Overview

A charitable gift annuity (CGA) is a permanent, irrevocable agreement in which a donor transfers assets to a qualified nonprofit and, in exchange, the nonprofit promises fixed annual (or periodic) payments for the life of one or two annuitants. When payments stop, the charity uses whatever remains to support its mission. CGAs are popular with donors who want a predictable income stream plus a charitable benefit.

Authoritative resources: see IRS guidance on charitable contributions (Publication 526) and the IRS page on valuation rates (Section 7520) for how the tax deduction and valuation are calculated (IRS.gov), and the American Council on Gift Annuities (ACGA) for commonly recommended payout rates (acga-web.org).

How the mechanics work (step-by-step)

  1. The donor transfers a lump-sum gift to the charity. Gifts can be cash or appreciated marketable securities; some charities accept other assets but policies vary.

  2. The charity establishes the annuity contract and calculates the annuity payment. The payment amount is based primarily on the annuitant’s age(s) at the gift date and the charity’s payout rate (many charities reference ACGA suggested rates).

  3. The charity makes fixed payments to the annuitant(s) for life. Payments are typically annual, semiannual, or quarterly and do not change once set.

  4. Part of the donor’s gift is treated as an immediate charitable contribution for income tax purposes. The deductible amount equals the gift’s fair market value minus the present value of the expected annuity payments (actuarial value). The calculation uses actuarial tables and discounting rules (IRS Section 7520 rates).

  5. At the death of the annuitant(s), remaining funds in the annuity—if any—pass to the charity.

Typical timeline and practical examples

  • Example (illustrative): A 70‑year‑old donor gives $100,000 and a charity sets a lifetime single‑life annuity paying about $4,500 per year (4.5% payout rate). The donor receives annual payments and an immediate partial charitable income tax deduction equal to the contribution less the actuarial value of the annuity. Actual payout rates and deduction amounts vary by charity and by current actuarial assumptions.

  • Couple example: Two‑life (joint) CGAs pay a lower rate than a single life for the same combined age because payments continue until the second annuitant dies.

Note: Examples are illustrative only. Payout rates and deductibility change with published actuarial assumptions (ACGA guidance and IRS Section 7520 rate). Always get a charity’s exact illustration before acting.

Tax treatment and recordkeeping

  • Income tax deduction: Donors claiming itemized deductions can typically deduct the present value of the portion of their gift that will remain with the charity. That calculation uses the IRS Section 7520 interest rate in effect for the month of the gift (IRS Section 7520 guidance).

  • Taxation of payments: Each annuity payment may be a mix of ordinary income, capital gain (if the donor gifted appreciated property), and a tax‑free return of principal. The donor’s accountant uses the ‘‘exclusion ratio’’ or other IRS rules to determine how much of each payment is taxable (see IRS Publication 525 and charity illustrations).

  • Basis and capital gains: If you donate appreciated securities directly to fund a CGA, you typically avoid immediate capital gains tax on the transferred asset. That can make funding a CGA attractive compared with selling the asset and donating cash.

  • Reporting and records: Keep the charity’s annuity agreement, the gift receipt, the actuarial illustration showing the charitable deduction calculation, and the charity’s IRS determination letter (to confirm it’s a qualified 501(c)(3)). For deduction support, see IRS Publication 526.

Authoritative links: IRS Publication 526 (charitable contributions) and IRS Section 7520 information: https://www.irs.gov/retirement-plans/section-7520-interest-rates

Who typically benefits from a CGA?

  • Older donors seeking steady income and a philanthropic legacy. Many charities require a minimum age (many recommend 60+ for a single‑life CGA) and minimum gift sizes.

  • Donors with appreciated, low‑basis securities who want to avoid capital gains while converting an illiquid holding into lifetime income.

  • Donors looking for a predictable, simple contract (versus the more complex calculations and potential volatility of a charitable remainder trust).

Pros and cons

Pros:

  • Fixed lifetime income that’s simple and predictable.
  • Partial income tax deduction in the year of the gift.
  • Possible capital gains tax avoidance when gifting appreciated securities.
  • Simple agreement and low administrative cost compared with some other giving vehicles.

Cons / risks:

  • Payments are backed by the charity’s general assets, not by an insurance guaranty fund; the charity’s solvency matters.
  • CGA payout rates are fixed and do not increase with inflation.
  • Irrevocable: once created, you cannot reclaim the gift.
  • The tax benefit and the taxable portion of payments depend on current actuarial assumptions and IRS rates.

How CGAs compare to other charitable vehicles

  • Charitable remainder trust (CRT): CRTs can provide variable (unitrust) or fixed (annuity trust) payments, often with more flexible income planning, potential for higher growth through investments, and the ability to name remainder beneficiaries. But CRTs are more complex and expensive to set up and administer.

  • Qualified charitable distribution (QCD): QCDs let IRA owners 70½/72+ (rules changed over time; check current IRS guidance) make tax‑free transfers to charities and are useful for required minimum distribution planning. QCDs provide immediate tax benefit but no lifetime income.

  • Direct gift: A straight donation maximizes the charitable benefit but provides no income back to the donor.

For ideas on timing gifts and maximizing deductions, see our guide on [Bunching and Beyond: Multi-Year Strategies to Maximize Charitable Deductions](