Charitable Gift Annuities: tax-advantaged ways of providing lifetime income while donating to charities

If you’ve been wondering about charitable gift annuities (CGAs) and whether they’re a good tool to incorporate into your planned gift toolbox, read on.  Particularly for small nonprofits, there’s a lot of confusion about and resistance to considering offering CGAs to donors.  I’m asked about CGAs often, and so I thought I’d take the opportunity to develop a no-nonsense primer on the subject.  I hope you find it helpful in stimulating a conversation with your staff and board about expanding your planned giving repertoire.

What is a Charitable Gift Annuity?

A charitable gift annuity (CGA) is an agreement in which a donor makes a gift to a nonprofit organization and in return, receives guaranteed annual income payments for the rest of their life or the life of one other person.

CGA1The ‘ideal’ donor for a CGA is a donor aged 62 or older – the older the better – why?  Because the older the donor, the larger their annual payment.  This is a way to offer an older donor a means of receiving a charitable deduction, they can see the results of their gift during their lifetime, and they can also leave a legacy while stilling benefit from having guaranteed income  at a much higher rate of interest than a typical CD or savings account.

Who Determines the Annual Rate of a CGA?

The  rate of payment on each CGA is dependent upon the age of the donor(s) at the time of the gift.  These rates are determined by the Council on Gift Annuities.  The older the donor is when she begins to receive payments, the larger her payments will be.  These payments can be dispersed on a monthly, quarterly, semi-annual, or annual basis, depending on the amount.  Donors can select to receive a lower rate of return for their payments, if they choose.  You might be thinking, Why would a donor want to do that?  The donor will know what the annual income rate is prior to enrolling.  So, she may decide that she doesn’t need that much.  In this case, she can lower the rate (and therefore, the gift) amount.  Alternatively, she can transfer CGA ‘residual assets’ to the nonprofit organization.  This is a wonderful source of reliable annual income for small nonprofits, so it’s something to consider when you speak with your donors about planned gifts.

What Kinds of Charitable Gift Annuity Are There?

There are four types of charitable gift annuities, and they’re very straight-forward.

Single Life Annuity:  A single life CGA is based on the life of one person.  Payments are made to this person for the rest of their life.  Upon the donor’s passing, the residual funds go to the nonprofit.

Double Life Annuities:  A double life annuity is based on the lives of two people.  Payments are made to both individuals for life, and after the passing of one of two people, payments are made to the survivor.  The rate is based on their ages and is determined for a tool called a “two life table”.  Upon the passing of the second person, the residual funds go to the nonprofit.  Typically, a single life annuity receives a more attractive rate than a double life annuity.

Deferred Gift Annuity:  As a donor, if you would like to select a date in the future to begin receiving payments, you can set up a deferred gift annuity.  The caveat is that the date must be more than one year and one day after the date on which the gift contribution was made.  Why might a donor want to do this?  Say you have a 62-year old donor who is still working but plans to retire at age 65; she doesn’t need the actual payments immediately (because she’s still working and therefore has an income stream), but she does need the charitable deduction right now.  She can set up a deferred gift annuity so that that she receives the charitable deduction now, with annual payments beginning in three years, when she retires at age 65.

Flexible Gift Annuity:  If you want to receive payments in the future, but don’t want to select a specific date when you’ll begin receiving payments – you reserve the right to designate that date at some point in the future.  These CGAs are not as popular as a deferred CGA because there is some ‘gray area’ with the IRS.

CGA2How Can Your Nonprofit Fund a CGA?

Charitable gift annuities can be created with cash or appreciated property.  Appreciated property is defined as property held for at least one year and one day, and can include stocks, securities* and real estate.  When a community foundation receives a gift of real estate (e.g., a parcel of land) to fund a CGA, it may request that the CGA be a designated as a flexible gift annuity.  Why?  Because the organization may not want to commit to a determined annual payment when it doesn’t know what it will receive from the sale of the property.  In this way, the organization has the benefit of time to investigate property values and sell the real estate and to fund the CGA, and use the funds to make the annual payment.  Depending on the economic climate, the time required to execute a real estate sale may be very rapid, or lengthy.  This option gives the nonprofit organization the benefit of time.

Advantages and Disadvantages of Charitable Gift Annuities


●  Donors get an initial tax deduction, which is a significant incentive for many.

●  Donors receive guaranteed fixed annual payments for life.

●  Income is partially tax-free for a specific period of years.

●  Most importantly, donors leave a legacy within your community.


●  Lack of flexibility.  You cannot modify your guaranteed income stream once you begin the annuity.  The only change would be to discontinue annual payments altogether and allocate the remaining annuity to the nonprofit.

The bottom line is that you should engage your donors in a one-on-one conversation to determine whether a CGA is right for them.  For example, say you have a donor who is 63 and is considering funding a CGA with a gift of one million dollars – that may initially seem like a fabulous idea.  On the other hand, 63 is still relatively young, so you might want to have a conversation with the donor about his comfort with risk, and whether or not he has additional assets and income on which he can rely.  If he lives for another thirty years, that’s a long time to have to rely on that income stream.  Risk management must be a critical point in the conversation, as well as a discussion with a certified financial planner.

What Does All of this “Look Like” to a Donor?

If you’re working through a community foundation (which you should consider – more on that below),   the first step is to create a no-obligation personal gift proposal tailored to the donor’s needs.  Generally, you will provide basic information about the donor – her age, income bracket, gift amount, date of gift, anticipated date of payment (unless it’s a flexible CGA), etc. Your community foundation representative will have a checklist of information points that you will collect from your donor.  That information is then ‘plugged into’ specialized software, which produces a report about what the anticipated payments will be, the tax deductibility profile for the gift, etc. This information is collectively referred to as an illustration, which you back to your donor to help explain what their gift will actually “look like” and, based upon that information, whether a CGA is still an attractive means of charitable giving for her.

Very often, your donors will be taken aback by what a great option it is and think, Wow, this is just too good to be true; when can I sign up?  This is always the response that nonprofit fundraisers are looking for, but I always encourage donors to take their illustration and consult with their financial planner, just so they have that additional layer of confidence and security.

Here’s an example illustration, intended for educational purposes only:

Donna is 75 years old and has watched interest rates fluctuate for years; she is considering a $15,000** charitable gift annuity.   She is not satisfied with her money market fund currently earning 2%.   She is looking for ways to get back to the 5-6% rate of return she had been used to when the market was performing better. However, Donna does not want to increase her market risk by investing in securities that would fluctuate in value.

If Donna put that $15,000 into her 2% money market account, her annual payout would be $300.00.  Alternatively, if Donna puts that $15,000 into a CGA at a current rate of 6.5%, her annual payout now jumps to $975.00.  What makes this an even sweeter deal is that with the money market account, that paltry $300.00 is still subject to taxes – there is no tax-free portion, but with the CGA, of that $975.00, the tax-free portion is $978.53.   For her gift of $15,000, the total charitable tax deduction is $5,226.60 for that year.  Not bad, huh?  When you sit down with your donors and review their illustration, they’re going to like what they see, and . . . your nonprofit benefits, too.

Which Donors Benefit Most from CGAs? 

After a while, you’ll likely find that your best candidates for future CGAs are your donors who already have CGAs.  In fact, I know some donors who have multiple CGAs because they’re just that good!  Here’s another statistic you’re going to like –  If a donor has a CGA with your organization, you’re also more likely to be designated as a beneficiary in that donor’s will – bequests and CGAs – what a wonderful legacy combination!

Typically, the ‘best-fit’ donors are those who are:

●  62 years of age and older.

●  Individuals who are committed to giving, but who also need the security of retirement income.

●  Individuals who want a continued income stream by who also want to be relieved of investment   responsibilities.

●  Donors with highly-appreciated but low income-producing securities or other property (these are perfect assets to give away, because they’re high-taxable).

Where Do You Find Such Prospects?

●  Current donor base (once you start talking about CGAs, they may come forward on their own)

●  Alumni or membership groups

●  Volunteers, senior staff and/or board members

●  Auxiliaries

Sounds too Good to Be True . . . Why Don’t More Small Nonprofits Offer CGAs? 

There are indeed some drawbacks to setting up CGAs, particularly for smaller nonprofits that lack sophisticated accounting and support.  There are some ways to circumvent the headaches, and I’ll cover those later.  For now, let’s review the potential drawbacks for your small nonprofit.

●  Liability on your books:  If you offer the CGA independently of a community foundation (that is, you’re doing this on your own), those assets will be carried on your books as liabilities until the donor passes away.

●  Administration can be time-consuming:  Administration can be burdensome; this is an understatement.

●  It’s not instant income (or at least, it shouldn’t be):  It can be tempting for smaller nonprofits to ‘co-mingle’ CGA funds with other investments and its portfolio – this is an absolute no-no!  Additionally, you can’t think of CGA funds as a “rainy day fund” – you cannot dip into this pool of donors that are intended to be invested over a long period of time in order to pay donors over their entire lifetimes.

●  CGA dollars need to be invested conservatively to insure coverage of annual payments.

●  Development staff historically isn’t often comfortable discussing CGA options.

How Can My Nonprofit Qualify to Offer CGAs? 

A nonprofit organization issuing charitable gift annuities is subject to the laws and regulation of the state in which the donor legally resides.  Consequently, if you’re an organization with donors in multiple states, this is an additional layer (or several layers, as the case may be) of administrative effort to deal with.  Typically, your organization will be required to register with your states insurance department.  In California, the appropriate agency is the California Department of Insurance and of course, pay a registration fee.  You can check each state’s registration requirements here.  Most state insurance codes require a minimum number of years of continuous operation (three years is common); others are silent on the issue.

Get ready for this mouthful – nonprofit organizations must have “the lesser of $300,000 or five times the face value of total outstanding gift annuities in unrestricted cash, cash equivalents or publicly-traded securities, not including the gift annuity fund assets.”  Sound complicated, but really, it’s just the government’s way of ensuring that if your nonprofit is dissolves, merges, or runs into financially troubling times, it will still have enough unrestricted funds to meet your obligations to your CGA donors – they’re counting on those annual payments.  What that actually means is that you “have to have money to make money” with CGAs, because you’ll have to pony up some hefty funds and set them aside – funds that you may want to use for operating funds and immediate priorities.  This is a huge obstacle for most small nonprofits.

Is there a solution to these barriers of entry to CGAs?  Yes, in many cases!

What If My Nonprofit Doesn’t Qualify For (Or Doesn’t Want To Administer) CGAs, But We’d Still Like to Offer Them to Our Donors?

Small nonprofits, you’re in luck!  Your best organizational friend may be your local community foundation.  Your community foundation is directly invested in the goal of getting more dollars into the nonprofit sector, so they want to help you.  How?  These organizations can help circumvent the need to qualify and register with the state, as well as eliminate the monetary requirement hurdle.  They can do this by declaring itself as the ‘backer’ of the CGA – they’re the agency that is insuring that the monetary requirement is met.  If it sounds good already – they also handle the administrative burden by making the direct deposits, filing the 990s, etc

CGA3What’s the catch?  Not much, really.  Check in with your local community foundation, but usually you’re required to create an agency fund with the community foundation.  This will allow you to offer CGAs to your donor base where ever they reside in the continental United States – they’ll help you put together illustrations regardless of where your donors are.  It also allows you to reduce the liability to your nonprofit organization and expands your planned giving toolbox right away.

Why is your liability reduced and not completely eliminated?  The community foundation can develop the CGA and has the state-required unrestricted funds to back them.  However, the community foundation will want your organization to set up a fund with them that represents a small percentage of the CGAs face value – usually, it’s around 10 percent.  Donors sometimes outlive their life expectancy significantly – it happens – so that the community foundation wants your organization to have at least a little “dog in the fight”.   The funds in your agency account with the community foundation are expected to remain in the fund for the life of the donor.  If the donor outlives his/her expectancy, it’s logical that the community foundation would want some level of backing from you – usually from your endowment dollars to mitigate at least some of the risk.  Don’t worry – ten percent ‘down’ is more than enough, and risk analysis shows that a donor would have to live very long, indeed, before your ten percent was ‘dinged’.  In short, it’s a sound investment.

Your community foundation holds and invests your assets, provides responsible and professional fund management, and well as total administrative duties – isn’t that wonderful?  They can also provide written materials and resources for planned giving communications and marketing, so you can focus on your mission, not CGA administration.

What’s the Cost of Having a Community Foundation Administer My Nonprofit’s CGA?

While it may vary, the administrative fee for handling CGAs, covering overhead, and managing assets is ridiculously low – on the order of 2-3 percent (and maybe even lower – that may vary by state and region), which isn’t invoiced to your organization, but rather is removed from the assets from the donor’s CGA

If you’ve never visited your local community foundation, make it a high priority to stop by and introduce yourself and your nonprofit’s work and mission.  If you’re not sure where your closest community foundation is, visit the Community Foundations website.

CGA4Where Can I Learn More About Charitable Gift Annuities?

If you’d like to read more on CGAs, the “go to” place on the webs is the American Council on Gift Annuities.  It’s a great site that is highly readable, and contains information for both donors and nonprofit organizations alike.

Good luck in adding CGAs to your planned giving toolbox.


Cheryl M. McCormick, Ph.D., Founder and CEO, Ascend Nonprofit Consulting and Executive Coaching,

Investment securities are often held by commercial and investment banks and are usually one of two main sources of revenue, along with loans.  Investment securities provide banks with a source of liquidity along with the profits realized from capital gains when they are sold.  Bonds are an example of Government-issued securities.

** Some charitable organizations and community foundations establish a minimum gift amounts.  Although many organizations encourage CGA gifts as low as $5,000, the administrative costs may not justify that amount – calculate roughly half.  In other words, you’ll receive $2500 total from a $5,000 gift, after all is said and done.  You will want to consider a minimum gift amount that justifies the investment of administrative effort and time from your staff.


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