Retired clients can put their qualified charitable distributions to work for a small, taxable income stream if they exercise care using charitable gift annuities (CGAs), advisors say.
“A CGA is essentially an agreement or contract between a donor and a 501(c)(3) qualified charity. The donor makes a gift to a charity under contract using cash or appreciated assets to fund the CGA and forfeits all future rights to the assets donated,” said Don Evans, president and CEO of Crewe Foundation in Salt Lake City. “In return, the donor becomes eligible to take a partial income tax deduction and receives a fixed-income stream from the charity for life.”
“CGAs are generally simpler and don’t require the kind of complex trust management that CRTs do,” added Abby Axelrod-Wunderman, philanthropic director at Fiduciary Trust International in New York. “Plus, CGAs are often better for smaller gifts. CGAs are a fixed payment for life often at a lower payout rate compared to CRTs.”
Most nonprofits offer annuity rates suggested by the American Council on Gift Annuities (ACGA), and the annuity is taxed as ordinary income.
“CGAs don’t make sense for everyone but can be a good option for those who are charitably inclined but also need, or want, an income stream,” said wealth advisor Krissy Rhoades, a CPA with Adero Partners in the San Francisco Bay Area.
QCD-funded CGAs have a $54,000 limit for 2025, and a husband and wife can jointly fund a CGA up to $108,000, Rhoades said. Many charities set minimum amounts they’ll accept for a CGA, she added, and each state has its own rules and requirements. A QCD can be used only once in a donor’s lifetime to fund a CGA.
The annuity amount differs for each grantor depending on the gift amount, donor’s age and payout rate set by the charity, Rhoades said. Donors can also defer the start date of their annuity payments.
These payouts do have certain requirements to qualify for tax and financial advantages. The donor must be at least 70½ years old at the time of the transfer, for example, and the transfer must be from an IRA.
CGAs must be made to a 501(c)(3) qualified public charity; not all entities qualify and not all choose to do CGAs. The most notable charitable organizations that cannot establish a CGA are donor-advised funds and private foundations, said Brian Tullio, wealth manager at Fairway Wealth Management in Independence, Ohio.
“The QCD needs to go directly to the charity, not to the donor first, to get the tax-free transfer,” Axelrod-Wunderman said.
“The annuity payments are going to be very small, a few thousand dollars a year,” said David Handler, partner in trusts and estates at Kirkland & Ellis in Chicago. “Most clients either want to give to charity, or do not, and are not counting on receiving payments back from the charity to live on.”
“With interest rates expected to drop, from a tax perspective, CGAs could be less attractive because lower interest rates usually mean lower tax deductions for the charitable gifts and possibly lower payouts,” added David Silversmith, a CPA and senior manager for private client services at Eisner Advisory Group in New York.
Tax planning is key, advisors say. “Once a donor funds a CGA with a QCD, whatever the remaining funding limit is must be used within the same calendar year,” Tullio said. “Ideally, a donor could use this amount in a year where they might expect high income to help mitigate the otherwise taxable recognition of their RMD, but that means waiting until after they turn 73, versus 70½, when the QCD funding option first becomes available.”
“One mistake some individuals make is funding a CGA, or any charitable donation for that matter, with cash when they could have funded it with appreciated securities to avoid income tax on the unrealized gains,” Rhoades said. “Another mistake we’ve seen made is when a donor funds a charitable gift with short-term securities instead of long-term securities. This leads to the income tax deduction being limited to cost basis instead of the FMV.”
The QCD-funded CGA also doesn’t result in a charitable income tax deduction for the donor. “Instead, it helps reduce the amount of their RMD for the year and potentially extends income recognition for the funded amount over the life of the CGA,” Tullio said.
Unlike with CRTs, there is no possibility for donor involvement over investments in a CGA.
“Although this is an easy arrangement for the donor, they’re completely trusting that the charity will make wise investment choices, remain healthy, in business and capable of making those lifetime payments,” Evans said. “CGAs also typically offer a less-aggressive payment amount as compared to non-charitable annuities.”
