Charitable Annuities

Donor Benefits:

• Charitable deduction for gift value

• Fixed income, partly tax free

• Reduction of capital gains tax

• Reduction of estate tax

• No setup cost

One of the simplest and most popular methods of making a life income gift is to create a gift annuity, a combination of a gift and an investment. With a simple agreement, the charity accepts the gift and agrees to pay a specified fixed dollar amount (annuity) to the donor (annuitant) and/or another recipient. It is an irrevocable gift and immediately becomes the property of the charity, which is then legally responsible for paying income for the lifetime of each annuitant. Patronato San Xavier uses the Community Foundation for Southern Arizona to administer its gift annuities. The Community Foundation follows Arizona state guidelines for administering these policies.

The annuity rates are based on the recommendations of the American Council on Gift Annuities, a voluntary group established in 1927 made up of more than 1,400 charities. Its rates are developed using mortality (actuarial) tables and are revised periodically to reflect current rates of interest in the investment market. They are designed so that Patronato should receive at least 50 percent of the value of the initial gift.

For tax purposes, the income stream (annuity) will be divided into these portions during the actuarial life expectancy of the income recipient(s):

• A tax-free portion. Because part of the income is regarded as a return of principal, it is not taxed.

• An ordinary income portion. The remaining portion is taxed at ordinary income rates if the original gift was made with cash.

• A capital gains portion. If the original gift was made with appreciated securities, the taxable income portion of the annuity is split between “ordinary” income and “capital gain” income and spread out over the annuitant’s expected years of survival, after which it becomes taxed at the ordinary income rate.

The tax-free portion is greatest when the annuity is funded with cash.

An example gift annuity document