Individuals with a concern for a charitable cause may be hesitant to bestow large donations, fearing the resulting loss of income. In such cases, it may be worth exploring the benefits of charitable gift annuities, which carry advantages for both the donor and the charity.

A charitable gift annuity is a process by which the donor bestows a gift on the charity, and, in return, the charity agrees to pay an income to the donor for life. The benefits to the donor are threefold: the receipt of an immediate tax deduction; the promised income, a portion of which is tax-free; and the satisfaction of providing assets to a good cause.

The charitable gift annuity is calculated to provide a benefit to the charity of at least half of the amount donated using a formula that includes the life expectancy of the donor combined with a reasonable rate of return expectation. The annuity can be structured to provide payments for a single person or to a couple, encompassing the life expectancy of each.

As an example, Mrs. A wishes to make a donation to a charitable organization in her community. With a gift of $100,000 at a guaranteed rate of 5%, Mrs. A can expect to receive $5,000 dollars per year from the annuity, with a guarantee of receiving those payments for life. In addition, her current income tax is lowered by an immediate tax deduction. As a result, charitable gift annuities can be a valuable way to add a supplemental income during retirement.

Payments from a charitable gift annuity can either be immediate or deferred. By deferring payments, donors in a higher income bracket can benefit from the immediate tax deduction and by delaying income taxes on annuity payments until a later date when income is lower, thereby decreasing the taxes due. In addition, because a portion of each payment is considered a return of principal, that portion will be free of taxes altogether, further increasing the tax benefits of charitable gift annuities.

It's important to examine the regulations applicable in your state of residence, as some states place restrictions on the type of donations that can be made, excluding for instance, real estate or business property and allowing only donations of cash or stock. Your donation to a charitable gift annuity funded with cash is deductible up to 50% of your adjusted gross income (AGI). Gifts of long-term appreciated securities (held at least a year) are deductible up to 30% of your AGI.

Donors should also be aware that the charitable gift annuity is not revocable; caution should be exercised in choosing the charity and the amount of the donation. Besure to seek the advice of a qualified legal and/or tax professional before final decisions are made concerning your charitable planning.

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