Charitable Gift Annuity (CGA)

A charitable gift annuity is a split-interest arrangement: a donor gives money or property worth more than the annuity the charity agrees to pay, so a portion of the transfer is allowable as a charitable deduction and the rest is treated as the price of the annuity. Internal Revenue Code section 501(m)(5) defines the term as an annuity where a portion of what is paid for it "is allowable as a deduction under section 170 or 2055" and the annuity satisfies section 514(c)(5). The charity issues the annuity and pays it from its own general funds. Because the payments continue for the annuitant's life, a gift annuity is part charitable gift and part personal income arrangement, which is what distinguishes it from an outright donation.

The tax result follows the split. The charitable deduction equals the fair market value of what the donor transferred minus the present value of the annuity the charity promises, valued using IRS actuarial tables and the section 7520 interest rate, which is 120 percent of the federal midterm rate for the month in which the gift is valued. Because a charitable deduction is allowable, section 7520(a) lets the donor elect the rate for either of the two preceding months instead, and the choice matters: a lower rate raises the present value of the annuity and so lowers the deduction. The larger the payments the donor keeps, the smaller the deductible gift.

The more valuable feature appears when the gift is funded with appreciated property. A gift annuity is a "bargain sale" under Treasury Regulation 1.1011-2: the donor is treated as having sold part of the property for the present value of the annuity. That sale portion carries a capital gain, but where the donor is the annuitant (alone, or with one designated survivor) and the annuity is nonassignable or assignable only back to the charity, the gain does not all land in the year of the gift. It is reported ratably over the donor's life expectancy, spread across the return-of-investment part of each payment. Selling the property and donating cash would instead trigger the entire gain at once.

The promise is the charity's own general obligation, not an insurance policy, and how much protection sits behind it depends on where the charity is. Some states regulate the practice directly: California Insurance Code section 11521, for instance, conditions a charity's certificate of authority on establishing and maintaining "a reserve fund adequate to meet the future payments under its outstanding annuity contracts." Where no such requirement applies, the annuitant's security is the charity's balance sheet, which is why a gift annuity from a financially thin organization carries real risk.

A charitable gift annuity is not a charitable remainder trust. The gift annuity is a contract with the charity rather than a separate legal entity, and it is simple and inexpensive to set up. A charitable remainder trust is a separate legal trust that holds and invests the assets, can pay more than one beneficiary and larger amounts, and costs more to create and administer. The gift annuity suits smaller, simpler gifts; the trust suits larger and more customized ones.

A distinct route exists for older IRA owners. Under Internal Revenue Code section 408(d)(8)(F), a taxpayer who is 70 1/2 or older may make a one-time election to fund a gift annuity directly from an individual retirement account with a qualified charitable distribution, up to $55,000 for 2026 (a figure the statute set at a $50,000 base and now adjusts for inflation). The election is available for one taxable year only, the annuity must be funded exclusively by the qualified charitable distribution and begin fixed payments of 5 percent or greater within one year of funding, and the income interest must be nonassignable and held only by the donor, the donor's spouse, or both. The amount counts against the donor's annual qualified charitable distribution limit, which is $111,000 for 2026.

Two consequences of that route are easy to miss, and both cut against the ordinary gift-annuity tax picture. First, there is no charitable deduction: section 408(d)(8)(E) provides that a qualified charitable distribution excluded from income "shall not be taken into account in determining the deduction under section 170," and the split-interest election does not change that. The benefit is the exclusion from income, not a write-off. Second, section 408(d)(8)(F)(v)(II) provides that qualified charitable distributions used to fund a gift annuity are not treated as investment in the contract under section 72(c), so every payment the annuity makes is ordinary income with no tax-free portion at all.

The steps are consistent across charities that offer them:

1. The donor transfers cash or property to a charity that issues gift annuities, choosing whether payments run for one life or two and when they begin.

2. The charity applies a payout rate, commonly following the suggested maximum rates the American Council on Gift Annuities publishes, to set the fixed payment. A higher age means a higher rate, because the payments are expected to run for fewer years.

3. The donor claims a charitable deduction equal to the value transferred minus the present value of the annuity, subject to the same percentage-of-income ceilings, 0.5 percent floor and five-year carryforward as any other charitable gift.

4. The charity pays the fixed amount for life and keeps whatever remains.

A hypothetical shows the appreciated-property mechanics. Elena, 70, transfers stock worth $50,000 that she bought for $20,000, in exchange for a lifetime annuity whose present value is $28,000.

• Charitable deduction: $50,000 value minus $28,000 annuity value equals $22,000.

• Capital gain on the sale portion: the basis assigned to the sale is $20,000 times ($28,000 / $50,000) equals $11,200, so the gain is $28,000 minus $11,200 equals $16,800.

Because Elena is the only annuitant and the annuity is nonassignable, that $16,800 gain is spread across her life expectancy rather than taxed all in the year of the gift, and only out of the return-of-investment portion of each payment. The exact dollar figures depend on the section 7520 rate for the month used, so the numbers here illustrate the method rather than a quote.

Pros

• Produces an immediate partial charitable deduction plus fixed income for life (except where the annuity is funded from an IRA, which is excluded from income instead of deducted).
• Spreads the capital gain on appreciated property over the donor's life expectancy instead of realizing it all at once, provided the donor is the only annuitant and the annuity is nonassignable.
• Simple and low-cost to arrange compared with a charitable trust.
• Payments are fixed and do not fall when markets do.

Cons

• The transfer is irrevocable; the property and its future growth are gone.
• Payments rest on the charity's own general obligation, and outside the states that require a reserve fund there is no separate pool standing behind them.
• Fixed payments do not rise with inflation and lose purchasing power over a long retirement.
• The payout rate is generally lower than a commercial annuity would pay, because part of the transfer is a gift.