The gift annuity is an arrangement under which you make a contribution to the Texas Methodist Foundation (TMF) and receive, in turn, guaranteed payments for life. It’s a way of giving that allows you to make a substantial gift even though you may need ongoing cash flow from your assets.
What are the Benefits?
In addition to stable payments, a charitable gift annuity provides other benefits, including:
- A portion of the payments is usually tax-free for a period of time
- Charitable deduction in the year of the gift
- An annuity rate often higher than the interest paid on current fixed investments
- Reduced capital gains tax
- Satisfaction of assisting TMF in its mission
How Does It Work?
Most charitable gift annuities are funded with cash or long-term appreciated securities. When you contribute securities, the annuity payments will probably exceed the dividends you were receiving.
While donors usually name themselves as beneficiaries, a relative or friend could be named as well (perhaps to provide support to an aged parent or a sibling who needs financial assistance). Married persons typically provide for payments to be made over both of their lives. When the first spouse dies, the payments continue at the same level to the survivor.
Texas Methodist Foundation invests and manages your contribution, and at the end of your life the remainder is available to TMF for present or future work.
The amount of the annual payments will depend on the amount transferred, the ages of the beneficiary(ies), and the annuity rate schedule in effect at the time of the gift. Once the annuity is established, the payments will remain fixed, regardless of changes in the economy. This makes the gift annuity especially attractive to older donors who like the security of fixed, stable payments.
What About Taxes?
The most notable tax benefit of a gift annuity is the charitable deduction in the year of the gift. The amount of the deduction depends on the rates in effect and on the age(s) of the annuitant(s) at the time the annuity is established. An additional benefit occurs when appreciated securities are contributed. Capital gains tax is avoided on the part of the property that is considered a gift. The rest of the capital gain (assuming the donor is one of the beneficiaries) will be recognized over a period of years, spreading out payment of the capital gains tax. Consider the following examples:
Peter and Norma M, both age 75, contribute $10,000 cash to our organization for a gift annuity, naming themselves as the beneficiaries. As long as either of them lives, they will receive payments of $500 per year (an annuity rate of 5 percent). For the duration of their life expectancy, $384.50 of their annual payments will be tax-free. They will also receive a charitable deduction of $3,695, which Peter and Norma can use if they itemize their deductions.
Mildred R, who is 80 years old, contributes $20,000 of securities (with an original cost of $8,000) to Texas Methodist Foundation for a gift annuity. With an annuity rate of 6.9 percent, she receives fixed, stable payments of $1,380 per year as long as she lives. For the duration of her life expectancy, $439.94 of her annual payments will be tax-free, and $659.92 of them will be taxed as capital gain. She also receives a charitable deduction of $9,666 which Mildred can use if she itemizes her deductions.
Gift annuities are a popular gift vehicle, allowing people the opportunity to support a charity and at the same time provide for their future financial security. We would be pleased to answer your questions, send you a personal financial illustration, or schedule a meeting with you. There is no charge and you are under no obligation. Let us hear from you if you want to take a closer look.
Please note that this information is for illustrative purposes and is not intended as tax or legal advice. Calculations are subject to change, as are rates which are suggested by the American Council on Gift Annuities.