By Sam Crawford and Dave Jones, JD, LLM, CFP®

With rising interest rates, Charitable Gift Annuities are emerging as a beneficial option for charitable planning. One can think of a Charitable Gift Annuity (CGA) as a loan between a donor and a non-profit organization. In this arrangement, the donor provides the principal (their gift), and in return the non-profit offers interest payments to the donor for life. However, the unique twist is that the non-profit gets to retain the principal upon the donor’s passing. In the current higher interest rate environment, CGAs present a distinct opportunity to donate to a non-profit while still maintaining income.

The role of interest rates in shaping the attractiveness of Charitable Gift Annuities is twofold: they impact both the annuity’s payout rate and the deduction a donor can claim. First, the payout rate is largely based on the American Council on Gift Annuities (ACGA) suggested maximum rates. While there are a variety of factors that influence the rates, the current federal funds rate is an important input in determining the suggested maximum rate. Other factors that influence the payout rate include the donor’s age and whether a donor wants to defer their first income payment. ACGA rates are designed to assume 50% of the grantee’s donation transfers to the charity upon the donor’s passing. Second, donors receive a one-time tax deduction based on the present value of the annuity or the present value of the money the IRS deems will be given to the charity. While the specifics of the deduction are intricate, one thing is clear: the deduction is highly sensitive to interest rates. A donor will find their deduction significantly diminished in a low interest rate environment compared to the deduction they would receive at a high rate.

Another attractive feature of CGAs is that donors receive a portion of the annual income payment tax-free. Though we recommend individuals work with their tax advisors when considering a CGA, many non-profit organization’s websites feature calculators which can be used to estimate the tax-free component of their CGA. As an example, let’s suppose a 75-year-old individual, in a high-tax bracket, is looking to donate $500,000 cash via a CGA to Harvard Medical School in August 2023. Using Harvard’s CGA calculator, the donor will receive a deduction of approximately $216,500. Additionally, they will receive $33,500 in annual income of which approximately $22,850 will be tax-free annually for their lifetime.

As if rising interest rates were not incentive enough, the SECURE Act 2.0, signed by President Biden in 2022, allows a one-time transfer of $50,000 of a Qualified Charitable Distribution to what the IRS defines as a new split interest entity. As background, a Qualified Charitable Distribution is a tool that individuals aged 70 ½ or older can use to give up to $100,000 annually directly to charity from their IRA. The individual does not pay income tax on the distribution, but also cannot take a charitable deduction for the gift. Split interest entities are structures that benefit both the donor and the non-profit. In this application, the vehicles that make the most sense to consider pairing with a Qualified Charitable Distribution are either a Charitable Remainder Trust or a CGA. Because CGAs do not require legal counsel to draft a trust document or ongoing accounting like Charitable Remainder Trusts, CGAs are the simper choice.

One clear risk of a CGA is the reliance on the non-profit to maintain payments for the rest of the donor(s) life. Although non-profits may allocate a portion of the donated funds for immediate use, they are required to maintain adequate reserves, as dictated by state laws, to meet the obligations of the gift annuities and comply with the diverse regulatory requirements in each state where they offer CGAs. Additionally, some states, including California, have investment restrictions that aim to protect the corpus of a non-profit’s CGA pool from suffering catastrophic market losses. In today’s landscape of rising interest rates, Charitable Gift Annuities (CGAs) are emerging as an increasingly attractive option for individuals seeking to combine charitable giving with financial security. By viewing CGAs as a unique partnership between donors and non-profit organizations, we can appreciate their potential to provide income for life while leaving a lasting philanthropic legacy.


Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. This publication has been distributed for informational purposes only and is not a recommendation of, or an offer to sell or solicitation of an offer to buy any particular security, strategy, or investment product. Neither Bailard nor any employee of Bailard can give tax or legal advice. The contents of this piece should not be construed as, and should not be relied upon for, tax or legal advice.