Alliance Financial Care
Increase Your Fixed Return While Still Benefiting Ministry
Posted by Rob Pease on January 15, 2018
In this edition of Alliance Financial Care, I’m interviewing Joseph Padilla, Vice President for Development with The Orchard Foundation, about charitable gift annuities (CGA). We specifically want to address how ADF investors can increase your fixed return anywhere from 4.6% to 9% (it varies by age) while still benefiting your ministry by partnering directly with The Orchard Foundation.
Joseph has been a regular contributor to the last several issues of Alliance Financial Care. He is a close friend and colleague and has been with The Orchard Foundation for more than 13 years. I have observed Joseph over the years and have seen firsthand his heart for ministry and serving donors.
Can you help explain what a CGA is?
A “charitable gift annuity” is a contractual agreement between one or two donors (typically husband and wife) and a charity. The donor(s) transfers assets as a gift to the charity. In return, the charity promises (“is obligated”) to pay a fixed annuity for life to the annuitant(s) of the donor’s (or donors’) choosing. A CGA is a way to make a gift to your favorite charity and still receive an income for yourself or others.
For clarity, the person who contributes an asset for the annuity is called the “donor,” and the person who receives the payments is called the “annuitant” or “beneficiary.” Usually, the annuitant is also the donor, but this is not always true. The maximum number of annuitants is two, and payments can be made to them jointly or successively. A jointly paid annuity pays to two persons simultaneously, and at the death of the first annuitant, the survivor is paid the full annuity amount. A two lives successively paid annuity pays first to person “A” only until their death and then if person “B” survives person “A,” payments go to person “B.”
Can you also explain who benefits from a CGA?
Most gift annuity donors are retired, want to increase cash flow, see the security of fixed payments, and would like to save on taxes. A CGA could be right for you in any of the following circumstances:
- Interest rates on your CDs and other fixed-income investments have declined, or you would like to increase your cash flow.
- You own appreciated stock or mutual fund shares and have considered selling some of the shares and reinvesting the proceeds to generate more income, but you don’t want to pay taxes on the capital gain.
- You desire fixed payments that are unaffected by interest rates and stock prices and which you cannot outlive.
- You want to ensure continuation of payments to a surviving spouse without the delay of probate proceedings.
- You’re looking to provide financial assistance to an elderly parent, a sibling, or another person in a tax-advantaged manner.
- You are an individual or couple age 65 or older and would like to receive immediate payments, or you are an individual or couple age 55 or older who are willing to defer receiving payments until age 65.
- You desire to gift to ministry.
- You want the security of a fixed income for life.
- You might need a tax deduction and/or lower current taxable income.
What are the advantages of having a CGA?
CGAs are simple to create and easy to understand. They are also advantageous for several other reasons, including:
- They provide immediate tax benefits.
- They offer dependable income for one or two people.
- They require a low initial gift amount to start ($10,000).
- They have great rates (ACGA Rates – Age Based).
Speaking of great rates, I understand there are great rates available through a CGA. Can you tell me more?
Since 1927, the American Council on Gift Annuities (ACGA) has periodically published a schedule of suggested charitable gift annuity rates. Although a charity is free to offer any schedule of rates it wishes – so long as its rates don’t exceed the limit imposed by federal and state laws – most charities follow the rates the ACGA suggests. Thus, donors generally find that the rates offered by various charities are identical. This consistency encourages donors to make philanthropic decisions based on the causes of the charities they consider supporting, rather than the rates offered. The Orchard Foundation has always followed the rates of the ACGA.
Charitable gift annuity rates are lower than those offered by insurance companies on commercial annuities, so a significant portion of a contribution will be available for charitable purposes. Though lower than commercial rates, gift annuities are still very attractive to individuals who want simultaneously to support a favorite charity and provide payments to themselves or others.
If I’m not age 65 yet, can I still benefit from a CGA?
Yes, a deferred CGA can begin as early as age 55, and payments will be deferred until age 65. Although payments are deferred, you receive an immediate charitable deduction when you establish the CGA and you get a higher gift annuity rate because of the deferral period.
What assets can be used to fund a CGA?
A cash gift is an excellent way to fund a gift annuity. A portion of the annuity income will be tax-free. Appreciated securities can also be a way to fund a CGA (stocks, mutual funds, etc.).
How much of my gift goes to the ministries I have selected?
While the rate and payments are important, providing for Kingdom work is also very important. Since 1955, the ACGA has targeted a residuum (the amount realized by the charity upon termination of an annuity) of 50% of the original contribution for the gift annuity.
How much can I deduct as a charitable donation?
Because deductions are based on age and the amount of the CGA contribution, I will give you two examples:
|Age||Rate||CGA Amount||Annual Payment||Charitable Deduction|
For years, ADF investors with charitable intent have been able to transfer their investment certificates or other qualified ADF accounts to CGAs penalty-free. So is there a minimum for doing so, and how do I go about opening a new CGA?
The minimum is $10,000 and you can contact me or a member of The Orchard Foundation team for a customized illustration at 888-689-6300 or firstname.lastname@example.org.
Thanks, Joseph, for taking the time to explain this opportunity. At ADF, we always talk about the Double Duty principle: your resources working for you and ministry. And CGAs certainly accomplish both those goals. It’s great when we can partner together in building the Kingdom!