How to Donate to Charity and Get Income in Return

By David Rodeck
From Kiplinger’s Money Power

Q: I’ve been thinking of making a sizable donation to charity, but I’m a bit worried about giving away money I might need in retirement. I’ve heard that a Charitable Gift Annuity could be the answer. How does that work?

A: A Charitable Gift Annuity can generate retirement income for you from assets you donate to the charity. After you make a single lump sum donation, the charity sets up an annuity contract.

“It’s like getting a pension,” says Patrick Simasko, an elder law attorney in Mount Clemens, Michigan. “They’ll pay you a fixed, predictable income stream for the rest of your life. Once you die, anything leftover stays with the charity.”

The amount of income depends on the charity, the size of your gift and your age—the older you are, the higher the payment.

Bruce Tannahill, director of estate and business planning for MassMutual, says that charities typically pay the same rates, using those recommended by the American Council of Gift Annuities. “That way organizations are competing for donors based on what they offer as a charity, not what they pay for annuities,” he says. For example, if you’re 65, the current rate is 4.2 percent, and a $100,000 donation generates $4,200 in annual income for the rest of your life.

Because you forfeit some annuity income, the IRS gives you an upfront deduction worth the estimated present value of all the missed payments over your expected lifetime. The charity or a tax adviser can calculate the total deduction before you make the donation, which can be a variety of assets, but don’t use retirement account money as that counts as a withdrawal, with income tax owed on the gift before it’s donated.

Simasko says charitable gift annuities are also quick and inexpensive to create. “The charity will give you a contract to fill out, and you transfer the assets. That’s it. You don’t need a lawyer.”

That simplicity comes at the cost of flexibility. These annuities lack inflation protection, and once you set up the contract, you can’t get your money back or change the annual payment. The gift annuity must be with only one charity, and not all offer gift annuities. “They’re usually available only at the large, established charities,” says Tannahill.

(David Rodeck is a contributing writer at Kiplinger’s Retirement Report. For more on this and similar money topics, visit Kiplinger.com.)

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