Charitable Gift Annuities
In this type of giving arrangement you make a payment of cash to a charity and ask that the charity arrange to pay you a certain amount for life. This is an effective way to turn taxable interest income from investments like GICs into partially tax-free payments for as long as you live.
For example,
- A donor makes a $25,000 payment to a charitable organization.
- The donor's life expectancy is nine (9) years. (Life expectancy is determined by insurance companies based on mortality tables.)
- The donor wishes a guaranteed annual payment stream of $2,500 which is expected to provide $22,500 during the donor's expected remaining life.
- Assume that an insurance company's guaranteed annual payment of $2,500 for the donor's life will require a single premium payment of $18,389.
Tax Treatment:
- The eligible amount of the gift for which the donor may claim charitable donation tax credits will be $6,611 (the total payment less the $18,389 advantage that was paid to the life insurance company in consideration of the annuity contract.)
- The donor receives $2,500 for life of which the income element $456.78 will be included in taxable income each year.
It is assumed that the donor lives exactly nine years from the date the annuity contract was issued. Compared to a GIC earning 5% (the maximum assumed rate available for a long-term $25,000 GIC) and assuming the donor's marginal tax rate is 40%, the result will be as follows:
| Gift Annuity | |
| Total payment to charity | $25,000 |
| Payment by charity to insurance company | 18,389 |
| Eligible amount of the gift | $ 6,611 |
| Charitable tax credit | $ 2,644 |
| Total of tax free payments (2,500 - 456.78 x 9) | 18,389 |
| Total remaining payments after tax (456.78 x 9 x 0.60) | 2,467 |
| Total net after tax return to the donor | $23,500* |
| GIC: | ||
| Total amount deposited in GIC | $25,000 | |
| After tax income of GIC over nine years (0.05 x 25,000 x 9 x 0.60) |
$ 6,750 | |
| Eligible amount of the gift at death | $25,000 | |
| Charitable tax credit | $10,000 | |
| Total net after tax return to the donor | $16,750* | |
* Note that the net after tax return to the donor is $6,750 better under the annuity program. The average after-tax cash available to the donor each year would be $2,611 ($23,500 / 9) under the annuity program while the annual after-tax return to the donor each year with the GIC investment would be $750 ($6,750 / 9). In other words, the bulk of the benefit is received by the donor during the donor’s lifetime in the case of a gift annuity, while the bulk of the benefit is received by the donor’s estate in the case of a GIC investment when the gift of capital is made at the donor’s death.
If you have any questions, contact us.
The purpose of CCCC Stewardship Services is not intended to replace legal and other professional advisers. The goal is to provide Christians with information based on biblical principles to enhance the stewardship of resources entrusted to them.
The CCCC Seal of Accountability indicates that a charity adheres to high standards. Look for the Seal of Accountability when making decisions about which Christian charities to support.
