Time to Surrender? Reasons to relinquish your CGA

What is a CGA?

A charitable gift annuity, or CGA, can be a mutually beneficial gift arrangement for both the donor and charitable organization. The most common life income gift, a CGA is funded with a gift of cash or marketable securities, and provides a fixed payment rate for up to two annuitants—the donor, donor’s spouse, or another designee–based on the age or ages of the annuitants at the time the gift is made. The donor also receives a charitable tax deduction in the year of the gift, and a portion of the quarterly payments are also tax free for a period of time. When the annuity ends, remaining assets are used by the charitable organization. According to the American Council on Gift Annuities (ACGA), a charitable organization following the ACGAs suggested maximum rate guidelines can expect a residual gift equal to 50% of the original gift amount.

For example, 72- and 65-year-old spouses give $50,000 to WashU to establish a charitable gift annuity. Based on their ages at the time of the gift, the donors will receive a 4% fixed payout rate for their lifetimes, paid in quarterly installments of $500, a portion of which will be tax-free for 22 years. In a low interest rate environment, the donors can expect a higher tax-free payment. They will also be eligible for a charitable deduction of over $17,000 at the time of the gift. When both annuitants are deceased, the remainder of the gift annuity will be distributed to Washington University for the purpose designated by the donors.

Why surrender?

A recent trend in planned giving is the voluntary termination of these gift annuities. Surrendering the remaining interest in these types of gift arrangements has become popular for a number of reasons. For most donors, the ultimate gift to charity is the motivating factor in terminating a life income gift. By relinquishing interest in the annuity early, the donor is able to see their gift in action while they are still living.

Donors who live longer than their original life expectancy and continue receiving annuity income run the risk of the principal shrinking substantially, sometimes to the point that the organization has paid out nearly as much as the original contribution–and in some cases, even more. For life income donors with primarily charitable intentions, they may relinquish their interest to avoid depriving the charity of resources.

Some donors may come to realize that they no longer need the quarterly payment they receive from their gift annuity, which is rarely significant in the overall picture of a donor’s retirement income. Or, they may wish to reduce their total income as they are downsizing or simplifying their affairs. Also, in many cases, if the donor has not outlived the life expectancy calculation, they may be entitled to an additional tax deduction for the remaining tax-free and capital gains distributions they have yet to receive.

How the Planned Giving Office Can Help

Beginning in 2022, in an effort to provide our donors with more resources to fulfill their philanthropic goals, the Planned Giving Office at Washington University will provide a personalized annual report to current gift annuity donors, including present market value and projected years to exhaustion. Should you be interested in exploring relinquishment of your WashU gift annuity, the Planned Giving Office is happy to assist you in reviewing the health of your contract, examining the potential tax benefits of surrender, and confirming the ultimate purpose of your gift to the university. Email plannedgiving@wustl.edu for more information.