Charitable gift annuities can be useful tools for clients looking both to transfer assets and to derive an income stream. But planners caution that despite the advantages of CGAs, they also come with several caveats that clients don’t always fully understand.
A CGA allows an individual to transfer assets to a charity in exchange for a tax benefit and a lifetime annuity. The annuity payments generally stop when the person dies, and the charity keeps the remaining funds.
The best candidate for CGAs are clients in their mid-70s or older, as the payout rates become higher as one grows older, says Walt Mozdzer, a planner at Syverson Strege & Co. in West Des Moines, Iowa. "Their income stream at that age may be 5% or 6%, depending whether they are single or married. The payout rates for a two-life CGA are lower, given the longer mortality tables for a couple."
Charitable gift annuities should only be used in those situations where the donor has a primary motivation of helping their favorite charity, religious organization or alma mater, says Lindsay Lapole, volunteer chairman of the American Council on Gift Annuities in Smyrna, Ga.
"The payout rate is going to be a little lower than a commercial annuity," Lapole says. Still, "in exchange for the support of charity there are cost-saving tax advantages to the donor."
'UNDERSTAND THE MATH'
Typically, commercial annuities pay 20% to 30% more in monthly income than CGAs, so the latter product is really more of a giving strategy, says Hersh Stern, publisher of the online Annuity Shopper Buyer's Guide in Princeton, N.J.
CGAs come with another consideration, as well: Upfront tax deductions on CGAs are reduced by the present value of the future income stream the charity is going to give the donor. For example, a $100,000 donation to United Way via a CGA is going to be likely worth $75,000, and the donor will only be able to write off $25,000.
"More often than not, that little piece of information is not communicated to the donor," Stern says. "I don't want to get in the way of someone donating a CGA, but they have to understand the math to make sure they know what they are doing."
Clients have to be careful about how they choose CGAs, says Michael Repak, vice president and senior estate planner at Janney Montgomery Scott in Philadelphia. "The area is less regulated than commercial annuities and although it doesn't happen often, it's not unheard of that a charity might go bankrupt and might not be able to fulfill its obligation on the annuity."
Katie Kuehner-Hebert is a freelance writer in Running Springs, Calif. She has contributed to Financial Planning, American Banker, Risk & Insurance and Human Resource Executive.