How Gift Annuities Work and What They Cost You
A gift annuity is a contract between you and a charity where you give money or property, receive payments for life, and the remainder goes to the charity when you die.
Unlike a commercial annuity you buy from an insurance company, a gift annuity is issued by a charitable organization — a nonprofit, university, hospital, or religious institution. You transfer assets to the charity, which invests them and pays you a fixed income stream. The charity keeps what remains after your death. The difference between what you gave and the present value of your lifetime payments counts as a charitable contribution for tax purposes, though you do not receive a deduction for the full amount you transferred.
Gift annuities are structured by the American Council on Gift Annuities (ACGA), a nonprofit that publishes recommended payout rates. Most charities follow these rates, though they are not required to. Rates vary by your age at the time you fund the annuity — the older you are, the higher your annual payment percentage, because the charity expects to pay you for fewer years.
Key Takeaways
- You transfer money or property to a charity and receive fixed payments for your lifetime, with the remainder going to the charity after you die.
- The payment rate depends on your age when you fund the annuity, with older donors receiving higher annual percentages of their contribution.
- Part of your contribution counts as a charitable deduction on your tax return, but the exact amount depends on your age, the payout rate, and current interest rates.
- Gift annuities are only available from may have access to charitable organizations, not from insurance companies or investment firms.
- Your payments are fixed for life and do not increase with inflation, so their purchasing power declines over time.
How the payout rate is set
The ACGA publishes a table of suggested payout rates based on your age. A 65-year-old might receive 4.5 percent of the contribution annually, while an 80-year-old might receive 6.5 percent. These rates are recalculated periodically — the ACGA last updated them in 2022 — and reflect assumptions about life expectancy and investment returns.
A charity can offer rates lower than the ACGA recommendation but rarely higher, because paying more than the suggested rate reduces the charity's benefit and may violate state insurance regulations. If you are shopping among charities, you may find slight variations in the rates they offer, so it is worth asking what rate each one uses.
The payment is fixed for your lifetime. If you live longer than the charity's actuarial tables predicted, you continue receiving the same payment. If you die sooner, the charity keeps the remainder of your contribution — there is no refund to your heirs.
The tax treatment of your contribution and payments
When you fund a gift annuity, the IRS allows you to deduct part of your contribution as a charitable gift. The deductible amount is your contribution minus the present value of the payments you will receive over your lifetime. The present value calculation uses your age, the payout rate, and the IRS discount rate (which changes monthly).
For example, if you contribute $100,000 at age 70 and the annuity will pay you $6,000 per year for life, the IRS calculates what those lifetime payments are worth in today's dollars. If that present value is $75,000, your charitable deduction is $25,000. You can claim this deduction on your tax return in the year you fund the annuity, subject to the limits on charitable contributions (usually 50 percent of your adjusted gross income for cash gifts).
The payments you receive are taxed as ordinary income, not as a return of your contribution. This is different from a commercial annuity, where part of each payment is treated as a return of principal and taxed more favorably. With a gift annuity, the entire payment is taxable income in the year you receive it.
Who can offer a gift annuity
Only may have access to charitable organizations can issue gift annuities. These include nonprofits recognized by the IRS as tax-exempt under Section 501(c)(3), as well as some religious organizations and charitable trusts. Your local community foundation, university, hospital, or national charity may offer them.
Before you fund a gift annuity with a charity, confirm that the organization is registered to offer them in your state. Most states regulate gift annuities as insurance products and require charities to register or obtain a license. You can check your state's insurance commissioner's office or the charity's website to verify registration. A reputable charity will provide this information without hesitation.
Insurance companies and investment firms do not offer gift annuities. If someone selling a commercial annuity mentions a "charitable" version, they are describing a different product — likely a charitable remainder trust or a donor-advised fund — which have different rules and tax treatment.
How a gift annuity differs from a commercial annuity
A commercial annuity is a contract with an insurance company where you pay a lump sum and receive payments for life. A gift annuity is a contract with a charity where you make a charitable contribution and receive payments for life. The key differences affect your taxes, your payout rate, and what happens to your money.
| Feature | Gift Annuity | Commercial Annuity |
|---|---|---|
| Issued by | may have access to charity | Insurance company |
| Charitable deduction | Yes, for part of contribution | No |
| Payout rate | Set by ACGA guidelines, typically lower | Set by insurance company, varies widely |
| Tax on payments | Ordinary income on full amount | Ordinary income plus return of principal (more favorable) |
| Remainder after death | Goes to charity | Goes to your heirs or estate |
| Inflation protection | No; payment is fixed | Available as an option, increases cost |
Gift annuities typically offer lower payout rates than commercial annuities because part of your contribution is treated as a charitable gift. If your primary goal is to maximize lifetime income, a commercial annuity may pay more. If you want to support a charity and receive income, a gift annuity lets you do both while getting a tax deduction.
What happens if you need your money back
A gift annuity is irrevocable — once you fund it, you cannot get your contribution back. The charity owns the assets, and you own only the right to receive payments for life. If your financial situation changes and you need access to a large sum, a gift annuity is not the right choice.
Some charities offer a small grace period (often 30 to 60 days) during which you can cancel and receive a refund, but this is not may provide. Always ask about the cancellation period before you sign. After that window closes, your only option is to continue receiving payments or, in some cases, to assign your payment rights to someone else — though this is rare and the charity must consent.
If you are concerned about needing liquidity, consider funding a gift annuity with only a portion of your assets, leaving the rest in accounts you can access. Many people use gift annuities as part of a larger retirement or estate plan, not as their sole source of income.
Frequently Asked Questions
Can I fund a gift annuity with property instead of cash?
Yes. You can transfer real estate, stocks, bonds, or other appreciated property to fund a gift annuity. If you donate appreciated assets, you may avoid capital gains tax on the appreciation, which can make a gift annuity more attractive than selling the asset and donating the proceeds. The charity will have the property appraised to determine its value for the annuity calculation.
What if I am married — can my spouse receive payments after I die?
A standard gift annuity pays you for your lifetime only. Some charities offer a two-life gift annuity, where payments continue to your spouse after your death, but at a lower annual rate because the charity expects to pay for two lifetimes. Ask the charity whether this option is available and what rate they offer.
Do I have to report the charitable deduction on my taxes?
Yes. You must itemize deductions on your tax return to claim the charitable contribution. If you take the standard deduction instead, you cannot deduct the gift annuity contribution. You will also receive a charitable gift annuity statement from the charity showing the deductible amount, which you use to complete your tax return. Consult a tax professional to may support you report it correctly.
What if the charity goes out of business or cannot pay me?
Gift annuities are regulated by state insurance commissioners, and charities must meet financial standards to offer them. However, the charity's assets back the payments, not an insurance may provide fund. Before you fund a gift annuity, research the charity's financial stability and ask how long it has been offering annuities. Larger, well-established organizations are generally lower risk.
Can I change my mind and convert to a different type of annuity?
No. Once a gift annuity is funded, it cannot be converted to a commercial annuity or another product. The contract is between you and the charity, and the terms are fixed. If you want a different income arrangement, you would need to let the gift annuity run its course and use future income to purchase a different product.
This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.