Charity Begins at Home Creating Income While Doing Good
By Katherine McKay
If your mailbox is anything like Thomas Hill’s, it is overflowing with solicitations begging for money from charities. The mountain of appeals, often with “free” gifts included, makes Hill wonder what difference his donation would actually make. “If I send a charity $25, are they going to spend it by sending out presents to 25 other people?”
The sheer volume can make even the most charitable person feel like a Scrooge. “I want to be generous,” says Hill’s wife Elizabeth. “But sifting through all the requests is time-consuming and ends up turning me off.” So the Hills created a giving plan for just a few charities with solid reputations, which makes it easier for the Hills to say: “No thank you” to other worthy groups or to potential scam artists with compelling appeals.
An AARP article entitled “Charities – Give Well But Wisely,” says it makes sense to develop a “charity-giving plan.” In this way, charity-minded people can decide how much and to whom they will give each year, often with the help of a financial advisor. The advisor determines whether gifts should be of cash, appreciated stock, or real estate, and whether outright gifts, trusts, or charitable-gift annuities work best for the givers’ particular situations.
For the Hills, the biggest component of their plan is a sizeable charitable gift annuity to the Salvation Army. “I wanted to do one big gift and not a whole bunch of small ones,” says Tom Hill.
“A charitable-gift annuity is simply a contract between a donor and a charity, where the charity agrees to pay the donor or beneficiary a guaranteed income for life in exchange for a gift,” says Meredith Johnson, the Salvation Army’s director of planned giving for Massachusetts. For most charities, $5,000 is the minimum contribution.
Because it pays a fixed income for life, a charitable-gift annuity can provide financial security. “I use charitable-gift annuities to build my own pension,” says James Nelson of Concord, Massachusetts, a former sales manager whose employer offered no pension plan until 401(k)s were established in the 1980s. “I participated in the 401(k) as soon as I could, but when I retired, I was looking for more income. I heard an ad on the radio from a reputable charity with a very strong financial background, so I called them.” James Nelson’s wife still works, so the deduction they receive from the annuities is useful to reduce their income taxes. For Mr. Nelson’s goals, gift annuities just made sense. Since that initial phone call, he has invested in four charitable annuities, established jointly with his wife so she will continue to benefit when he dies.
Many retirees are looking for the high rates of return they enjoyed in the ’90s, and are turning to charitable-gift annuities to boost their incomes with rates much higher than CDs. And, as the adage goes, charity begins at home.
“I have a $10,000 CD maturing next month that pays about 4 percent,” said one 82-year-old who prefers to remain anonymous. “I’m going to get another charitable-gift annuity that will pay me 8.2 percent and double my return. At my age,” he says, “there’s just one thing I’m looking for – income – and charitable-gift annuities give me that in spades for the rest of my life.”
Income rates paid through a charitable-gift annuity are based on age and whether there are one or two beneficiaries. The older the beneficiary, the higher the fixed rate of return. Rates are slightly higher for a one-person plan than for plans with two beneficiaries.
In addition to receiving a tax deduction for establishing the annuity, beneficiaries are paid monthly, quarterly, or semi-annually, and a portion of those payments is tax-free. Upon the death of the beneficiary (or both beneficiaries in a two-life plan), the gift residual goes to the charity to use as the donor designated.
At 102, Aborn Breed has a giving plan that uses charitable-gift annuities toward her favorite charity while giving to family members at the same time. “I thought I’d let my relatives have the benefit of some income now, rather than waiting until I pass on to leave them the money,” says Mrs. Breed. “It’s been a pleasure to see how they benefit while I’m still alive.”
Unlike complicated trust agreements, charitable-remainder trusts are popular because of their simplicity. “On average, 88 percent of our clients’ planned gifts are in the form of charitable-gift annuities,” says Carolyn Freeman, a principal at State Street Global Advisors of Boston. “Donors and nonprofits alike appreciate the ease with which a charitable-gift annuity can be completed.” The idea of a guaranteed fixed income for life is especially appealing.
If you do set up a charitable-gift annuity, be sure to select a charity with a reserve that will enable it to meet its obligations. “You don’t do a gift annuity with a charity about which you have little knowledge, because the gift annuity is backed by the charity’s assets,” advises Frank Minton, chairman of the American Council on Gift Annuities. “It’s important to set up the charitable-gift annuity with a well-established charity that is financially strong.”
“It’s very difficult to be generous to everyone who sends a request,” says Elizabeth Hill. But by using a charitable-gift annuity, she and her husband were actually able to give more. He elaborates: “The tax deduction was fine, the income we receive is just great, and we help a very worthwhile organization at the same time.”
