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Retirement planning often becomes more complex in the years immediately before retirement. Donors may be earning more than ever, accumulating appreciated assets, considering the sale of a business, and trying to determine how much income they will need once they retire. At the same time, many are looking more closely at how their financial decisions support their charitable goals and create a lasting legacy.

For charitably inclined individuals, a charitable gift annuity (CGA) addresses multiple factors in that planning equation. A CGA is relatively straightforward for both the nonprofit and the donor. The donor transfers cash or appreciated property to a nonprofit and the nonprofit agrees to make fixed payments to one or two annuitants for life. A CGA will also provide the donor with a current charitable income tax deduction for the charitable portion of the arrangement. 

For donors approaching retirement, the flexibility of a CGA is particularly valuable. A deferred gift annuity, for example, is useful for donors approaching retirement because they allow the donor to make the charitable gift and receive the charitable income tax deduction now, while delaying the payments until a more beneficial timeframe. From there, additional nuances in CGA structures provide even more flexibility.

The most recent ACGA survey results highlighted that the average age for an immediate annuitant was age 79 and the average age for deferred annuitants was age 68. Many organizations market CGAs to donors who have already reached retirement age. This remains a consistent sweet spot for donors, based on many years of ACGA survey data. 

While many nonprofit marketing campaigns wait to introduce CGAs to donors when they reach retirement age, there may be an overlooked opportunity to introduce it to donors in earlier years. By the time a donor retires, a CGA becomes a very attractive charitable gift. For a donor looking ahead, however, a deferred CGA may align more with their retirement goals, allowing the donor greater control over when payments begin.

CGA Choices

The distinction between an immediate and deferred CGA is primarily timing. An immediate CGA begins payments within one year of the gift, typically within one payment period. Deferred CGAs, by contrast, allow donors to postpone payments until a later date, which is a useful planning opportunity.

For example, a donor in their highest income-earning years may not consider additional income a priority. The donor may instead want to benefit from a charitable deduction during those earning years and defer payments until retirement, when additional income may be more useful. 

Standard Deferred CGA

With a standard deferred CGA, the donor establishes the annuity today and selects a future payment date. The annuity rate is determined based on the donor's age at the time of the gift and the length of the deferral period. Because the charity has the opportunity to invest the contributed assets before payments begin, the deferred rate is typically higher than the rate available for an immediate annuity.

In the years leading up to retirement, a donor may be looking for a way to balance substantial income and a growing investment portfolio while also making a meaningful charitable gift. Donors who hold highly appreciated stock or other appreciated assets, should consider funding a CGA as a way to incorporate these assets into their charitable and retirement planning. Doing so may create a charitable deduction while also providing an income stream and potentially spreading the recognition of the capital gain associated with the annuity portion over the donor's life expectancy. Together, these benefits make a deferred CGA a valuable part of a broader retirement plan.

Stacking CGAs 

One of the most useful planning opportunities is that a donor is not limited to funding only one deferred CGA. Once a CGA is established, additional contributions are not permitted and as such new contracts will be required. However, this is a planning advantage because the donor can establish a series of deferred CGAs over several years, creating a series of charitable income tax deductions and additional future payments.

A donor may decide to make equal annual cash contributions or adjust the amount and type of property contributed from year to year. For example, a donor may make a larger contribution during higher-income tax years to generate additional charitable income tax deductions, while using smaller contributions in other years. Multiple contracts are usually structured with the same payment schedule, allowing the donor to receive a combined payment even though the underlying annuities remain separate contracts.

These planning strategies are particularly attractive in the years before retirement. Rather than making one large charitable gift, donors should consider creating a series of gifts that builds future retirement security over time. Applicable federal rates (AFRs), the value of contributed property, and potential changes in the ACGA suggested maximum rates will influence the planning. A gift planner may find it useful to project the total CGA payment stream and estimated charitable deductions to help conceptualize this strategy with the donor. It will be important to highlight that a projected series of gifts is not the same as a contractual commitment to make those future gifts or a guarantee of the projected results.

Flexible Deferred CGAs 

A standard deferred CGA works well when a donor has a clear target for when they want payments to begin, but retirement dates are not always predictable. For donors who have a general retirement goal but are less certain about the exact date, a flexible deferred CGA offers another approach. In a flexible deferred CGA, a donor plans for a future income stream while retaining the ability to adjust when the payments begin. This approach provides reassurance to donors who want the security of knowing that a payment stream will be available but may be uncomfortable committing to a specific future payment date.

Under the structure prescribed by the Internal Revenue Service (IRS), a donor establishes a “target retirement date” while retaining the ability to elect a payment date within a specified timeframe. The charitable deduction is calculated using the target date. If the donor elects to begin payments earlier, the payout will be reduced. If the donor waits longer, the payout will increase. The payout adjustment ensures the original charitable deduction remains the same from when the gift was made.

 A donor who is 55 may think retirement will happen at 67. But what if the donor decides to work until 70? Or what if an opportunity arises that makes early retirement attractive? A standard deferred CGA requires the donor to commit to the selected payment date. A flexible structure recognizes that retirement planning is often a range rather than a precise date. This flexibility makes a meaningful difference in donor conversations. With a flexible deferred CGA, payments are designed around the donor's retirement plan rather than forcing the donor's retirement plan to fit the CGA.

Stay tuned for our next newsletter issue where we will review a common donor profile for the flexible deferred CGA and explore additional CGA strategies that may support donors at different stages of retirement.