Comparing Charitable Gift Annuities and Charitable Remainder Trusts

Estate Planning With Charitable Giving in Mind

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You've gotten mailings from your alma mater and a favorite nonprofit about how to simplify your estate planning and also help a charitable cause by establishing a charitable gift annuity or a charitable remainder trust.

But what are these financial plans, and how are they different? How will they help? Are the promises justified?

What Is a Charitable Gift Annuity?

Sometimes called "Life Income Plans," almost all larger nonprofits advertise these charitable gift annuities as a way to benefit an organization whose work you want to support and as a way to invest safely with a predictable return. 

The charitable gift annuity (CGA) is straight forward and easy to understand. The arrangement involves a contract between one or two donors and a charity. The donors give the charity certain assets. The charity, in return, pays a fixed annuity (usually quarterly or monthly payments) to the donors (also known as the annuitants) for their lifetimes.

But should you take the bait?

These kinds of annuities are not for everyone, but they can be attractive to people nearing retirement who have healthy savings or investments and a philanthropic mindset.

Setting Up a Gift Annuity

To set up a gift annuity, the donor gives assets to a charity. Assets include cash or securities such as stocks, bonds, mutual funds, and appreciated property.

Those assets go into an annuity that pays out a guaranteed interest rate of around 5% per year to one or two beneficiaries (usually spouses). The charity determines the minimum amount of assets needed for a CGA, typically about $10,000. At the donor's death, the nonprofit gets to keep whatever is left of the original sum.

The American Council on Gift Annuities sets the rates that guide annuity payments. These rates are calculated so that the nonprofit ends up with about half of the donor's initial contribution.

Charitable annuities commonly provide an income to the donor after a certain age, usually 50-55 and above. A portion of the annuity payments is tax-free, and you can take an upfront income tax deduction for the gift.

You can also pay taxable gains on appreciated stocks or property over your life expectancy rather than paying capital gains taxes immediately the way you would if you sold those assets for other purposes.

Benefits of Funding a Gift Annuity

There are many benefits of a gift annuity, such as:

  • Easy to set up
  • Guaranteed fixed income for life.
  • Immediate tax deduction.
  • Part of the income stream may be free.
  • Many types of assets can be included in the initial gift.
  • Possible avoidance or reduction of capital gains taxes on appreciated securities or property.
  • Support of a beloved charity.

What to Watch Out For

As inviting as gift annuities appear, there are some drawbacks as well. They include:

  • Gift annuities involve an irrevocable transfer of assets. You can't get your gift back once you fund an annuity. You are also stuck with the rate of interest when you fund the annuity. It won't go up when interest rates or inflation rise. On the other hand, the interest rate won't go down either, and you get to support a beloved institution or cause.
  • Although donors can receive payments immediately, many charities don't allow payments until you are over 50 or 55. However, the older you are, the higher the rate. What you receive will also depend on whether you secure a gift annuity just for yourself or include your spouse.

Charitable gift annuities may or may not pay as well as commercial annuities, depending on the current interest-rate climate. That is because the instrument's purpose is to support a charitable cause, not provide the investor with the most possible income. You should consult your financial adviser, accountant, or attorney to make sure a gift annuity works best for you.

  • Since annuities are backed by the charity's assets, you should thoroughly vet the institution's financial strength before funding an annuity. If the charity goes out of business, you could lose out. Ask organizations about their total asset levels and for records of any defaulted annuities. Gift annuity defaults, due to insolvency, are rare, however.

Charitable Remainder Trust Vs. Gift Annuity

A charitable remainder trust (CRT) is another common philanthropic and estate planning tool.

With the CRT, a donor can transfer assets, such as cash, stocks, property, and artwork, to a trust. Income from the invested assets can generate income for the donor or another named beneficiary for a set amount of time (no more than 20 years). After the end of the term or the death of the donor, what remains in the trust goes to the donor's designated charity or group of charities.

Setting up a CRT involves donating assets such as cash, securities, or property. The donor receives an immediate partial tax deduction. The amount of the deduction depends on several factors, such as the kind of trust, the term of the trust, projected income, and the IRS determined interest rate.

The donor or the named beneficiaries then receive income monthly, quarterly, semi-annually, or annually depending on how the trust was set up. The IRS specifies that the annual annuity must be at least 5% of the trust's assets, but no more than 50%.

Two Types of Charitable Remainder Trusts

There are several types of charitable remainder trusts, but the most widely used are probably CRATS and CRUTS.

  • Charitable remainder annuity trusts or CRATS. These trusts have fixed distributions each year. The donor may not make additional contributions.
  • Charitable remainder unitrusts or CRUTS. These trusts have payouts based on a fixed percentage of the balance of the trust's assets. The balance is revalued every year. Also, the donor may make additional contributions, so the distributions may vary annually.

When the donor contributes either to set up a charitable remainder trust initially or to add to it, those contributions are irrevocable. At the end of the trust's term or when the beneficiaries die, the assets remaining in the trust are distributed to one or more designated charities, also known as the charitable remainder beneficiaries.

Benefits and Disadvantages of CRT


  • With a CRT, the full value of appreciated assets is preserved through the trust's exemption from taxes when an asset is sold. Consequently, this allows for more income to the non-charitable beneficiary and the charitable beneficiaries ultimately.
  • A CRT can be funded with tax-exempt bonds and the donor may continue to receive tax-free income
  • The CRT allows more than two income beneficiaries and multiple charitable beneficiaries.

When donating assets to the trust, the donor may be able to take a partial tax deduction based on the estimated final distribution (or remainder) to the charitable beneficiaries.

  • A CRT's income from its investments is tax-exempt, benefiting both income and final distribution. However, the non-charitable beneficiary must pay income tax on the income stream received.


  • A CRT is more complicated to set up than a charitable gift annuity.
  • A CRT is not suitable if you only have a small amount of money to give. The trust has to have enough assets to generate beneficiary income and still have money left for the charity.
  • You transfer responsibility for managing the trust to the charity or the manager for a group of charities. Since you lose control, choose wisely.
  • The CRT is irrevocable. Consequently, donors should consult with an estate planner before executing a CRT.

Disclaimer: This article is just for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant.