Taxwise Giving: Charitable Gift Annuities Reduce Taxes and Increase Income

What is a charitable gift annuity?
A charitable gift annuity is a simple contract between the donor and the University of Rochester. Generous charitable gift annuity rates make this form of giving ideal for many donors. A recent creative example of how such a gift can work:

Theresa Canada ’89 (EdD) recently purchased a charitable gift annuity for her mother, Mildred, on the occasion of her 52nd wedding anniversary, presenting it to her on that day as a token of her love and esteem. Theresa told us “This was a wonderful way to say thank you to my mother for all her years of love and support, as well as a way to make a gift in her name to the Warner School.” For example, in exchange for an irrevocable gift of cash or marketable securities valued at $5,000 or more, the

Theresa Canada ’89 (Ed.D.), a member of the Dean’s Advisory Committee, with her mother, Mildred (right)

University agrees to pay one or two annuitants a fixed sum each year for life. In many cases, part of each payment is tax free for a period of years, increasing each payment’s after-tax value. Payments are made quarterly. The donor qualifies for a federal income tax deduction in an amount equal to the projected charitable remainder value. The donor or another designated annuitant will receive fixed and guaranteed payments in quarterly installments each year for life. In addition, a portion of each year’s payments may be tax free for a period of years.

What asset is most commonly used to fund a gift annuity?
Appreciated stock that pays minimal or no dividend is most commonly used to fund an annuity. Spendable income increases and the donor owes no capital gains tax at the time of the gift. Rather, a portion of the annual payments from the gift annuity will be taxed as capital gain for a period of years. If the donor were to sell and reinvest this property, tax would be owed for the year of sale on the entire capital gain.

Why are gift annuities especially attractive at this time?
Current low interest rates, coupled with a volatile stock market, have created an atmosphere within which many donors are choosing to invest in charitable gift annuities. This unique giving vehicle provides guaranteed fixed income, generous rates, as well as a charitable income tax deduction.