Charitable Gift Annuities

A charitable gift annuity lets the same dollars do two jobs at once. You transfer cash or appreciated assets to a charity, the charity pays you a fixed amount for the rest of your life, and whatever remains when payments end supports the cause you care about. Most charities follow rates suggested by the American Council on Gift Annuities, which are designed to leave roughly half of the original gift for the charity, so a gift annuity will pay less than a commercial income annuity. In exchange, you receive an immediate income tax deduction, part of each payment may be tax-free, and a gift of appreciated stock can spread the capital gain over many years. That trade, lower income for a meaningful gift and tax benefits, is the heart of a charitable gift annuity, and everything else sits on top of it.

Jason Stolz, CLTC, CRPC, DIA, CAA, is Chief Underwriter at Diversified Insurance Brokers, and charitable gift annuities are a strategy our office regularly helps clients evaluate alongside commercial income annuities. As an independent annuity broker with access to dozens of insurance carriers, our office can show you what a commercial annuity would pay on the same dollars, so you can decide with clear numbers whether a gift annuity, an income annuity, or a combination of the two best serves your income and your giving goals.

Considering a charitable gift annuity and want to compare your income options?
Compare My Income Options

Charitable Gift Annuity vs. Commercial Income Annuity

How a Charitable Gift Annuity Works

A charitable gift annuity is a contract between you and a charity. You make an irrevocable gift of cash, publicly traded securities, or in some cases other assets, and in return the charity promises to pay you, and if you choose, a second person, a fixed amount for life. The payment amount is set when the contract is signed and does not change, regardless of how the charity’s investments perform or how long you live.

Part of your transfer is treated as a gift and part as the purchase of an annuity. The gift portion produces a charitable income tax deduction in the year you make the transfer. The annuity portion produces the stream of payments. When the last annuitant dies, payments stop, and the remaining funds, often called the residuum, belong to the charity to use for its mission.

Gift annuities are offered by a wide range of nonprofit organizations, including universities, hospitals, religious organizations, and national charities. Minimum gifts and payment frequencies vary by charity, and some organizations accept only cash and marketable securities. Because the contract is irrevocable, the money cannot be taken back once the gift is made, and that is the most important point to accept before moving forward.

The income is lifetime income in the truest sense. Like a commercial immediate annuity, it converts a lump sum into payments you cannot outlive. Unlike a commercial annuity, it is built from the start to leave a meaningful amount behind for charity, and the payment rate reflects that goal.

Current Suggested Gift Annuity Rates

Most charities follow the suggested maximum rates published by the American Council on Gift Annuities, a nonprofit organization that sets the rate schedules used across much of the nonprofit sector. The rates are not required by law, but charities that offer higher rates take on more risk that the gift will be exhausted before payments end. The suggested single-life rates below are current as published by the ACGA and are subject to change when the council updates its assumptions.

Rates for two-life gift annuities are lower because payments continue until the second person dies. Under the current ACGA schedule, for example, a couple both age 65 would receive a suggested rate of 5.0%, a couple both age 75 would receive 6.2%, and a couple both age 80 would receive 6.9%.

The ACGA builds its rates on stated assumptions: a gross investment return of 5.75% a year, annual expenses of 1%, a blended mortality table, and a target that about 50% of the original gift remains for the charity when payments end. When interest rates and investment expectations change, the council revisits those assumptions, so the rate a charity offers can move up or down over time. Once your contract is signed, however, your rate is locked for life.

Why Gift Annuity Rates Are Lower Than Commercial Payouts

Comparing a gift annuity rate with a commercial annuity quote can be surprising. Because the ACGA’s suggested rates are designed to leave about half of the gift for charity, the income they produce is meaningfully lower than what an insurance company would pay on the same deposit at the same age. A commercial income annuity is priced to return the full value of the deposit as income over your expected lifetime, after the insurer’s costs and margin, with nothing set aside for a third party.

It is also important to compare like with like. A gift annuity rate is the annual payment as a percentage of the gift. A commercial annuity’s income annuity payout rate is calculated the same way, but commercial payouts vary from carrier to carrier and change frequently with interest rates. Reviewing current income annuity rates for your age gives a realistic benchmark.

The difference in income is not a flaw in the gift annuity. It is the price of the gift. The question is whether the charitable deduction, the tax treatment of payments, the capital gains benefit, and the satisfaction of supporting a cause outweigh the income you give up. For donors with strong charitable intent, the answer is often yes. For someone whose main goal is the highest possible lifetime income, a commercial annuity will usually be the better fit, and our office can show the difference in actual dollars.

Some charities offer rates below the ACGA’s suggestions, particularly for younger donors or smaller gifts, and a few in certain states may need to follow state-specific rules. Checking the offered rate against the published schedule is a simple way to make sure you are being treated fairly.

Want to see a commercial annuity quote next to a gift annuity offer?
Get a Side-by-Side Quote

The Tax Picture: Deduction, Payments, and Capital Gains

A charitable gift annuity carries three separate tax effects. The first is the charitable deduction. In the year you make the gift, you can generally deduct the difference between the amount you transfer and the present value of the annuity payments you will receive. That present value is calculated using IRS tables, your age, the payment rate, and a federal discount rate that changes monthly, so the same gift can produce a slightly different deduction depending on when it is made. The deduction is available only if you itemize and is subject to the usual percentage-of-income limits, and recent federal law changes affect how itemized charitable deductions are calculated. Our summary of the One Big Beautiful Bill tax changes covers those updates.

The second effect is how payments are taxed. For a gift annuity funded with cash, each payment is generally split into a tax-free return of your investment in the annuity and ordinary income. The tax-free portion is spread over your life expectancy, which is why our explanation of how life expectancy is calculated is relevant here. Once you outlive that life expectancy, payments generally become fully taxable as ordinary income. This exclusion-ratio approach is similar to the way payments from a commercial annuity bought with after-tax money are taxed, as our guide to non-qualified annuity taxation explains.

The third effect applies when you fund the annuity with appreciated securities. Instead of recognizing the entire capital gain when the charity receives the stock, the gain attributable to the annuity portion is generally reported gradually over your life expectancy, as long as you are an annuitant. The gain attributable to the gift portion is not taxed. That combination can make a gift annuity an efficient way to convert highly appreciated, low-dividend stock into fixed lifetime income.

The charity will provide the annual tax reporting showing how each year’s payments are divided. Because the details depend on your full tax situation, the decision should always be reviewed with a tax professional. Our overview of how annuities are taxed offers useful background for that conversation.

How the Charitable Deduction Is Calculated

The charitable deduction for a gift annuity is not the full amount you transfer, and understanding why helps set expectations. The calculation treats your transfer as two pieces. One piece buys the stream of annuity payments you will receive. The other piece is the gift. Only the gift piece is deductible.

To value the annuity piece, the charity uses IRS actuarial tables and the federal discount rate in effect for the month of the gift, sometimes called the Section 7520 rate. The calculation estimates the present value of all the payments you are expected to receive based on your age and the payment rate. Subtracting that present value from the amount you transfer produces the deductible gift. Older donors generally receive a larger deduction relative to the gift because fewer payments are expected, while two-life annuities and younger donors generally produce a smaller deduction.

The discount rate matters as well. Because the rate changes monthly, and donors are typically allowed to use the rate for the month of the gift or either of the two preceding months, the timing of a gift can modestly affect the deduction. A higher discount rate generally reduces the present value of the payments and increases the deduction.

Once calculated, the deduction is subject to the same rules as other charitable gifts, including percentage-of-income limits that depend on the type of asset given, with a carryforward for amounts that exceed the limit. The charity will provide the calculation, and your tax professional can confirm how it applies to your return. Jason can review that illustration with you alongside commercial annuity alternatives so you see the full financial picture.

Gifts of Appreciated Stock: A Closer Look

Funding a gift annuity with appreciated securities is often where the strategy is most powerful. Consider a donor holding stock bought long ago at a low cost that now pays little or no dividend. Selling the stock to buy a commercial annuity would trigger capital gains tax on the entire gain in the year of the sale, reducing the amount available to produce income.

When the same stock is transferred directly to a charity in exchange for a gift annuity, the charity can sell it without paying tax. The donor’s capital gain is divided between the gift and annuity portions. The gain on the gift portion is not taxed at all, and the gain on the annuity portion is generally reported gradually over the donor’s life expectancy as part of the annual payments, as long as the donor is an annuitant. Each payment can then contain three parts: a tax-free return of basis, capital gain, and ordinary income.

For appreciated securities held for more than one year, the deduction for the gift portion is generally based on fair market value. Securities held for one year or less are treated differently, so holding periods should be confirmed before the transfer. The shares should be transferred directly to the charity rather than sold first, since selling them yourself would trigger the full gain.

This approach can also help a donor diversify out of a concentrated position in a single stock while turning it into fixed income. Because the tax results depend on the cost basis, holding period, and the donor’s overall tax situation, the transfer should be coordinated with a tax professional and the charity’s planned giving office in advance.

Funding a Gift Annuity From Your IRA

Federal law now allows a one-time opportunity to fund a charitable gift annuity directly from an IRA. Under the qualified charitable distribution rules, an IRA owner age 70½ or older can make a single election to direct a limited amount, which started at $50,000 and is adjusted annually for inflation, to a charitable gift annuity or certain charitable remainder trusts. The rules are set out in Section 408(d)(8)(F) of the Internal Revenue Code.

The requirements are specific. The gift annuity must be funded exclusively by qualified charitable distributions, it must begin fixed payments of 5% or more no later than one year after funding, only the IRA owner, the owner’s spouse, or both may receive payments, and the payment interest cannot be assigned to anyone else. The election can be made only once.

The tax treatment differs from a gift annuity funded with cash. The distribution from the IRA is not included in income, but there is no charitable deduction for it, and every payment from the gift annuity is taxed as ordinary income. For many retirees, the main benefit is that the distribution counts as a qualified charitable distribution, which can help manage required minimum distributions. Our guide to qualified charitable distributions and our overview of RMD rules after SECURE 2.0 explain how these pieces fit together.

Because the dollar limit is modest, and because the 5% minimum payment rule can come into play when a younger spouse is included as a second annuitant, not every charity offers IRA-funded gift annuities, and some set their own minimums. Confirming the charity’s policy and coordinating with your IRA custodian before year-end deadlines is essential.

Immediate, Deferred, and Flexible Gift Annuities

Most gift annuities begin payments within a year of the gift, which makes them immediate gift annuities. Donors who do not need income yet can choose a deferred gift annuity instead, with payments starting at a future date that is at least a year away. Under the ACGA’s methodology, the payment rate for a deferred gift annuity reflects interest compounding during the deferral period at an assumed rate of 4.75%, so the longer the deferral, the higher the eventual payment rate.

A deferred gift annuity has two advantages for younger donors. It produces a higher payment rate than an immediate annuity started at the same age, and the charitable deduction is taken in the year of the gift, which can be valuable in a high-income year such as the sale of a business or a large bonus. Payments can then begin in retirement, when the donor may be in a lower tax bracket.

Some charities also offer flexible deferred gift annuities, which let the donor choose the starting date within a range, with a higher rate for a later start. That flexibility can be useful when retirement timing is uncertain. The concept mirrors a commercial deferred income annuity, where income is purchased today and paid later, although the commercial version is designed for maximum income rather than a charitable gift.

Deferred and flexible designs are not offered by every charity, and the terms vary, so they are best compared side by side with an immediate gift annuity and with a commercial deferred income annuity before choosing.

Gift Annuities Compared With Charitable Remainder Trusts

Charitable gift annuities are often compared with charitable remainder trusts, which also provide income to the donor and leave the remainder to charity. The two tools work differently. A charitable remainder trust is a separate legal entity, usually drafted by an attorney, with a trustee who invests the assets. A charitable remainder annuity trust pays a fixed dollar amount each year, while a charitable remainder unitrust pays a fixed percentage of the trust’s value as revalued each year, so its payments can rise or fall with the investments.

Federal rules require a charitable remainder trust to pay out at least 5% and no more than 50% of its value each year, and the present value of the amount expected to pass to charity must be at least 10% of the initial contribution. Trusts can be tailored in ways gift annuities cannot, including naming several charities, choosing the trustee, and in some cases paying income for a term of years rather than for life.

That flexibility comes with costs. Setting up and administering a trust involves legal, investment, and tax-filing expenses, which is why charitable remainder trusts are generally used for larger gifts. A gift annuity, by contrast, is a simple contract with a charity, often available for much smaller gifts, with no separate trust to manage.

Another difference is security. Gift annuity payments are backed by the charity’s general assets, while trust payments depend on the trust’s own investments. For donors who want a simple fixed payment without administration, a gift annuity is usually the simpler choice. For larger gifts or donors who want investment control, a trust may be worth discussing with an estate attorney.

Gift Annuities and Donor-Advised Funds

Donor-advised funds have become one of the most popular ways to give, and donors sometimes ask whether a donor-advised fund can be used to fund a gift annuity. Generally, it cannot. Grants from a donor-advised fund cannot provide a personal benefit to the donor, and lifetime income from a gift annuity is exactly that kind of benefit.

The two tools serve different purposes. A donor-advised fund provides an immediate deduction and lets the donor recommend grants to charities over time, but it pays nothing back to the donor. A gift annuity provides lifetime income in exchange for a smaller deduction, with the remainder going to a single charity at the end.

Some donors use both. Assets that the donor does not need for income can go to a donor-advised fund for flexible giving over the years, while a portion of the portfolio that should produce income can fund a gift annuity or a commercial income annuity. Deciding how to divide the assets starts with how much income you need, which is where comparing gift annuity and commercial annuity income becomes valuable.

One Life or Two

A gift annuity can cover one person or two. A two-life gift annuity, usually for spouses, pays until the second person dies, either jointly and to the survivor or one after the other. Because the charity expects to pay for a longer period, two-life rates are lower than single-life rates at the same ages, as the ACGA examples above show.

The choice works much like the decision between single and joint payouts on a commercial annuity. A couple who would rely on the income after the first death usually needs two-life coverage. A couple with other income sources may prefer the higher single-life rate on one spouse’s life. Our page on a joint income annuity for spouses walks through the same trade-off in the commercial market.

Naming a second annuitant who is not your spouse raises additional tax questions, because providing someone else with a right to future payments can be treated as a gift to that person. Those situations should be reviewed with a tax advisor before the contract is signed.

How Secure Are Gift Annuity Payments?

A charitable gift annuity is a promise from the charity, backed by its general assets. It is not an insurance product, and it is not protected by the state guaranty association system that stands behind commercial annuities up to state limits. If a charity were to fail, annuitants would generally be creditors of the charity.

State regulation provides some protection, but it varies widely. Some states require charities to register or obtain a permit before issuing gift annuities and to maintain segregated reserves, while others require only a notice filing or impose few requirements at all. The protection you receive can depend on the state where you live and the state where the charity operates.

The practical safeguard is to choose an established charity with a long history of operating a gift annuity program, substantial assets relative to its gift annuity obligations, and transparent financial reporting. Large, well-funded institutions are generally better positioned to honor payments for decades than small organizations with limited reserves. Asking how the charity manages its gift annuity reserves and how long its program has operated is a reasonable part of the decision.

A Gift Annuity Versus Income Annuity Plus a Separate Gift

There is a useful alternative worth modeling before committing to a gift annuity. Instead of giving the full amount to the charity in exchange for a gift annuity, a donor can split the money: use part of it to buy a commercial income annuity for lifetime income, and give the rest directly to the charity today. Because a commercial annuity pays more per dollar, it may take less than the full amount to produce the same income, leaving a portion to give outright, with a charitable deduction for that direct gift.

Each approach has advantages. The split approach can deliver the same income with a larger immediate gift to the charity, puts the income under the protection of the insurance system, and lets the charity use its gift now rather than at the donor’s death. The gift annuity is simpler, keeps the donor’s relationship with one charity, and offers a capital gains advantage when funded with appreciated stock that the split approach cannot match without selling the stock first.

Commercial income annuities also come with trade-offs, including the loss of access to the principal once income starts, as our discussion of the drawbacks of lifetime income annuities explains. The right answer depends on the assets you plan to use, your tax bracket, how much income you need, and when you want the charity to benefit. Jason can run both versions with real commercial quotes so the comparison is based on actual numbers rather than assumptions.

Replacing the Gift for Your Heirs

Some donors hesitate because a gift annuity reduces what they leave to their children or other heirs. A long-standing planning approach addresses that concern directly. The tax savings and income from the gift annuity can be used to pay premiums on a life insurance policy, often owned by a trust, whose death benefit replaces the value of the gifted assets for the family.

This combination, sometimes called wealth replacement, allows a donor to support a charity, receive lifetime income, and still pass on a comparable amount to heirs, with the life insurance proceeds generally received income tax-free. Our article on life insurance in estate planning explains how insurance is used for this kind of planning.

Wealth replacement depends on the donor’s insurability and on the premium being affordable relative to the income and tax savings. It works best when it is planned at the same time as the gift, so the numbers for the gift annuity, the insurance, and the estate plan can be reviewed together with your attorney and tax advisor.

Want to see whether an income annuity plus a direct gift would serve you better?
Run the Comparison

Planning Around Inflation and Longevity

Gift annuity payments are fixed for life, which is a strength and a weakness. The certainty is valuable, but fixed payments lose purchasing power over time. At an average inflation rate of 3%, a fixed payment buys about half as much after roughly 24 years. For a donor in their seventies or eighties, that erosion matters less than it does for a younger donor who may receive payments for decades.

One common way charities and donors address this is by laddering gift annuities. Instead of making one large gift at a single age, a donor can establish several smaller gift annuities over a period of years. Because suggested rates rise with age, each later annuity pays a higher rate than the one before, and the total income grows over time. Laddering also spreads the timing of deductions and allows the donor to reassess needs before each new gift.

Fixed gift annuity income also works best alongside income that does adjust for inflation, such as Social Security. Donors who want inflation protection on a portion of their guaranteed income may also consider commercial options, such as an inflation-protected income annuity, for the part of their plan that must keep pace with rising costs.

Longevity cuts the other way. A gift annuity, like a commercial income annuity, pays for life no matter how long that is, so a donor who lives well beyond life expectancy continues to receive income long after the payments have exceeded the original gift. That lifetime guarantee is one of the most valuable features of both products.

Common Mistakes to Avoid

A few mistakes come up repeatedly with gift annuities. The first is treating a gift annuity as an investment. It is primarily a gift, and the income is lower than a commercial annuity would pay. Donors who are not motivated by the charitable purpose are usually better served elsewhere.

The second is giving more than you can afford to part with. The gift is irrevocable, and the principal cannot be recovered later for a medical expense, long-term care, or another emergency. Keeping adequate liquid reserves before funding a gift annuity is essential. The third is failing to compare the offered rate with the ACGA’s suggested rates and to check the charity’s financial strength and its standing in your state.

The fourth involves IRA-funded gift annuities: missing the requirements, such as funding the annuity exclusively with qualified charitable distributions or meeting the deadline for the distribution in a given tax year, can undo the intended tax result. The fifth is overlooking the tax consequences of naming someone other than a spouse as a second annuitant. Each of these mistakes can be avoided with a careful review before signing, and our office is glad to help coordinate that review with your tax advisor.

Who a Charitable Gift Annuity Fits

A charitable gift annuity tends to fit people who already intend to leave money to a charity and would like income from those dollars during their lifetime. It is especially attractive for donors in their seventies and eighties, when suggested rates are highest, and for those who own highly appreciated stock that pays little income, since the gift annuity can convert it into fixed payments while spreading the capital gain over time.

It also suits donors who value simplicity and certainty. Payments are fixed, they do not depend on market performance, and there is nothing to manage once the contract is signed. For donors who want to see the impact of their gift while they are alive, a deferred gift annuity in the earlier years or a direct gift alongside a commercial annuity may be worth considering as well.

A gift annuity is a weaker fit for anyone whose primary goal is the highest possible income, who may need access to the principal later, or who wants the remaining value to pass to family. It is also less suitable for someone concerned about inflation, since payments never increase, and for anyone uneasy about relying on a single charity’s financial strength for decades of income. In those cases, a commercial annuity or a different charitable strategy may serve better.

Questions to Ask the Charity Before You Sign

Before committing to a gift annuity, a few questions help confirm that the offer is sound. Start with the rate: ask whether it matches the ACGA’s suggested maximum for your age and, if not, why. Then ask about the charity’s program: how long it has issued gift annuities, how it manages and invests the reserves that back them, and whether it is registered or permitted to issue gift annuities in your state.

Next, ask about the mechanics. Find out the minimum gift, which assets the charity accepts, how often payments are made, and when the first payment will arrive. Ask for the disclosure statement and a sample contract, and request an illustration showing the charitable deduction and how payments will be taxed each year.

Finally, ask how the residuum will be used. Many charities allow donors to direct the remaining funds to a specific program or endowment, which can make the gift more meaningful. Taking the time to ask these questions protects your income and makes sure your gift accomplishes what you intend.

It also helps to ask what happens if your circumstances change. Because the contract is irrevocable, the charity cannot return the gift, but some organizations allow an annuitant to give up the remaining payments as an additional gift later, which can produce a further deduction. Ask whether that option exists, how payments would be handled if you move to another state, and whom to contact for tax documents each year. Getting those answers in writing, and reviewing them with your tax advisor alongside a commercial annuity quote, gives you a complete picture before you commit.

How Our Office Helps

Charitable gift annuities are issued by charities rather than insurance companies, so our office’s role is to help you make an informed comparison. Jason can review a gift annuity offer, explain how the rate compares with the ACGA schedule, and place it next to commercial income annuity quotes from multiple carriers for the same dollars and the same ages.

When a commercial annuity is part of the plan, whether alone or alongside a direct gift, we shop the market for the strongest payout from highly rated carriers and help you choose features such as joint income, cash refund, or period certain protection. When wealth replacement is part of the conversation, we can also review life insurance options and coordinate the numbers with your tax advisor and estate attorney.

Many donors also involve family members in the decision, since a gift annuity changes what passes to heirs. Jason is glad to walk adult children or other advisors through the numbers, so everyone understands how the gift, the income, and any wealth replacement coverage fit together, and so the plan you choose has the support of the people who matter most to you. That conversation often surfaces questions about liquidity, long-term care, and timing that are best answered before the gift is made rather than after.

Because we are independent, our goal is the right outcome for your income and your giving, not a particular product. If a charitable gift annuity is the best fit, we will tell you so and help you evaluate the offer. If a different structure would deliver more income or a larger gift, we will show you how.

Ready to compare a gift annuity with your other income options?
Request My Comparison