like Charity Navigator or GiveWell. A strong financial rating does not may provide the annuity will be paid, but it is a sign the organization is stable. Some states regulate charitable gift annuities, so you may also want to ask whether your state requires the charity to register or file reports about the annuity program.

When a charitable gift annuity makes sense versus other options

A charitable gift annuity works well if you have a lump sum you want to give away, you need predictable income, and you support the charity's mission. It is especially useful if you have appreciated stock you want to donate — you avoid capital gains tax on most of the gain, and you get income for life.

It is less useful if you need the money to pass to your heirs. Once you die, the charity keeps the balance. If you want your children to inherit the funds, a different structure — such as a charitable remainder trust or a donor-advised fund — might work better. It is also less useful if you think you will need access to a large sum of money in an emergency, because the annuity contract is binding and you cannot get your principal back.

If you are young (under 60), the payment rate will be low, and you might get better returns investing the money yourself. If you are very old (over 85) and in poor health, the payment rate will be high, but you should understand that the charity is betting you will not live long enough to receive the full value of your gift — that is how they profit from the arrangement.

What happens if the charity closes or faces financial trouble

This is the biggest risk. If the charity goes bankrupt or closes, your annuity payments could stop. The charity's creditors might try to claim the annuity fund. Some states have laws that protect annuitants by requiring charities to hold the funds in a separate reserve, but not all states do, and the protection varies.

To reduce this risk, choose a charity with a long track record and strong finances. Ask whether the annuity fund is held separately from the charity's general operating funds — it should be. Some charities buy insurance or reinsurance to back up their annuity obligations. Ask whether yours does. If the charity uses a third-party administrator or insurance company, that adds a layer of protection, because the administrator may be required by law to protect the funds even if the charity fails.

You can also structure the annuity with a survivor beneficiary — usually a spouse — so that payments continue to them if you die. This does not protect you if the charity fails, but it ensures your spouse is not left without income if you pass away first.

How to start the process with a charity

Contact the charity's development office or gift planning department and ask whether they offer charitable gift annuities. Many charities have a gift planning specialist who can walk you through the process. They will ask you how much you want to give, your age (and your spouse's age if you want survivor payments), and whether you are giving cash or securities.

The charity will provide a contract that spells out the payment rate, the payment schedule (monthly, quarterly, or annually), and what happens if you die. Read it carefully or have a lawyer review it. The contract is binding, so you want to understand every term. The charity will also provide an illustration showing your total expected payments over your lifetime and the charitable deduction you will receive.

Once you sign, you transfer the money or securities to the charity. If you are giving stock, the charity will provide instructions on how to transfer it. The charity then invests the funds and begins sending you payments according to the schedule. You will receive a statement each year showing how much of your payment is taxable and how much is tax-free.

Frequently Asked Questions

Can I change my mind after I fund the annuity?

No. A charitable gift annuity is a binding contract. Once you transfer the money or securities, you cannot get it back. If you think you might need the funds later, do not fund an annuity. If you are unsure, start with a smaller amount to test whether the arrangement works for you.

What if I live much longer than expected?

You keep receiving payments for as long as you live. The charity cannot stop paying you because you have outlived their projections. This is one of the protections built into the contract — it guarantees income for your entire lifetime, no matter how long you live.

Can I fund a charitable gift annuity with my IRA or 401(k)?

Not directly. If you withdraw money from an IRA or 401(k) to fund an annuity, you owe income tax on the withdrawal. However, if you are over 72 and subject to required minimum distributions, you can sometimes satisfy your RMD by directing a distribution to a charity, which avoids the tax. Talk to a tax professional about your specific situation.

Do I owe taxes on the full payment I receive each year?

No. Part of each payment is a return of your own principal and is not taxed. Part is taxable income. The charity sends you a statement each year breaking down the taxable and non-taxable portions. You report only the taxable portion on your tax return.

What if the charity offers a higher rate than the recommended rate?

Be cautious. A rate significantly higher than the American Council on Gift Annuities recommendation may signal that the charity is in financial trouble or is not being conservative with its reserves. Ask why they are offering a higher rate and whether they have reinsurance or other protections in place.