Stewardship is what we do after we say, “We believe.”
A charitable gift is something you give to an organization that you believe in and wish to support. An annuity is a fixed sum of money that is paid to you each year. Put them together and you have a charitable gift annuity, “the gift that pays you back.”
That’s how a 75-year-old individual can make a substantial gift to a charity and actually increase her cash flow. She funds her gift annuity with $25,000 from a GIC and receives guaranteed annuity payments that are significantly higher than the interest she has been receiving from her GIC. What’s more, in her case, those payments are largely tax-free!
The gift annuity is an arrangement under which you make a contribution to a church or charity and receive, in turn, guaranteed payments for life. It’s a way of giving that allows you to make a substantial gift to a church or charity even though you may need ongoing income from your assets.
The practice of transferring property to a church in exchange for life payments has a long history. According to a memorial plaque in England’s Winchester Cathedral, in the year 1321 Sir William de Lillebone surrendered lands to the Priory and received an annuity worth about ten pounds yearly.
Some Canadian churches or charities have been issuing gift annuities for many years. They invest the donated assets and use the earnings on the assets, and the capital if necessary, to make the annuity payments. Whatever portion of the donated assets remains at the death of the donor or other beneficiary is used for charitable purposes. These charities are said to self-insure their gift annuities.
However, most churches and charities in Canada do not self-insure their gift annuities. Instead they reinsure their gift annuities. This means that they use a portion of the donation to purchase an annuity from a commercial insurance company that pays the amount promised to the donor. The church/charity retains the balance of the donation and can either use it now or let it grow in an endowment for a number of years. If it is invested in the endowment, by the end of the donor’s life it will often have reached or exceeded the value of the original donation. Then it can be continued as a perpetual endowment in the donor’s name.
The Canada Revenue Agency (formerly known as Revenue Canada) has recently stated that the implications for the donor are the same whether the charity self-insures or reinsures. The tax benefits are explained below.
Establishing a gift annuity
To establish a gift annuity, you and a representative of the church sign an agreement specifying the beneficiaries, the annual payment amount, and the starting date and frequency of the payments. The agreement may also specify the purpose for which your gift will be used.
Gift annuity donors normally name themselves as annuity income beneficiaries, individually or as a couple, although a relative or friend could be named as well. A gift annuity may be established for a specified term of years instead of one or two lives, although this is rarely done.
You might want to contribute surplus cash in a chequing account or money market fund, or a maturing GIC or bond. Payments from a gift annuity will usually exceed the interest you are receiving, resulting in increased cash flow. In any case, do bear in mind that your gift annuity arrangement is irrevocable and the principal cannot be returned. Therefore, you should always retain sufficient capital to meet unforeseen needs.
Gift annuity rates
The amount of the annual payments will depend on the amount transferred, the ages of the beneficiary(ies) (or annuity term), and the annuity rate schedule in effect at the time of the gift. Once the annuity is established, the payments will remain fixed, regardless of changes in the economy. This makes the gift annuity especially attractive to older donors who like the security of fixed, guaranteed payments. The annuity agreement will also specify how often payments are to be made and when they are to begin. Those who wish may have the payments made directly to their bank account.
The older the beneficiary(ies) when the contribution for a gift annuity is made, the higher the payments will be. For example, a 75-year-old donor who contributes $10,000 would receive larger payments than a 65-year-old donor who also contributes $10,000. That is because the 75-year-old has a shorter life expectancy, and hence payments will probably be made over fewer years.
The annuity rates charities pay to donors of various ages periodically change depending on economic conditions. Generally, if interest rates rise, gift annuity rates will be increased, and if interest rates fall, gift annuity rates will be decreased. The annuity rates offered by insurance companies fluctuate in the same manner. Of course, the rate in effect when you fund your gift annuity will remain constant for the balance of your life. Once begun, your payments will neither increase nor decrease.
You may detach, complete and return the coupon at the back of this paper and we will send you a financial illustration showing the annuity amount you would receive, based on our current gift annuity rate schedule and on your current age. Chances are you will discover that the gift annuity payments would be well above the interest you are currently earning on your investments. If you are concerned because declining interest rates have reduced your own income, a gift annuity could be just the thing to restore your cash flow to a level you want.
Tax benefits of a gift annuity
The most notable tax benefit of a gift annuity is that the annuity payments will be largely or entirely tax-free. This means that your annuity payments have significantly more purchasing power than an equal amount of taxable income. Furthermore, tax-free annuity payments will not cause a reduction of Old Age Security (OAS) payments through the “clawback” tax. The amount of the tax-free portion depends on the rates in effect and on the age(s) of the annuitant(s) at the time the annuity is established. Consider the following examples, keeping in mind that the annuity rates cited are not necessarily the ones paid by our organization at the present time. These are illustrative rates to demonstrate the tax benefits.
Peter and Norma M, ages 75 and 73, contribute $50,000 to General Synod for a gift annuity, naming themselves as the beneficiaries. As long as either of them lives, they will receive payments of $3,350 per year (an annuity rate of 6.7%). Of this amount, 69.2 percent ($2,318) will be tax-free. If their marginal federal/provincial tax bracket is 50 percent, a fully taxable investment would have to yield approximately 9.26 percent to produce payments of equivalent after-tax value. They also receive a donation receipt of $12,420 in the year they make their gift, generating additional tax savings.
In some situations, older donors will receive a donation receipt and fully tax-free income.
Mildred R, who is 86 years old, contributes $20,000 to her parish church for a gift annuity. Her annuity rate is 10.7 percent, so she receives fixed, guaranteed payments of $2,140 per year as long as she lives, entirely tax-free. She also receives a donation receipt for $5,059. Because her marginal federal/provincial tax bracket is 46.4 percent, this can yield a tax credit of as much as $2,347 in the year of her gift, reducing the “net cost” of her annuity to $17,653 ($20,000 – 2,347).
