The mechanism of the charity gift annuity is exactly like that of the common annuity, fixed or variable type. These annuities are basically a combination of both, an investment and also a charitable gift to charitable institutions, which again provides a significant and genuine tax advantage.
An annuity is a contract between an investment company or financial institute or any other annuity provider and the owner/annuitant. In such a contract the company accepts certain investment payments from individuals and reinvest them into a highly reliable portfolio under the monitor of certain fund managers. The proceeds from that portfolio are then paid off as returns or annuity payments on a periodic basis to the annuitant, or rather the beneficiary of the annuity.
A majority of the annuities also tend to have a certain death benefit. Now depending upon the features of the annuity there are several details which may differ such as the number of years for which the investment payments are to be paid, the time period between two payments, commencement of the return payments which are made by the company to the annuitant and the time interval between these payments.
The returns can be fixed, variable or there can be a combination of both. Fixed returns, are the ones where the total annuity payments, which are also known as annuity living benefits, amount of which is repaid to the annuitant is fixed. On the other hand, the payments from a variable annuity depend upon factors such as portfolio performance, the performance of the economy and other such factors.
Facts About Charitable Gift Annuity
Charitable gift annuities, may work as variable or even fixed. These annuities are chiefly classified to be 'Planned Giving', under the Tax rules. American Council on Gift Annuities sets forth definitions, guidelines, investment and reinvestment norms for all charitable gift annuities.
An annuity as a charitable gift is a bit more unconventional from the point of view of acceptance of deposits of payments from the 'donors' of the annuity. The donors can donate, cash, real estate, marketable and evaluable securities and assets. The annual payment by the 'donor' is fixed from the beginning. The annuity payments in most of the cases are also fixed and in fact, it must be noted that the rate of return offered may be a bit lower than the usually prescribed rates.
Conventionally, these predetermined payments are affected by factors such as the age of the annuitant, value of the annuity, payments or donations from the annuitant and most important of all, the nature and rate of interest/returns offered by the institute.
There is a two-way advantage of having such a cash flow, one, the annuitant has a regular income once the annuity payments commence and secondly, the annuity installments made by the annuitant tend to give the charitable institute a great and assured inflow of cash. As against the other annuities, almost all charitable gift annuities do not have any death benefit.
In cases of charitable gift annuities, the 'vehicle' of provision of investment is provided by the charitable organization itself or by some financial institute which forwards the donations to the charitable institutes which are defined by the annuitant. Fact is, the 'profit' element is partially donated to the charitable institute. This 'profit' is the return on investment which you would receive through the annuity.
This donation amount sounds very small, but in reality it is huge owing to the versatile and high volume of principle and high rate of return on investment. The principal amount invested plus 4-6% return on investment is repaid to the annuitant/donor. Annuitants with philanthropic motives can also have a provision wherein 0% return on investment or a no rate at all is offered to the annuitant. Here the return on investment is donated charitably, and the principle invested amount is returned to the annuitant.
The charitable gift annuities are meritorious in 3 ways, one they provide a distinct advantage over tax liabilities of a person, they also have a great philanthropic side to them and lastly, they tend to provide an assured monthly income.