It all depends on what your goals are. If you are looking primarily to make a charitable gift, and getting a benefit is a nice secondary objective, then a charitable gift annuity could be a good idea. If you are looking to maximize the income you receive from an annuity, then a charitable gift annuity will likely not be a good fit.
What is a charitable gift annuity?
For simplicity’s sake, when we refer to an annuity in this article, it will mean an immediate income annuity. An immediate income annuity is when a lump sum of money is handed over to an insurance company, and in return the investor begins to immediately receive a monthly check for the rest of their life. A charitable gift annuity works very similar to a normal annuity, except the money is handed over to the donor’s preferred institution rather than an insurance company. Additionally, the donor usually receives additional tax benefits from the donation, as it is considered a charitable donation. The catch is that charitable gift annuities usually have lower income amounts than comparable private market annuities. The question is then whether the income from charitable annuities plus the tax benefits received exceed the income from a standard private market annuity. Based on annuity rates from 11/10/2022, it looks like the answer is going to generally be no. If you are looking to maximize the financial benefits from an annuity purchase, private market annuities seem to offer a better deal, although there may be situations where this isn’t the case. Let’s go through an example.
Charitable Gift Annuity vs Private Insurance Example
Susan is a 62-year-old, single female, who is looking to alleviate some of her longevity risk with an annuity. She is looking to purchase a $250,000 annuity with cash. Her alma mater conveniently sends some materials highlighting the benefits of charitable gift annuities. After doing some research she learns the following:
Key Data | |
Charitable Annuity Purchase Price | $250,000 |
Charitable Annuity Annual Income | $11,500 |
Charitable Deduction | $110,000 |
54% of income tax-free for 22 years | N/A |
Marginal Tax Rate | 32.00% |
Private Market Annuity Purchase Price | $250,000 |
Private Market Annuity Annual Income | $16,500 |
67% of income tax-free for 22 years | N/A |
Here’s a direct comparison between a charitable gift annuity and a private annuity.
The blue line represents the charitable gift annuity. It begins at about -$215,000 due to the $250,000 premium payment and the ~$35,000 tax benefit of the upfront charitable deduction. It was given favorable assumptions that the entire charitable deduction would be able to be used in the 1st year, and that Susan faced a 32% tax rate on the charitable deduction amount. In other words, the $110,000 charitable deduction received was able to offset $110,000 of income that faced income taxes at 32%. For the first 22 years, Susan would receive approximately $9,800/year after-taxes from the charitable annuity, and $14,750/year after-taxes from the private annuity. Afterwards, the entire income amounts would be taxable on both annuities, and the charitable gift annuity income would fall to about $7,800, and the private annuity income would fall to about $11,200. It would take about 8 years for the private annuity to deliver more benefits than the charitable annuity. Afterwards, the private annuity continues to outpace the charitable annuity.
In this example, it takes the charitable annuity about 22 years to provide benefits equal to the cost of $250,000. The private annuity returns an investor’s original payment to them in 17 years.
This example illustrates that if someone is primarily looking for an annuity with the highest benefits over a long life, the private annuity is likely to offer a better return than a charitable annuity. However, if someone is looking to primarily make a donation with their money, but is looking to get some benefits from their donation, and an annuity is an attractive benefit to them, then the charitable annuity could be a great fit for their situation.
Charitable annuities can provide significant benefits to donors, but they will likely deliver less benefits than a similar private market annuity.
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