Why Charitable Gift Annuities are Having a Moment: Increased Rates and a New IRA Giving Opportunity
Charitable gift annuities (CGAs) are becoming even more attractive, making this planned giving vehicle a good fit for your clients who like the idea of an up-front tax deduction, a steady lifetime income stream, and a remainder gift to charity.
If you are not already doing so, now is a good time to consider talking with clients about CGAs. A CGA, like any other annuity, is a contract. Your client agrees to make an irrevocable transfer of cash or marketable assets to OCF. In return, OCF agrees to pay the client (or a designated beneficiary such as a spouse) a fixed payment for life. Your client is eligible for an immediate income tax deduction for the present value of the future amount passing to charity.
The popularity of CGAs is increasing for a few reasons.
Increase in payout rates
First, in late November 2022, the American Council on Gift Annuities voted to increase the rate of return assumption it uses in its suggestions for maximum payout rates for CGAs. Effective on January 1, 2023, the rate of return assumption moved from 4.50% to 5.25%. This increase translates to a significant boost in payout rates for annuity contracts and is therefore good news for a client’s income stream. The new rates are now available on the ACGA’s website.
New Legacy IRA opportunities
Second, with the December 2022 passage of the Legacy IRA enhancements to the Qualified Charitable Distribution (QCD) rules, CGAs could become even more attractive. This is because the new Legacy IRA rules allow for a once-in-a-lifetime, $50,000 QCD from an IRA to a split-interest vehicle. While the law allows a taxpayer to make a QCD to a charitable remainder trust, the $50,000 statutory maximum for a Legacy IRA gift may be a deterrent. This is because minimums for CRTs are usually at least $100,000;*, including at OCF. This is not the case, however, for CGAs, which typically can be established at much lower minimums. Because of the difference in minimums, the CGA may be more attractive for taxpayers who want to take advantage of the one-time Legacy IRA gift as part of a QCD strategy.
Note that CGAs created to receive a QCD contribution are different from other CGAs in a few important respects under the new law. For example, annuity payments are taxable as ordinary income, and must be at least 5%. Although the 5% requirement is not an issue at the moment due to the new, higher payout rates, this stipulation could present a challenge in the future. Also, since the transfer is a QCD from the client’s IRA, there is no upfront income tax deduction for the remainder value since the transfer is made free of taxation.
Tax planning with appreciated assets
Third, gifts of appreciated assets are always a strong planning technique, especially to a CGA. As an example, when a taxpayer contributes appreciated stock in a public company to a CGA, the taxpayer typically is eligible for a charitable income tax deduction of the remainder value, based on the stock’s fair market value on the date of the gift. When the recipient charity sells the stock, the charity pays no capital gains tax. Especially if the stock was paying low or no dividends, the CGA has enabled the taxpayer to unlock a low-income producing asset and convert it to a vehicle that pays an income stream. Plus, the taxpayer gets the benefit of the upfront tax deduction, presumably in a tax year when their taxable income is higher than it will be after they retire. In addition, the annuity will generally consist of capital gains and tax-free income as well as ordinary income so the tax liability for the income stream is generally less than many other similar sources of income.
We look forward to working with you to establish your clients’ philanthropic legacies.
The team at OCF is grateful to be able to serve as a resource for you as you work with your clients on their charitable planning. We are happy to run illustrations that show deduction amounts and anticipated taxation of annuity payments. Please reach out to discuss further or request an illustration for your clients. This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.