A charitable gift annuity is an irrevocable planned giving arrangement in which up to two annuitants, generally the donor and their spouse, receive a regular payment for life based on the value of assets (which may be cash, securities or a variety of other assets) transferred to a 501(c)(3). After the donor’s death (or the death of the surviving spouse), the assets are retained by the organization. The annual annuity payment amounts are based on the amount of the contribution and the donor’s age at the time of the contribution.
In addition to a guaranteed lifetime annuity, CGAs also provide a charitable donation and a partial income tax deduction for the donation. Although the taxable amount of the contribution is governed by Internal Revenue Code Section 72, the charitable gift annuity itself is regulated by each state. Consequently, if a charity operates in one state and the donor resides in a different state, the regulations of both must be observed.
Contributing to a CGA from an IRA
Donors sometimes fund their CGAs with assets from their individual retirement account. In the past, these transfers had to be funded with after-tax dollars. That meant that the funds had to be withdrawn from the IRA — and taxed — before the contribution could be made. Now, under Section 307 of the Secure 2.0 Act, which was signed into law on Dec. 29, 2022, individuals aged 70 1/2 and older can make a one-time qualified charitable distribution of up to $50,000 from an IRA to a CGA and have that amount excluded from their taxable income.
This is a one-and-done contribution, meaning that even though some nonprofits allow CGAs to be funded with amounts as low as $10,000, donors who choose to fund their CGAs with a lower amount cannot later add to it and still benefit from the exclusion.
For example, a donor who opts to contribute $10,000 to a CGA in 2023 can have that amount excluded from their 2023 taxable income. However, if they decide to make another gift to the CGA from their IRA in 2024, the amount of the second gift will be included in their taxable income.
Taxpayers who are subject to the 3.8% surtax on net investment income or who have taxable Social Security benefits may benefit from being able to exclude $50,000 from their above-the-line income.
Other requirements
CGAs are also subject to other rules.
- Generally, only the IRA participant and/or their spouse may be designated as noncharitable beneficiaries.
- The contributed amount counts against the $100,000 annual limit (as indexed for inflation) for qualified charitable distributions in the year in which the transfer is made.
- It is unclear, however, whether each spouse can contribute up to $50,000 to a single gift annuity contract or charitable remainder trust that would be payable jointly or to either the survivor.
- The payout amount must be at least 5% of the funded amount.
- Income interest may not be assignable.
- All distributions must be taxable as ordinary income (except for the $50,000 one-time exclusion).
Other considerations
Many charitable organizations set a minimum age (usually 60) for income recipients.
Donors age 73 or older need to be aware that the contributed amount counts toward their required minimum distribution.
Under certain circumstances, a donor may choose not to have the annuity go to their surviving spouse. It takes careful analysis to determine which option is better.
There is minimal expense and potentially excellent benefits from setting up a CGA. All taxpayers may benefit, but high net worth taxpayers who are seeking to preserve their family wealth benefit more. Still, as with most tax and estate planning strategies, the rules are complicated. Consult your tax adviser to determine whether CGAs might be beneficial for you.
We welcome the opportunity to put our accounting expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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