Charitable Gift Annuities

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itsmeagain
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Charitable Gift Annuities

Post by itsmeagain »

The payout rates for Charitable Gift Annuities (CGAs) have increased substantially this year (effective July 1, 2022).
https://www.acga-web.org/current-gift-annuity-rates

In some cases, CGAs might offer a better solution than using half of the funds to purchase a regular annuity and the other half to make a charitable donation. I'm willing to figure that out for my circumstances, but that's not my question for the moment.

Before I put effort into the calculations, I wonder if someone with experience with CGAs could tell me whether they add a lot of complication when it comes to taxes.

Are they as easy as, say, a 1099-R from an IRA?

Or do they add complications that the usual tax software (for example TurboTax) does not easily handle?
Last edited by itsmeagain on Fri Aug 05, 2022 1:22 pm, edited 1 time in total.
jebmke
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Re: Charitable Gift Annuities and Tax Reporting

Post by jebmke »

Pretty much. The taxable amount will not be the same as the gross amount and the code in Box 7 will be different. In terms of processing in software, pretty much the same process. The software should handle it without incident if the data is entered per the issued 1099-R
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itsmeagain
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Re: Charitable Gift Annuities and Tax Reporting

Post by itsmeagain »

Thank you, jebmke!
crefwatch
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Re: Charitable Gift Annuities and Tax Reporting

Post by crefwatch »

You get a 1099 that makes it clear. You have a non-taxable portion and a capital gains amount, both of which are in the gross amount. Taxability changes after 20 years, I think. But I presume the 1099 is different then.

We have three charitable annuities, but it should not be assumed that they provide the absolute highest dollar yield you can get for your retirement dollar.
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Re: Charitable Gift Annuities and Tax Reporting

Post by cadreamer2015 »

Your 1099-R will show capital gains income, ordinary income and return of capital. All flow easily into TurboTax. Your charity should provide a schedule which shows the breakdown of annual income in the 3 categories. As another poster noted, after 20 years or something it will all be ordinary income. Your charity should give you a table which shows all this.
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itsmeagain
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Re: Charitable Gift Annuities and Tax Reporting

Post by itsmeagain »

Thank you crefwatch and cadreamer2015 for confirming that tax reporting should be simple for CGAs.

And thank you crefwatch, too, for sharing so much knowledge about TIAA-CREF issues on this site. In fact, I am making comparisons between a TIAA traditional annuity and a CGA. My TIAA traditional is in an RA account with a good proportion of old vintages, and I'd also be getting an additional "loyalty" bonus of about 16%. Of course, the TIAA payout would be greater than a CGA, where half is estimated to go to the charity. On the other hand, comparing the CGA payout with half the TIAA payout and the other half going to charity comes out ahead. So it's not a bad deal.

My spouse and I don't really need an annuity for income. We're in comfortable circumstances. That said, it seems potentially useful as a way to ensure a permanent lifetime income (given TIAA's financial strength, as well as the sound finances of the large institutions that we would consider using for a CGA) in the event of death or dementia. In other words, an ongoing income stream (in addition to Social Security) that could not be stolen by an unscrupulous person or mis-invested by someone with poor judgement. (I've known someone who had plenty of assets when they passed, but did not consider this issue to protect a surviving spouse.)

It's also interesting when I do IRR calculations for payouts using the life-expectancy tables for myself and my spouse. A top commercial annuity seems to give an IRR of about 3.2% per year, and is clearly inferior. The TIAA annuity with the additional amounts for older vintages and the loyalty bonus gives an IRR of about 5.0%. The charitable annuity gives an IRR of about 6.2%, assuming the initial investment is only half as much (with the other half going to the charity, although I know that only happens upon death, but it's easier for the calculations). Of course, these are not inflation-adjusted returns, but they seem pretty good, and they're both well above the commercial annuity.

Any thoughts on these further issues would be more than welcome!
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Re: Charitable Gift Annuities

Post by crefwatch »

One reason we have CGAs is that at the beginning of our retirement, my wife was more concerned about having sufficient income that I was. (I'm talking more about "comfort level" than about exact "numbers." So I thought that a reunion-year gift that produced income (too ... ) would be an easy sell. Because our big-name accounting firm left out one of the three 1099s one year, I'm a little cooler on the annuity idea now than before we had all three of them. They deliver $9,000 or so a year in total. (We live in a HCOL area.)

Because legitimate charities exclusively use a figure supplied by the IRS for income, your payout will be strongly dependent on prevailing interest rates at the time you begin the CGA. Of course your two ages are crucial inputs as well. Note that many charities have other life=income options (which are not "annuities") for gifts over (the number I'm familiar with ... ) $100,000. Some of them have higher initial numbers, but maybe less stability over an unknown long term. Development officers are only too happy to discuss these with you. (!)

I imagine that your joint life expectancy is also crucial in computing the deductible amount, since it's the "expected" actuarial yield to the charity.
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nisiprius
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Re: Charitable Gift Annuities

Post by nisiprius »

Some side issues, which are things to be aware of.

First, CGAs are generally not considered insurance and are not protected by the state guaranty associations. (Insurance is regulated by state law so everything varies by state, you might check your own state). The chief "protection" is simply that the payouts are targeted to use up only about half of the amount contributed, so there is about a 100% margin of safety against the charity running into financial difficulties in managing the CGA.

Second, in the words of the American Council on Gift Annuities here
Any attempt to establish a philosophy of Gift Annuity Agreements must emphasize the word "gift". These agreements constitute one method by which charities solicit and receive contributions to carry out their purposes.

A person who enters into a Gift Annuity Agreement with a charity makes a gift to the institution and receives fixed payments for life. If the person could afford to do so, he or she would probably donate as an outright gift the entire amount paid to the organization; but he or she needs to make some provision for income while alive.
The point is the gift, not the annuity.

Third, charitable gift annuities are not competitive--not with commercial for-profit SPIAs, and not with each other. There's no point in shopping around, they all use the same payout table (and had to get a specific antitrust exemption from Congress to do so). Again quoting the ACGA,
The ACGA suggested maximum rates are set to achieve a target residuum of at least 50% of the funding amount if the annuitant(s) live to their life expectancy and the gift annuity fund’s investment performance matches the ACGA’s assumed investment return.
In other words, on the average and "actuarially," about half of the money you donate is a gift to the charity, and only about half is used to fund the annuity payments to you.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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itsmeagain
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Re: Charitable Gift Annuities

Post by itsmeagain »

crefwatch wrote: Fri Aug 05, 2022 1:43 pm Because legitimate charities exclusively use a figure supplied by the IRS for income, your payout will be strongly dependent on prevailing interest rates at the time you begin the CGA. Of course your two ages are crucial inputs as well ... I imagine that your joint life expectancy is also crucial in computing the deductible amount, since it's the "expected" actuarial yield to the charity.
Thank you again, crefwatch. Yes, payouts will depend on prevailing interest rates when the CGA is initiated. The rate dictated by the American Council on Gift Annuities took a nice jump as of July, which caught my interest. And yes, ages matter a lot. I used the same information on our ages for the comparisons in my previous post. I also used the exact same joint-life expectancy tables to calculate "expected" payouts by year when computing the implied IRR for the TIAA, CGA, and commercial cases.
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itsmeagain
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Re: Charitable Gift Annuities

Post by itsmeagain »

nisiprius wrote: Fri Aug 05, 2022 2:16 pm Some side issues, which are things to be aware of.

First, CGAs are generally not considered insurance and are not protected by the state guaranty associations. (Insurance is regulated by state law so everything varies by state, you might check your own state). The chief "protection" is simply that the payouts are targeted to use up only about half of the amount contributed, so there is about a 100% margin of safety against the charity running into financial difficulties in managing the CGA.

Second, in the words of the American Council on Gift Annuities here
Any attempt to establish a philosophy of Gift Annuity Agreements must emphasize the word "gift". These agreements constitute one method by which charities solicit and receive contributions to carry out their purposes.

A person who enters into a Gift Annuity Agreement with a charity makes a gift to the institution and receives fixed payments for life. If the person could afford to do so, he or she would probably donate as an outright gift the entire amount paid to the organization; but he or she needs to make some provision for income while alive.
The point is the gift, not the annuity.

Third, charitable gift annuities are not competitive--not with commercial for-profit SPIAs, and not with each other. There's no point in shopping around, they all use the same payout table (and had to get a specific antitrust exemption from Congress to do so). Again quoting the ACGA,
The ACGA suggested maximum rates are set to achieve a target residuum of at least 50% of the funding amount if the annuitant(s) live to their life expectancy and the gift annuity fund’s investment performance matches the ACGA’s assumed investment return.
In other words, on the average and "actuarially," about half of the money you donate is a gift to the charity, and only about half is used to fund the annuity payments to you.
Thanks for these important points, nisiprius ... and all your other excellent posts on the Bogleheads site. I was aware of these issues, but not every reader will be, so it's good that you've raised them as clearly as you have done.

One comment by way of clarification for my particular case, where you say that "The point is the gift, not the annuity." In my case, I'm thinking of it like this. Let's say we want to give 50K to the charity and also purchase an annuity for 50K. Is it better, in terms of payouts, to (A) get a 50K annuity from TIAA and give 50K to the charity, or (B) get a 100K CGA from the charity? Taxes complicate things (and I need to think this through more carefully, since the TIAA funds are in a retirement account, but they will come out at some point as RMDs), but it looks like choice (B) is meaningfully better in our circumstances at present.

That outcome surprised me a bit, given that TIAA has also been raising their payouts, and my funds in the traditional account not only have a lot of higher-yielding vintages but also a "loyalty" bonus that TIAA seems to use to reward long-time funds. Although I used the same mortality tables in calculating IRRs for TIAA, CGA, and commercial annuities (and applied them to the promised payouts from each annuity), I suspect TIAA uses mortality tables with longer life expectancies than the CGA given TIAA's pool of long-living, academic-type annuitants. That may well explain why the CGA payout (adjusted for the half that goes to charity) is higher than for TIAA.

If nothing else, it's an interesting exercise in math!
petulant
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Re: Charitable Gift Annuities

Post by petulant »

itsmeagain wrote: Fri Aug 05, 2022 3:55 pm
nisiprius wrote: Fri Aug 05, 2022 2:16 pm Some side issues, which are things to be aware of.

First, CGAs are generally not considered insurance and are not protected by the state guaranty associations. (Insurance is regulated by state law so everything varies by state, you might check your own state). The chief "protection" is simply that the payouts are targeted to use up only about half of the amount contributed, so there is about a 100% margin of safety against the charity running into financial difficulties in managing the CGA.

Second, in the words of the American Council on Gift Annuities here
Any attempt to establish a philosophy of Gift Annuity Agreements must emphasize the word "gift". These agreements constitute one method by which charities solicit and receive contributions to carry out their purposes.

A person who enters into a Gift Annuity Agreement with a charity makes a gift to the institution and receives fixed payments for life. If the person could afford to do so, he or she would probably donate as an outright gift the entire amount paid to the organization; but he or she needs to make some provision for income while alive.
The point is the gift, not the annuity.

Third, charitable gift annuities are not competitive--not with commercial for-profit SPIAs, and not with each other. There's no point in shopping around, they all use the same payout table (and had to get a specific antitrust exemption from Congress to do so). Again quoting the ACGA,
The ACGA suggested maximum rates are set to achieve a target residuum of at least 50% of the funding amount if the annuitant(s) live to their life expectancy and the gift annuity fund’s investment performance matches the ACGA’s assumed investment return.
In other words, on the average and "actuarially," about half of the money you donate is a gift to the charity, and only about half is used to fund the annuity payments to you.
Thanks for these important points, nisiprius ... and all your other excellent posts on the Bogleheads site. I was aware of these issues, but not every reader will be, so it's good that you've raised them as clearly as you have done.

One comment by way of clarification for my particular case, where you say that "The point is the gift, not the annuity." In my case, I'm thinking of it like this. Let's say we want to give 50K to the charity and also purchase an annuity for 50K. Is it better, in terms of payouts, to (A) get a 50K annuity from TIAA and give 50K to the charity, or (B) get a 100K CGA from the charity? Taxes complicate things (and I need to think this through more carefully, since the TIAA funds are in a retirement account, but they will come out at some point as RMDs), but it looks like choice (B) is meaningfully better in our circumstances at present.

That outcome surprised me a bit, given that TIAA has also been raising their payouts, and my funds in the traditional account not only have a lot of higher-yielding vintages but also a "loyalty" bonus that TIAA seems to use to reward long-time funds. Although I used the same mortality tables in calculating IRRs for TIAA, CGA, and commercial annuities (and applied them to the promised payouts from each annuity), I suspect TIAA uses mortality tables with longer life expectancies than the CGA given TIAA's pool of long-living, academic-type annuitants. That may well explain why the CGA payout (adjusted for the half that goes to charity) is higher than for TIAA.

If nothing else, it's an interesting exercise in math!
That's what all the planned giving strategies are designed for--for somebody who wants to provide for family needs and make charitable gifts, a good planned giving strategy should do both more efficiently: CGA, CRT, CLT, bargain sale, etc.
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Re: Charitable Gift Annuities

Post by crefwatch »

itsmeagain wrote: Fri Aug 05, 2022 3:55 pm , since the TIAA funds are in a retirement account, but they will come out at some point as RMDs)
As you said, taxes are a consideration. I trust that you are not contemplating using a QCD to pay for anything. You are not permitted to receive something of value in exchange for a QCD. You would have to make a taxable distribution from the IRA to get the money to buy something. But you would likely have enough deductions to itemize that year, because of the (partial) deductibility of the CGA.
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itsmeagain
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Re: Charitable Gift Annuities

Post by itsmeagain »

petulant wrote: Fri Aug 05, 2022 9:21 pm That's what all the planned giving strategies are designed for--for somebody who wants to provide for family needs and make charitable gifts, a good planned giving strategy should do both more efficiently: CGA, CRT, CLT, bargain sale, etc.
Yes, it's nice to see that it can work more efficiently in practice.
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itsmeagain
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Re: Charitable Gift Annuities

Post by itsmeagain »

crefwatch wrote: Sat Aug 06, 2022 9:04 am
itsmeagain wrote: Fri Aug 05, 2022 3:55 pm , since the TIAA funds are in a retirement account, but they will come out at some point as RMDs)
As you said, taxes are a consideration. I trust that you are not contemplating using a QCD to pay for anything. You are not permitted to receive something of value in exchange for a QCD. You would have to make a taxable distribution from the IRA to get the money to buy something. But you would likely have enough deductions to itemize that year, because of the (partial) deductibility of the CGA.
Agreed, this would not involve a QCD. And yes, we typically give enough to make it worthwhile to itemize.
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Re: Charitable Gift Annuities

Post by IowaSon »

I work in development at a non profit. Internally, we believe folks who complete a CGA with us add at minimum 10 years to their life expectancy. So if nothing else, choose a CGA and you'll live to 100! :sharebeer
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itsmeagain
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Re: Charitable Gift Annuities

Post by itsmeagain »

IowaSon wrote: Sat Aug 06, 2022 1:18 pm I work in development at a non profit. Internally, we believe folks who complete a CGA with us add at minimum 10 years to their life expectancy. So if nothing else, choose a CGA and you'll live to 100! :sharebeer
From your lips to God's ears :sharebeer
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