They are not investments, but charitable gift annuities provide a steady stream of income for retirees — a portion of which is tax-free.
They were very popular when “the markets did not do well from 2007 to 2009,” according to Matt Bernstein, a certified financial planner and director of planned giving for the Jewish National Fund. “My sense is that people at that time were looking for stability, and they looked at us and Hadassah as areas of stability where they could get some income and help the cause.”
Here’s how a charitable gift annuity works: A donor makes an irrevocable transfer of cash, marketable securities or other assets to the charity and then signs a contract in which the charity promises to pay a fixed amount for life to one or two individual annuitants. The payments can be quite high, depending on the age of the donor.
There are no withdrawal or surrender provisions. A portion of the donation is considered a charitable income tax deduction.
“When you get a tax deduction, you take the money off your income,” said Bill Samers, vice president of planned giving and endowments at UJA-Federation of New York. “If you earned $10,000 in a year and you gave $2,000 to charity and — assuming you can use the deduction — you would owe taxes on $8,000 as opposed to taking $2,000 off your taxes. So the deduction reduces your income.”
Because the donor gets money back for the rest of his or her life by making use of a charitable gift annuity, “the government says you are not entitled to deduct the full amount [of the gift],” he noted.
The contributed property is held by the charity in a segregated gift annuity reserve account designed to fund its payment obligation.
“These annuities are full faith and credit obligations of the charities that issue them,” Bernstein explained. “If the fund does not perform well, the money must come from the operation of the organization. We look to balance what we think is a reasonable rate of return that will keep the program healthy, meet our obligations and be competitive in our universe.”
Lori Lasson, Hadassah’s national director of planned giving and estates, pointed out that her organization sends annuity checks to donors as they request — on a monthly, quarterly, semi-annual or annual basis.
“Most people do it quarterly and request direct deposit into their bank account,” she said. “It is such a popular gift that we have some people who establish more than one charitable gift annuity. One woman has 21 and she is in her late 80s. … Those who have multiple annuities generally receive their payments monthly. We do not use any of the [gifted] funds until the donor passes away.”
Charities that establish charitable gift annuities may use different payouts, but 97 percent of them follow the rates suggested by the American Council on Gift Annuities. The rates are designed to provide attractive payments to individuals who want to make a gift but need to receive income from their contribution and to leave a significant amount of the contribution for charitable purposes after fulfilling the payment obligation.
Those rates were increased by the ACGA July 1, the first time they have changed since 2012.
“The last time they were changed it was because interest rates were dropping precipitously and we dropped our rates too,” Bernstein said. “Now that interest rates are moving up a little bit, we decided to do the same.”
The new ACGA rates increase from 4.4 percent to 4.7 percent for those aged 60. For 70-year-olds, it increased from 5.1 to 5.6 percent, for 80-year-olds it rose from 6.8 percent to 7.3 percent, and for 90-year-olds it rose from 9 percent to 9.5 percent.
For example, if a 75-year-old contributes $50,000 for a gift annuity, he or she would receive $3,100 a year for life, according to the ACGA rates.
If a couple, both 75, contributed $50,000 for a gift annuity, they would receive $2,750 jointly each year and the survivor would continue to receive it for life.
Although the rates offered by JNF may be 0.1 percent different from that of the ACGA, Bernstein said, that difference “should not be a driving factor in the decision” where to donate one’s money. Hadassah will be following the ACGA rates effective Sept. 1.
The rates for those with existing annuities are not affected.
“Some people do shop around, but this is not an investment,” Lasson stressed. “We are regulated by the New York State of Financial Services, not by the Securities and Exchange Commission. These are charitable gifts. If you want to leave a gift that will make a difference and provide you with income during your lifetime, it is a wonderful gift.”
Samers said UJA-Federation’s annuity rate is higher than that of the ACGA and that it did not raise its rates when the ACGA rates increased “because we are already higher than the changes the others are making.”
He noted that if donors are “within six months of their birthday, they get the rate as if they were a year older. … For some, this is a very attractive idea. Others who don’t need the income might want to make an outright gift. It depends on a person’s sense of their own personal financial situation. The gift annuity is just another way of supporting the organization, and we like to provide people with different ways.”
For both JNF and Hadassah, the minimum gift is $5,000. Hadassah’s minimum age to establish a charitable gift annuity is 60. Bernstein said he has established one for someone as young as 50.
“Age has its rewards, and over your lifetime you are going to have these quarterly or monthly benefits,” Lasson observed. “You can also defer an annuity, which makes a wonderful gift from someone who has not yet retired and wants to supplement his or her retirement income at a later date. So you could be 60 and have payments start at 70, and the longer you defer, the higher the payout rate.”