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Charitable Gift Annuities
Old 12-05-2009, 12:04 PM   #1
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Charitable Gift Annuities

Hi, I'm a 53-year-old trying to retire on a modest nest egg; tracking expenses, practicing diversification, belt-tightening, etc.

One subject I haven't seen discussed on this immensely informative forum, is that of Charitable Gift Annuities (CGA's).

Say I have $100,000 that I want to put to work, generating income. According to Red Cross, Salvation Army, and other charitable org websites, I could get a CGA that would generate about $5000 income per year at age 55. Rates fluctuate based on age and interest rates on long-term bonds, just like an insurance company annuity. There would be some tax breaks the year of the CGA purchase. The $5,000 per year would be treated by the IRS as part income, part return on principal.

90% of the pros and cons of CGA's are identical to those applicable to single premium immediate annuities issued by insurance companies.

There are some important differences, however.

Although I haven't researched it for my state, I assume the insurance pools that protect annuitants in the event of the issuer's financial failure, wouldn't step in for a worthless CGA.

On the positive side, though, if you're hit by a bus the day you sign the contract, the windfall principal payment goes to charity, not an insurance company.

There are well-run charities (Red Cross and Salvation Army are just a couple of examples) that seem unlikely to default. An annuitant would have the protection of regular contract law to enforce the deal.

Some people are rich enough in retirement that they could lose a hundred grand without worrying about the impact on meeting their basic financial needs. Others, not so much. In the opinion of forum participants, would it be insane for a relatively young person, retiring on a bit of a shoestring, to buy a CGA? If so, what due diligence should precede execution of a contract?

All input is appreciated.

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Old 12-05-2009, 04:40 PM   #2
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If you do decide a CGA is the way to go for you, one thing to consider is what percentage the 100K is of your nest egg. For example, if you had $1 million, that would be just 10% of your nest egg vs if you had $500,000 which would be 20%.

My understanding is that once you commit that money that is irrevocable so there is no turning back in case of emergencies.

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Old 12-05-2009, 06:56 PM   #3
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Would the tax break allow you to convert some IRA money to a ROTH?

Just thinking out loud?


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Old 12-05-2009, 09:34 PM   #4
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I would be very leery of doing this, especially if you are on a shoestring. In addition to the usual knocks on SPIAs for younger poeple (carrier solvency over the long term, inflation risk, etc.), you are exposed to the finances of a charity that is not regulated or capitalized like an insurance company. I don't know how these deals work, but if the charity uses a portion of your money to buy a SPIA from an insurer and keeps the rest, that might be OK. OTOH, if they are the ones who are obligated for the payments, you are taking a lot of counterparty risk. Despite the much maligned status if the regulators, insurers are required to set up reserves, have actuaries attest to their reserves annually, hold a chunk of excess capital over and above what are likely conservatively stated reserves to cover unforseen events, and are looked at constantly by insurance regulators. AFAIK, charities don't afford you any of those protections, nor do they get the benefit of coverage from that state guaranty funds.
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Good info
Old 12-07-2009, 09:59 AM   #5
Confused about dryer sheets
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Good info

Thanks for the responses. This is useful information for anyone considering a CGA purchase.

The idea that if I died soon after finalizing an annuity contract, the homeless and disaster victims would get my money, is very appealing.

However, I'd be dead. If I lost a hundred grand, I'd be very much alive, and probably a nuisance to family and/or US taxpayers upon whom I might need to lean for partial support.

I'll bet the chief financial officers of most large charities are highly intelligent, educated, and ethical. On the other hand, as Brewer points out, the legal and regulatory framework for protecting annuitants of CGA's just isn't there.
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