Charitable gift annuity

Jun 18, 2024 Last reply: 2 years ago 2 Replies
A

A friend asked me to look up some information for him.



A charitable gift annuity is a one-time gift as a qualified charitable distribution from your IRA, counted against the QCD limit for the year. There is no deduction for the charitable contribution but the QCD is excluded from taxable income. It counts against required minimum distribution if the taxpayer is subject to RMDs.



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This article talks about contributing to the annuity with post-taxed monies beyond the one-time gift. There is a charitable contribution deduction for the portion the benefits the charity. The tax advantage is that a portion of the distribution from the annuity counts as return of principle and therefore not taxable income... after you've already taken the charitable deduction.



I don't understand how these calculations are made. When contributing to the annuity, a portion is a gift but another portion is principle that may be returned if it doesn't earn enough for the fixed payments? Or can a portion of the deduction for the contribution be clawed back?



Funding it from post-taxed monies allows you to control when you begin receiving the distribution. Funding it with the one-time gift, the distribution begins immediately, and is fully taxed as ordinary income. It's unclear to me what portion counts of return of principle.



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There are two similar concepts, a charitable remainder trust and a charitable remainder ANUITY trust. I haven't looked up how the rules apply to different situations in which these might be considered advantageous to the taxpayer.



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B

I read the Kiplinger article. It provided what I would certainly characterize as a VERY high-level explanation of this transaction. The way I would break it down is you start with an IRA. You make a gift from the IRA to the charity. This reduces how much you may use for QCDs for the rest of the year. You don't count the gift in income as a distribution. You don't get a charitable deduction. The charity will pay an amount annually based on the contribution and the ACGA payout rate. The payout will be low enough that, actuarially speaking, a portion will not be used. I think this is to meet the IRS anti-abuse rules. That's why the payments are lower than if you purchased an SPIA from an insurance company. The charity will allocate a portion of the payout to principal and the balance to income each year based on life expectancy and assumed interest rate.

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A

What about the Schwab article, which discusses contributions with post-taxed monies? You have taken the charitable deduction. With return of principle, must the charitable deduction be clawed back, or is the allocation between charitable contribution and principle to be returned in future made at the time of contracting for the annuity?

That isn't explained.

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