BDQ #1: What Is a Charitable Gift Annuity, and Why Would a Donor Want One?

The Earliest Gift Annuity

The precise origins of the annuity – a stream of payments in a fixed amount – is lost to antiquity, but they were a common financial arrangement at least as far back as ancient Rome. However, the combination of an annuity in exchange for a charitable contribution is uniquely American dating back to 1830 when artist John Trumbull, whose iconic Revolutionary War paintings still hang in the rotunda of the U.S. Capitol, made a gift to Yale in exchange for a lifetime annuity.

Despite his success, by the time he was 75 years old Trumbull was living alone and found himself short of cash, although he still owned a large collection of his own paintings. In his book, A History of Charitable Gift Planning: How gift annuities shaped American philanthropy 1830-1919 (CreateSpace, 2017), our colleague Ron Brown recounts that when Trumbull’s friend Benjamin Silliman, a Yale professor, asked what he planned to do with his paintings, Trumbull replied, “I will give them to Yale College to be exhibited forever for the benefit of poor students provided the College will pay me a competent annuity for the remainder of my life.” Thus, Trumbull became the first gift annuity donor and Silliman the first charitable gift planner.

Why Would Someone Want a Charitable Gift Annuity?

A lifetime of payments in exchange for the contribution can provide a safe way for a donor to consider a contribution – often a larger gift than they initially imagined. After their first gift annuity, it’s not at all unusual for donors to become serial gift annuitants, making new gift annuity gifts every year or so for the rest of their lifetimes. For some donors, a deferred payment gift annuity can be a way to provide a reliable source of funds during retirement years.

It's tempting to think about gift annuities as analogous to certificates of deposit, providing a secure source of fixed income, but a gift annuity can also appeal to those who, like John Trumbull, have asset wealth but are cash poor. Gift annuities can be an opportunity to convert low-yield or unproductive assets into a stream of payments for the donor or others.

Gift annuity donors enjoy several tax advantages, including an income tax charitable deduction for the value of the gift and the opportunity to reduce capital gains taxes when giving appreciated assets. In addition, in most cases, a portion of the gift annuity payments is tax free.

(Spoiler alert: Under today’s tax laws, Trumbull’s gift of his own works would be a gift of ordinary income property, and his entire annuity payment would be taxable. And, there was no charitable deduction in Trumbull’s time – a topic we’ll consider in a future BDQ.).

Overall, a charitable gift annuity can be an attractive option for those who want to support a charitable cause, receive a steady stream of payments, and benefit from tax advantages. Donors can streamline their financial and estate planning by transferring assets to a charitable organization in exchange for a stream of payments during their lifetime. Certainly not least, a charitable gift annuity allows a generous donor to make a significant contribution.