Give away money, keep enough for retirement

Personal Finance

November 26, 2006|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

J. Richard Thomas was looking several years ago for a way to give back to Baltimore, where he grew up and made his living as a life insurance broker.

At the same time, the 81-year-old says, he wanted an income stream for life, particularly for his wife who is a few years younger and likely to outlive him.

The solution: a charitable gift annuity.

"It's a very efficient way for someone who needs income or wants income to give money away," Thomas says. He has gift annuities set up with several charities in Baltimore.

A charitable gift annuity allows an individual to make a donation to charity and get an upfront tax deduction for part of that gift. In return, the charity promises a lifetime income stream, sort of like a pension, based on the size of the gift and the donor's age. When the donor dies, the charity can use what money is left to finance its mission.

Gift annuities have been around since the 1830s, but the number of charities offering them has jumped in recent years. For instance, 345 organizations have permits to offer gift annuities in Maryland, up from 150 six years ago, according to the Maryland Insurance Administration.

Their appeal is likely to grow as donors live longer and have more years of retirement to finance. A gift annuity can fulfill the desire to do good while reducing qualms about running out of money.

"Very often you hear, `I would love to give more to charity but I'm afraid I will outlive my assets or I'll have a catastrophic illness,'" says Jamie Caplis, director of development at the Baltimore Community Foundation, which offers gift annuities. "I don't think many people know about charitable gift annuities."

You don't need to be rich to set up a gift annuity. Charities typically require a minimum donation of $5,000 or $10,000.

You can set up an immediate gift annuity, where you start receiving income shortly after making the donation. Or, with a deferred annuity, you can make a donation now and choose a future date for payments to begin.

The gift annuity can provide an income for one or two people, say, a married couple or a parent and child. The payout is based on the life expectancy of those receiving the income. The older the donor, the higher the payments. That's why planners often recommend that donors don't start taking payments until age 65 or older.

Most charities make payouts based on the recommendations by the American Council of Charitable Gift Annuities.

The group publishes a rate table at www.acga-web.org.

For example, the annual payout for an immediate gift annuity would be 5.5 percent of the original donation for a 55-year-old, 6.5 percent for a 70-year-old and 11.3 percent for someone 90 or older.

You can donate cash, appreciated securities and, in some cases, real estate. The charity will invest your donation along with those of others. Payments are made from this investment pool.

Part of your original contribution is returned to you as annual income, so you will only get a partial charitable tax deduction upfront. (The expectation is that once you die the charity will end up with at least half of the original donation.)

Also, if donating cash, some of the income you receive each year will be tax-free and the rest will be taxed as regular income. Donate appreciated securities held for more than a year, and part of the income will be tax-free and the rest will be taxed as capital gains and ordinary income.

(By donating securities instead of selling them yourself, you avoid an upfront capital gains tax bill.)

Kathleen Rehl, a financial planner in Florida, provides a recent example of an 88-year-old client who funded a gift annuity with $25,000 in appreciated mutual fund shares. Rehl says her client's charitable deduction is $14,145 and her annual payout will be $2,650, or 10.6 percent. Of that, Rehl says, $712 will be taxed as ordinary income, $289 will be taxed as capital gains and the rest will be tax-free.

Charitable gift annuities aren't for everyone. You must have money to donate that you aren't going to need to live on in retirement. Once a gift is made, you can't take it back.

"You have to be in a position where you don't need the principal, and ... you got to be in a position where you don't need the principal for children after your death," says Thomas, the retired insurance broker.

Also, a gift annuity is foremost a charitable donation, says Howard Max, assistant commissioner for life and health with Maryland's Insurance Administration. If your goal is to maximize retirement income, you can get a much better deal getting an annuity through an insurance company, he says.

Be aware, too, that payments are fixed for life. "If you're older, the fact that they don't go down is important," says Frank Minton, chair of the American Council of Gift Annuities. "If you're younger, you might want some inflation protection. You don't have that with a gift annuity."

If you decide on a gift annuity, make sure the charity is financially sound.

"Know who you are dealing with," Thomas advises. "It's important to pick a fiscally well-managed charity that is doing a good job."

Also, make sure the charity has experience doing gift annuities, says W. Thomas Curtis, a Gaithersburg financial planner.

One of his clients came into a windfall last year and wanted to set up a deferred gift annuity with an environmental charity. One group that had never done gift annuities before promised far more generous terms than the American Council recommends. That made Curtis uneasy. You don't want a charity making promises it might not be able to keep, he says.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@ baltsun.com. Podcasts featuring Ambrose can be found at baltimoresun.com/ambrose.

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