Overview

A Charitable Gift Annuity (CGA) lets a donor combine philanthropy with income planning: you give an irrevocable gift (cash, securities, or other property) to a charity and the charity agrees to pay a fixed amount to you (and sometimes a second beneficiary) for life or for a specified term. At the gift date you receive a partial charitable income tax deduction. At the annuitant’s death, the charity keeps the remaining principal.

How a CGA is structured

  • Gift: You transfer assets to a charity and the charity becomes the owner of those assets.
  • Annuity: The charity promises fixed payments (monthly, quarterly, or annually) to the designated annuitant(s). Payments do not change for inflation unless the charity offers a special indexed annuity (rare).
  • Remainder: After payments end, any remaining value stays with the charity to support its mission.

Key parties and documents

  • Donor (giver of assets)
  • Annuitant(s) (recipient(s) of the income stream)
  • Charity (issuer of the annuity contract)
  • Written agreement (the CGA contract) detailing payout rate, payment schedule, beneficiaries, and whether the annuity is single or joint-and-survivor.

Tax basics (2025) — how the deduction and income are calculated

  • Charitable deduction: The donor’s income tax deduction equals the fair market value (FMV) of the contributed property minus the present value (PV) of the annuity payments the donor (or beneficiary) will receive. The present-value calculation commonly uses the IRS Section 7520 rate and actuarial life-expectancy tables; charities often use the same assumptions in their contracts (IRS guidance summarizes the mechanics). See the IRS page on charitable gift annuities for specifics: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-gift-annuities.

  • Taxation of annuity payments: Payments are typically treated as composed of three parts — tax-free return of principal (exclusion ratio), ordinary income (if any), and capital gains (if the gift was appreciated property). The exclusion ratio determines the portion of each payment that is tax-free until you have recovered your basis. If you donated highly appreciated securities, the capital-gain portion is usually spread out over the expected payments, not due all at once, but specific tax treatment depends on the type of property and the annuity contract.

  • Reporting: Charities usually issue a year-end summary and may issue Form 1099-R to annuitants showing taxable income. Consult IRS instructions and your tax advisor when preparing your return.

Payout rates and expected returns

  • Payouts are a percentage of the gift’s value and vary by annuitant age, single vs. joint, and the charity’s pricing. Recommended minimums are commonly set by the National Association of Charitable Gift Annuities (NACGA); typical ranges in recent years have been roughly 4% for younger annuitants to 8–9% or higher for very senior annuitants. Actual charity rates may differ.

  • You should treat the CGA’s “return” as the sum of current income plus the present value of the future charitable gift (tax deduction and eventual remainder to charity). A CGA often produces higher current income than Treasury yields for older donors because payout rates are age-based.

Risks and limitations

  • Credit risk: CGA payments are unsecured obligations of the issuing charity. If the charity becomes insolvent or faces financial stress, payments could be reduced or terminated. Evaluate the charity’s financial statements and Form 990.

  • Inflation risk: Payments are fixed, so purchasing power declines over time. CGAs are less attractive to donors who need inflation-adjusted income.

  • Irrevocability and liquidity: CGAs are usually irrevocable. You generally cannot take back or reassign the gift, and the charity typically will not allow cancellation for an equivalent refund.

  • Opportunity cost: Funds used for a CGA are no longer available for other investments that might appreciate more or provide inflation-protected income.

  • Complexity and tax pitfalls: Calculation of the charitable deduction, exclusion ratio, and character of income can be complex. Mistakes in tax reporting or failing to document the gift can create surprises.

Comparing CGAs to alternatives

  • Immediate annuities: An immediate commercial annuity will often pay a higher rate because the issuer is an insurance company and not giving a charitable remainder; however, you won’t get a charitable income tax deduction.

  • Charitable Remainder Trusts (CRTs): CRTs (CRUTs or CRATs) can offer investment flexibility, possible higher payouts, and treatment of capital gains when you contribute appreciated assets, but they are more complex and costly to set up and administer. For a deeper comparison, see FinHelp’s guide: Charitable Remainder Trusts: What You Need to Know (https://finhelp.io/glossary/charitable-remainder-trusts-what-you-need-to-know/).

  • Donor-Advised Funds (DAFs) and other planned-giving vehicles: DAFs provide immediate tax deductions with retained advisory power over distributions, but they do not pay lifetime income. For other legacy tools and how they fit together, see Planned Giving Tools: Endowments, Charitable Trusts, and Bequests (https://finhelp.io/glossary/planned-giving-tools-endowments-charitable-trusts-and-bequests/).

Practical steps before you sign a CGA contract

  1. Check the charity’s financial health: Review audited financials and IRS Form 990. Ask how the charity funds annuity obligations — from a reserve fund, pooled endowment, or current assets?
  2. Ask if the charity follows NACGA payout recommendations and whether it publishes payout history.
  3. Request a written disclosure: You should receive a contract showing the actuarial assumptions, payout rate, exclusion ratio, and the estimated charitable deduction.
  4. Compare expected after-tax cash flow to alternatives (immediate annuity or bond ladder) using your marginal tax rate and life-expectancy assumptions.
  5. Consult your tax advisor: The calculation of the deduction and the tax character of payments depends on the 7520 rate and specifics of the gift (e.g., appreciated property).

Example (illustrative, not exact)

  • Gift: $100,000 in publicly traded stock to Charity A.
  • Annuitant: you, age 75.
  • Charity payout: 5% annually ($5,000 per year).

The charitable deduction would be the $100,000 FMV minus the present value of the $5,000-per-year annuity for your lifetime. The present value uses actuarial tables and the IRS Section 7520 rate in effect for the month of the gift. Part of each $5,000 payment is treated as tax-free return of basis (until the exclusion ratio is exhausted), part as ordinary income, and a portion attributable to capital gain on the gifted stock may be taxed as capital gain when recognized. Exact numbers depend on the 7520 rate and the charity’s calculations; this is why a written calculation is essential.

Professional perspective

In my practice I’ve had donors use CGAs effectively when they want predictable, simple income and are comfortable with the issuing charity’s credit. CGAs often make sense when a donor is older, wants to decrease taxable income in the current year via the charitable deduction, and values simplicity over potential higher returns from more complex vehicles. I advise clients to compare projected after-tax cash flow, not only nominal payout percentages.

Regulatory and best-practice notes

  • Section 7520: The IRS Section 7520 rate is used in many charitable present-value calculations. The rate fluctuates monthly and materially affects the charitable deduction and taxable income split.
  • State rules: Some states regulate CGAs or require charities to disclose specific financial information; check state charity regulators or your attorney.
  • NACGA guidance: Many charities follow NACGA recommended minimum payout rates and disclosure templates — ask whether the charity does and request their NACGA compliance statement.

Common mistakes to avoid

  • Not getting the disclosure in writing.
  • Forgetting to confirm whether the charity is a NACGA member or follows its recommended practices.
  • Assuming payments are inflation-protected.
  • Overlooking how capital gains on gifted property are reported and taxed.

When a CGA may be right for you

  • You want a simple, predictable income stream and to support a specific charity.
  • You prefer an immediate partial tax deduction and are comfortable making an irrevocable gift.
  • You are older (higher payout rates for older annuitants) and value the charity’s mission alongside income needs.

When a CGA may not be right

  • You need inflation-adjusted income or full liquidity.
  • You prioritize maximizing estate value for heirs rather than leaving a charitable remainder.
  • You’re concerned about the charity’s credit or want more control over invested capital (in which case a CRT or DAF may be better).

Next steps and checklist

  • Obtain the charity’s written CGA illustration showing payout rate, exclusion ratio, and estimated charitable deduction.
  • Review the charity’s Form 990, audited financials, and NACGA membership or disclosures.
  • Run a side-by-side comparison of after-tax cash flows for a CGA, an immediate commercial annuity, and a CRT or bond ladder.
  • Consult your CPA or tax attorney to model the deduction and the annuity’s tax character under current IRS rules.

Authoritative sources and further reading

Professional disclaimer

This article is educational and general in nature and does not constitute tax, legal or investment advice. Exact tax consequences of a CGA depend on the donor’s situation, the type of property transferred, state law, and the charity’s contract terms. Consult a qualified tax advisor, attorney, or certified financial planner before establishing a CGA.