How charitable gift annuities work (step‑by‑step)

  1. Donor transfer. A donor transfers a lump sum of cash or appreciated assets (commonly stock) to a qualified 501(c)(3) charity that offers CGAs.
  2. Contract & rates. The charity issues a contract promising fixed annual (or semiannual) payments to one or two annuitants for life. Payout rates are usually based on the charity’s policy and industry guidance (the American Council on Gift Annuities publishes recommended maximum rates).
  3. Income stream. The annuitant receives a fixed payment for life. Payments are partly a tax-free return of principal and partly taxable (ordinary income) depending on age, gift size and IRS calculations.
  4. Remainder to charity. After the annuitant(s) die, the charity keeps the remaining principal (the ‘‘charitable remainder’’) to support its programs.

(For background on similar vehicles, see these related guides: Charitable Remainder Trusts: Income and Philanthropy and When to Use a Charitable Gift Annuity vs Direct Donation.)

Typical profile: who benefits from a CGA?

  • Retirees seeking a simple, partly guaranteed lifetime income stream. Most CGA donors are older adults (commonly 65+), though younger people can use them too.
  • Donors who want to support a specific charity while keeping predictable cash flow.
  • People with appreciated securities who want to reduce immediate capital gains exposure and still receive income (structured nuances below).
  • Those who value a philanthropic legacy but also need near‑term income.

Caveat: CGAs are not a substitute for full retirement planning. Consider them alongside Social Security, pensions, IRAs, and other guaranteed income sources.

Taxes: what to expect

  • Charitable income tax deduction: Donors generally receive an immediate charitable deduction equal to the fair market value of the gift minus the present value of the annuity payments (the remainder interest). The present‑value calculation uses the IRS Section 7520 rate in effect for the month the gift is made (IRS guidance: Retirement Topics—Section 7520 rate) (IRS).

  • Taxation of annuity payments: Each annuity payment is typically reported as a mix of three components—tax‑free return of principal, ordinary income, and sometimes capital gains—until the donor’s investment in the contract is recovered. The carrier/charity reports this breakdown on Form 1099‑R when required.

  • Funding with appreciated assets: If you transfer appreciated stock, the charity typically sells the securities tax‑free when it’s a gift to a tax‑exempt charity; however, tax rules allocate gain between the charitable portion and the annuity portion, so some capital gain may be recognized by the annuitant when payments are received. Exact treatment depends on how the gift is structured—consult your tax advisor and the charity.

Authoritative sources: IRS pages on charitable giving and Section 7520 rates, and guidance from the American Council on Gift Annuities (ACGA) and National Philanthropic Trust (NPT) provide current practice details.

Example calculation (illustrative)

Assume a 70‑year‑old donor gives $100,000 in cash to a charity and the charity issues an immediate CGA with a 4.5% annual payout.

  • Annual payment: $100,000 × 4.5% = $4,500 a year for life.
  • Charitable deduction: Calculated as $100,000 minus the present value of the expected lifetime payments (using the 7520 rate and the annuitant’s life expectancy). If the present value of the payments is $45,000, the charitable deduction would be about $55,000.
  • Taxation of payments: Each $4,500 payment will be divided into tax‑free principal recovery and taxable portions until the principal element is exhausted. Exact numbers require the charity’s actuarial schedule.

This example is simplified; do not use it to prepare tax filings. Your actual deduction and tax‑free portion rely on IRS actuarial factors and the Section 7520 rate at the time of gift.

Risks and common downsides

  • Credit risk of the charity: A CGA is an obligation of the issuing charity backed by its general assets. If the charity becomes insolvent or restructures, future payments could be reduced or cease. State protections and charitable financial reserves vary.

  • Lower payout than market annuities: Commercial annuities (insurance companies) sometimes pay higher rates because they price for-profit risk and purchase reinsurance. A CGA’s payout is also affected by the charity’s desire to leave a meaningful remainder.

  • Irrevocability: Most CGAs are irrevocable once established. You generally can’t get your principal back.

  • Complex tax reporting: Funding with appreciated assets introduces capital gains nuances. The non‑charitable portion of the gift is often subject to taxation.

How CGAs compare to alternatives

  • Charitable remainder trusts (CRTs): CRTs offer flexible payout structures (unitrust or annuity trust) and can be set up to defer taxes or manage appreciated assets differently. For a deeper comparison, see FinHelp’s guide on Charitable Remainder Trusts: Income and Philanthropy.

  • Donor‑advised funds (DAFs) and direct gifts: DAFs let donors time grants and take immediate deductions without creating a lifetime income stream. For guidance on when a CGA may be preferable to a direct gift, see When to Use a Charitable Gift Annuity vs Direct Donation.

  • Commercial immediate annuities: If your priority is the highest guaranteed income, a commercial annuity from an insurance company may outperform a CGA, but it provides no charitable remainder.

Practical steps to set up a CGA

  1. Identify the charity: Confirm it is a qualified 501(c)(3) and that it has an established CGA program or partners with a community foundation that underwrites CGAs.
  2. Request the charity’s CGA disclosure: Ask for the contract, payout rate schedule, reserve policy, and sample actuarial allocation (how they calculate the charitable deduction and payment breakdown).
  3. Ask about state regulation and solvency safeguards: Some charities purchase reinsurance or pool reserves; others operate on general funds.
  4. Get tax projections: Request or obtain a worksheet showing the estimated charitable deduction, taxable portion of payments, and any capital‑gain implications.
  5. Coordinate with advisors: Work with your CPA and financial planner to ensure the CGA fits your cash‑flow, tax, and estate plans.

Due diligence checklist: questions to ask the charity

  • Are you issuing the CGA directly or through a pooled program? What safety nets exist if the charity fails?
  • Which payout rates do you use and how often are they updated? Are your rates aligned with ACGA recommendations?
  • Can you provide actuarial schedules showing the remainder interest and payment breakdown for my age(s)?
  • What costs or fees will be charged to the gift (administrative, legal or sales commissions)?
  • How will charitable funds be used after my death? Can I designate a program or fund?

When a CGA makes the most sense (professional view)

In my financial‑planning work, CGAs are most useful when a client needs modest lifetime income, wants an immediate charitable deduction, and prefers the simplicity of a direct charity contract over trust administration. They are particularly attractive when funded with low‑basis appreciated securities and the donor values making a meaningful gift to a specific institution.

However, if maximizing income or controlling tax timing is the priority, I often compare CRTs or commercial annuities first.

Sources and further reading

Professional disclaimer: This article is educational and not individualized tax, legal or investment advice. Rules for CGAs—tax treatment, state regulation and payout rates—change over time. Consult your CPA, estate attorney, and the issuing charity before establishing a charitable gift annuity.