Consider charitable gift annuities for your clients with expiring CDs

By Julius Giarmarco

Giarmarco, Mullins & Horton, P.C.


With certificate of deposit rates below 1.5 percent, clients with expiring CDs that were paying 5 percent or more should consider donating the principal to a nonprofit organization in exchange for a charitable gift annuity. The annuity will provide for lifetime payments (either to the donor for life or to the donor and his/her spouse for their joint lives).

The annuity payout rate is determined by the donor's age. For example, the payout rate for a 65-year-old couple is currently 4.7 percent, and rises to 5.7 percent for a 75-year-old couple. For single donors, the current rates are 5.3 percent at age 65, and 6.5 percent at 75.

The American Council on Gift Annuities publishes suggested gift-annuity rates by age at www.acga-web.org for a fee. A portion of each payment received will be subject to income taxes (once again based on the donor's age). However, after the donor(s) reach their life expectancy, 100 percent of the payments are subject to income taxes.

The donor also receives an up-front income tax deduction (for the estimated amount that will pass to the charity). While any remaining principal at the donor's death passes to the charity, it's possible that if the donor lives long enough, he/she will receive back more than the initial gift. Some donors will use the "excess" income to purchase life insurance to "replace" the wealth eventually passing to the charity.

As with any estate or financial planning tool, there are some drawbacks to using a charitable gift annuity. First, it's an irrevocable transaction. Thus, the donor loses access to the donated funds (beyond the annual payments).

Second, the payout rate is fixed, while CD rates could rise in the future. Finally, unlike CDs which are insured by the FDIC, a donor could lose all remaining annuity payments if the charity files for bankruptcy. Thus, a careful examination of the charity (and whether or not the charity purchases commercial annuities to cover its gift annuity obligations) should be undertaken by the donor's advisers before making the gift.

THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.