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What Could be Better Than Giving and Receiving?

More people are seeking investment income from an unlikely source: their favorite nonprofits. Why "gift annuities" are on the rise.

In charity, as in all matters, the greatest gifts are the ones that keep on giving. This is especially true when the gift actually gives back to you after you make the gift. It comes as no surprise then that “gift annuities” are rather popular right now.

That noted, gift annuities are not perfect for everyone and there are some risks.

A recent article in SmartMoney titled Charitable Gifts That Give Back addressed both sides of the gift annuity coin. The essential idea behind any annuity is to transfer a large sum of money in exchange for regular and equal payments over a specified period of time (to include over the remainder of your life). As such, annuities can be a powerful source of predictable income late in life under the right circumstances.

Commonly, you establish an annuity with a large financial institution because it can make enough money off of your money (and the money of other annuitants) to honor its commitment to make the current and future payments back to you.

On the other hand, should you establish your annuity with a charity, the annuity works the same way with a few twists. First, at the end of the annuity, any remaining funds will pass to the charity. Second, because the charity ultimately will benefit, your initial lump sum funding counts as a charitable gift and is deductible as such in the year made. [Note: There is a rather sophisticated calculation that determines the actual amount of the deduction.]

As with most financial decisions, caveat emptor (i.e., “let the buyer beware”).

Not all charities offer gift annuities and, if they do, you should be sure to evaluate their ability to make good on the payment stream. Note: Large financial institutions are able to offer annuities because they intend to make a profit, but a nonprofit only intends to break even or, at best, use the money elsewhere.

While the gift annuity process can be uniquely satisfying, and is therefore worth consideration, be sure to look carefully before you leap.

You can learn more about  estate tax planning  on our website. Be sure to sign up for our free e-newsletter to stay abreast of issues like these that could affect you, your loved ones and your estate planning. 

Reference: SmartMoney (April 6, 2012) “Charitable Gifts That Give Back

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