Giving a Charitable Gift Annuity

I received information from the American Cancer Society about buying a charitable gift annuity, which could benefit the organization and give me income. Is this a good idea?

It depends on your goals. A charitable gift annuity won't give you the highest payout, but it will help you support a charity, receive lifetime income and get some big tax breaks, too. It's a way to give money to a charity now rather than waiting until after you die.

Most charities, including the American Cancer Society, use standard rates set by the American Council on Gift Annuities, which is currently paying 6% for life if you invest the money at age 65, 6.5% if you buy at age 70, 7.1% if you buy at age 75, 8% at age 80 and 11.3% at age 90. A 65-year-old who contributes $100,000 to a gift annuity, for example, will immediately start receiving $6,000 per year for life. The payouts represent a return of principal as well as interest, so only part is taxable.

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The payouts are lower if you choose a joint annuity, which pays out as long as you or your spouse are alive. For example, if a 65-year-old man and his 70-year-old wife contribute $100,000 to an American Cancer Society charitable gift annuity, they'd receive $5,700 per year as long as either one lives. If the couple bought a regular immediate annuity from an insurance company, on the other hand, they could get as much as $7,464 per year as long as either one lives, according to ImmediateAnnuities.com.

But some of the money you invest in the charitable gift annuity does support the charity, and you also get several tax breaks you wouldn't get with a commercial annuity. Using the example above of the $100,000 gift annuity, you would get a tax deduction of $32,381 for the charitable contribution, which could save you $8,095 in taxes in the 25% bracket.

You can get an extra tax break if you donate appreciated stock, which would help you avoid part of the capital-gains tax bill. By giving the money now rather than after you die, you keep the money out of your estate and the charity has more years to benefit from the funds.

Because a charitable gift annuity is a long-term contract that may pay out for decades, it's best to work with an established charity that should be around for a while. Rob Mitchell, president of the American Cancer Society Foundation, recommends researching the charity's finances at the Better Business Bureau's Wise Giving Alliance (also known as Give.org). Then contact the charity's development office, which can walk you through the process.