Gift Annuities Benefit Donors, Nonprofits

Charitable annuities are the gifts that keep giving.

These vehicles allow individuals to support a charity, reduce their tax bill and secure a steady stream of payments for life.

The rates paid to annuity beneficiaries are scheduled to decrease in February, but they're still attractive in today's depressed market.

The American Council on Gift Annuities, a nonprofit that sets the rates that guide annuity payments, cut its recommended rates by .4% to .7% for annuities funded after Feb. 1.

But with guaranteed rates of 5.3% to 9.5% for individuals 65 and older, gift annuities compare favorably with cash-like investments. Five-year certificates of deposit are yielding 2.78%, for example, and the yield on 10-year Treasurys is 2.67%.

For someone seeking a fixed payment, "in the midst of a recession, those rates still look pretty good," says Tony Martignetti, managing director of Martignetti Planned Giving Advisors.

The annuity rate reductions are a result of deep declines in both long and short-term interest rates — markers used in calculating rates, says Cam Kelly, assistant vice president for principal gift programs at Duke University, who chairs the council's rates committee. Lower rates will help charities preserve their assets.

Charities aren't required to adopt the recommended rates but most will, Kelly said.

Under the new rates, a 70-year-old donor making a charitable gift of $100,000 would receive $5,700 a year, down from $6,100 under the current rates. Tax advantages vary with an individual's specific circumstances.

People with existing contracts aren't affected by the lower annuity rates.

Annuity rates are set with an eye toward the nonprofit receiving about half the donor's initial contribution.

Those concerned with maximizing their payments in retirement can typically receive higher payments from commercial annuities.

"You have to have a charitable intent to create one of these," said Jonathan Lander, vice president and senior wealth planner with PNC Financial Services Group Inc.'s wealth management business.
Tax Benefits

When funding a charitable gift annuity, donors make a gift of cash, securities or other assets to a charity. In return charities pay donors a fixed amount for their lifetime. The remainder goes to the charity.

Most organizations don't charge fees and a document can be drawn up fairly easily, planned giving experts say.

A portion of the annuity payments are tax-free and donors can take an upfront income tax deduction on the gift.

You can also recognize taxable gains on appreciated property, such as stock, over your life expectancy instead of paying capital gains tax all at once, as you would if you sold the property and purchased a commercial annuity.

Charitable annuities can be appealing for investors looking to avoid market risks, ACGA's Kelly says. With markets that are "going up, down and all over the place, donors can use charitable gift annuities to transfer the market risk to the charity and assure a fixed dividend for life," she says.

The flip side of a fixed rate is its inability to keep up with rising interest rates or inflation.

Since annuities are backed by the charity's assets, Kelly suggests thoroughly vetting the institution's financial strength before funding an annuity. Ask organizations about their total asset levels and for records of any defaulted annuities.

Gift annuity defaults, due to an organization's insolvency, are rare, said Frank Minton, senior adviser at charitable consultancy PG Calc and former chairman of the ACGA.

Donors should be wary of a charity that doesn't use the ACGA's rates and ask why, said Jere Doyle, senior vice president at Bank of New York Mellon Corp.'s wealth management division.

Donors can also consult their financial adviser, accountant or attorney to make sure a charitable gift annuity is best for their particular financial situation.

Remember that gift annuities involve an irrevocable transfer of assets, Minton says. You can't get your assets back once you fund an annuity.

When funding a gift annuity, donors can choose to receive payments immediately or defer them to a later date. The older you are, the higher the rate you receive. Some charities enforce a minimum age, such as 60 years old, to begin receiving payments.

Rates for immediate gift annuities are based on the beneficiary's age at the time the annuity is established. Rates for deferred gift annuities, which are less common, take into consideration both the compound interest on the contribution during the deferral period and the annuity rate for the age at which payments begin, Minton says.

A gift annuity is typically structured with funds of at least $10,000.

Payments can go to one person for the individual's lifetime, or for a slightly reduced rate, to two people in succession. For example, if a husband and wife fund a charitable annuity the charity would continue to make payments until both spouses pass on. Donors may also fund a charitable gift annuity for another family member, such as a parent or ill sibling.

Parents or grandparents may consider funding a tuition annuity, whereby a gift annuity is created for a young child, with the donor deferring the payments until age 18, or when the child is expected to go to college. Some states such as New York do not permit this type of annuity.

Write to Shelly Banjo at shelly.banjo@dowjones.com and Kristen McNamara at kristen.mcnamara@dowjones.com