How charitable gift annuities (CGAs) provide income and support

Charitable gift annuities combine an outright gift with a simple, predictable income stream. You give a lump-sum gift to a 501(c)(3) charity and the charity agrees to pay you (and, if you choose, a designated co-annuitant) a fixed annual amount for life. Payments are generally based on the donor’s age at transfer and an annuity rate the charity follows; the remainder stays with the charity when the annuitant(s) die, supporting the nonprofit’s mission.

This structure appeals to donors who want dependable income but also care about philanthropic impact. Because the charity handles the administrative and investment responsibilities, CGAs are usually easier to set up and maintain than trust-based alternatives.

(For federal tax rules and basic guidance, see the IRS information on charitable gift annuities.)

Background and context

CGAs date back to the 19th century and were originally used by churches and hospitals to support long-term work while helping older donors maintain income. Over time the arrangement has become a mainstream planned-giving tool for colleges, cultural organizations, and health institutions.

In practice, charities typically follow the American Council on Gift Annuities (ACGA) suggested rates when setting payout schedules; those rates are updated periodically and are age-based. Because CGAs are regulated differently by state law, many charities keep a portion of gifts in reserve to meet future payment obligations (state reserve rules vary).

How a CGA actually works — step by step

  1. Confirm eligibility: you and the charity. The charity must be a qualified 501(c)(3) organization willing to issue CGAs. Many charities limit CGAs to donors above a minimum age (commonly 60), though policies vary.
  2. Donate property: most CGAs accept cash and marketable securities; some accept real estate or closely held stock but may require immediate sale or special handling.
  3. The charity calculates the annuity: payment amounts are determined by the donor’s age(s) and the charity’s payout schedule.
  4. Payment begins: the charity pays a fixed dollar amount at the agreed frequency (annually, semiannually, or quarterly).
  5. Tax reporting: the donor may receive an immediate charitable income tax deduction for the present value of the remainder interest. Portions of annuity payments are treated as tax-free return of principal, ordinary income, or capital gains depending on the asset gifted and the payout structure.
  6. Remainder to charity: after the annuitant(s) die, the charity retains the remaining principal and uses it per donor instructions or unrestrictedly if no restriction exists.

Example scenarios

  • Single-life CGA: A 75-year-old donor gifts $100,000 in cash. Based on the charity’s schedule, the donor receives fixed annual payments for life (for illustration only—specific rates vary). After the donor dies, the charity keeps the remainder.

  • Joint-life CGA: A married couple names the younger spouse as the survivor; the annuity pays both while alive, switching to the survivor after the first death, usually at a reduced combined rate.

  • Gift of appreciated stock: Some donors give long-term appreciated securities to a charity to fund a CGA. The charity generally sells the securities (without the donor recognizing capital gain if the charity sells, but the tax treatment of annuity payments may include a portion attributable to capital gains). The donor’s charitable deduction and the taxable components of payments depend on IRS calculation rules.

Because tax treatment is complex and factspecific, donors should work with tax counsel or a CPA before donating appreciated property.

Tax and financial considerations (practical summary)

  • Charitable deduction: donors typically receive an immediate charitable income tax deduction equal to the present value of the remainder interest; that value is computed using IRS life-expectancy tables and an applicable discount rate.
  • Taxation of payments: CGA payments can include ordinary income, tax-free return of basis, and—if funded with appreciated property—capital gains. The taxable mix is reported to the annuitant on IRS Form 1099-R and can vary over time.
  • Estate and gift tax: because the gift is partially completed at the time of transfer, CGAs can reduce estate value. The exact estate tax effect depends on remaining life expectancy and the deducible remainder value.

Authoritative resources: IRS guidance on charitable gift annuities and recommended payout-rate guidance from the American Council on Gift Annuities are essential references when modeling tax effects (IRS; ACGA).

Who typically uses CGAs — eligibility and suitability

  • Older donors seeking lifetime income who also want to support a charity.
  • Donors who want simpler administration than a trust-based arrangement (CGAs are issued by the charity and do not require a separate trust or trustee).
  • Donors willing to accept fixed payments (no cost-of-living adjustments) and who do not need full liquidity of the gifted funds.

CGAs are less suitable for donors who need inflation protection, want high levels of flexibility, or require a large tax-efficient distribution plan for heirs. If you need flexibility or variable payouts tied to investment performance, consider alternatives such as a charitable remainder trust (see: “Charitable Remainder Trusts: What You Need to Know”) or donor-advised funds (see: “Donor-Advised Funds: Pros, Cons, and Use Cases”).

Key advantages

  • Predictable, guaranteed lifetime income backed by the issuing charity’s general resources.
  • Immediate partial charitable income tax deduction in the year of the gift.
  • Simpler administration than trusts — the charity issues payments and handles investment.
  • Possible capital gains advantages when gifting appreciated, long-term securities (subject to taxable components in payments).

Limits, risks and common pitfalls

  • Irrevocable: CGAs are usually final — you cannot reclaim the principal once the contract is signed.
  • No inflation adjustment: payments are fixed and do not track inflation, so purchasing power declines over time.
  • Credit risk: payments depend on the issuing charity’s financial health; CGAs are unsecured obligations of the charity, not insured by the federal government.
  • State rules and reserves: state laws can affect a charity’s ability to issue CGAs and how much must be set aside; confirm the charity follows good practices.
  • Tax complexity: the split between tax-free, ordinary, and capital-gain components can be complex and varies by asset type funded and annuitant age.

How to evaluate a CGA offer — practical checklist

  • Confirm the charity is a qualified 501(c)(3) and experienced in issuing CGAs.
  • Ask which payout rates they use and whether they follow ACGA suggested rates; request a sample illustration.
  • Verify how the charity invests annuity reserves and whether it maintains a reserve fund to meet obligations.
  • Request a written contract showing payment frequency, survivor provisions, and what happens if the charity dissolves.
  • Model taxes with a CPA — get an estimate of your charitable deduction and the taxable portion of payments.
  • Compare alternatives: a charitable remainder trust (CRTs) can offer investment flexibility and inflation protection; donor-advised funds (DAFs) provide tax advantages and grant flexibility but do not provide lifetime income. For comparisons, review our guides to charitable remainder trusts and donor-advised funds.

Helpful internal reading: Donor-Advised Funds: Pros, Cons, and Use Cases and Charitable Remainder Trusts: What You Need to Know.

Practical setup steps (what I do with clients)

In my practice I follow a repeatable process when a client asks about CGAs:

  1. Clarify goals: income needs, charitable priorities, legacy goals, and tax situation.
  2. Obtain illustrations: request payout and deduction illustrations from the charity for several ages and gift amounts.
  3. Tax modeling: run after-tax cashflow and deduction scenarios with a CPA to show short- and long-term effects.
  4. Compare vehicles: contrast the CGA with CRTs and DAFs on taxes, investment flexibility, and estate impact.
  5. Document the gift: review the charity’s CGA contract carefully and confirm reporting procedures for Form 1099-R.

Case study (anonymized)

A retired client in her late 70s wanted modest additional income and a way to support her alma mater. We modeled a CGA funded with cash and compared it to a charitable remainder trust. The CGA gave a slightly higher immediate payout with simpler administration and a meaningful charitable deduction; the CRT offered more flexibility (continued investment growth) but higher setup and ongoing costs. The client chose the CGA for simplicity and reliable payments.

Frequently overlooked details

  • Ask whether the charity will accept noncash gifts and how it will handle sale/tax reporting.
  • Confirm survivor options and whether starting payments can be deferred to increase payout.
  • Make sure the charity provides timely Form 1099-R reporting for tax filing.

Professional disclaimer

This article is educational and not a substitute for personalized legal, tax, or financial advice. Rules that affect charitable deductions and annuity taxation are detailed and fact-specific; consult a qualified tax advisor, estate attorney, or financial planner before establishing a CGA.

Sources and further reading

If you’re considering a CGA, start by requesting a written illustration from the charity and schedule a tax planning meeting to model the deduction and payment taxation.