When donors choose to give to your organization, they want to make a positive difference and feel part of something bigger than themselves. They likely have some connection to your work and value your mission. When donors choose how to give, though, the decision becomes much more practical. They have numerous options, and they can select the gift that fits best with their unique situation and goals.
Not all donors will want or need to create an income stream for themselves or loved ones. For those who do, though, both charitable gift annuities (CGAs) and charitable remainder trusts (CRTs) present powerful planning options. Thoroughly understanding the features and differences can be quite valuable as you help guide donors to the gift that will best serve them.
Charitable Gift Annuity
A charitable gift annuity is the simpler of the two choices. The donor makes an irrevocable gift to your organization, and in return, you make fixed lifetime payments to the donor and/or a chosen beneficiary, with the payment amount based on the age of the annuitant(s) and the amount of the gift. The payout rate is set by the charity and is fixed at the time of the CGA’s creation. The gift portion qualifies for an income tax deduction, and payments are favorably taxed to the donor.
Charitable Remainder Trust
A charitable remainder trust is more complex (and costly) than a CGA. The donor makes an irrevocable contribution to the CRT, and the trust then makes payments to one or more beneficiaries (possibly including the donor) for life or a specified number of years (not to exceed 20) before passing the remaining assets to the charity. The resulting gift qualifies for an income tax deduction. The tax-advantaged income payments are partially determined by the type of CRT. A charitable remainder annuity trust (CRAT) pays a fixed amount—a percentage of the initial trust assets. A charitable remainder unitrust (CRUT) pays a variable amount—a percentage of annually revalued trust assets.
Comparing Features and Advantages
Perhaps the best way to help a donor determine which giving tool fits best into their existing plans is to start asking questions. The following will provide a good starting point.
Is planning flexibility necessary?
The CGA is simple and straightforward but offers little in the way of options or variations. The CRT, on the other hand, has the flexibility to meet a variety of planning goals. In addition to the two main types (CRATs and CRUTs), CRUTs have four distinct subtypes, each offering various planning features that will be useful in particular situations.
How many people will be receiving income payments?
A CGA can make payments to one or two people for life. A CRT can make payments to any number of people for either their lifetimes or for a set number of years (up to 20).
Is it more advantageous to receive fixed payments or payments that vary with investment performance?
Both CGAs and CRATs offer fixed payments, which retirees may value as a dependable income stream that can’t be diminished by a market downturn. CRUTs offer variable payments that change each year based on investment performance, which appeals to those who are comfortable with taking on some level of risk and might benefit from potentially higher returns during strong market years. This variability can be particularly attractive to younger retirees looking for an opportunity to grow their payments over time and can afford to weather periods of lower returns.
Is there a desire to make additional contributions?
Neither a CGA nor a CRAT can accept additional contributions, but a CRUT has the flexibility to do so.
What size gift is being considered?
Minimum funding for a CGA is determined by the charity but can be as low as $10,000. Because of the fees and complexity of establishing a trust, the minimum for a CRT is generally considered to be $100,000.
Which assets are being considered?
Cash or long-term appreciated stock work well for either a CGA or CRT. In fact, donating long-term appreciated stock has a tax benefit, as capital gains taxes are only due as they are paid out, reducing the tax payment and spreading it out over time. A CRT has the most flexibility, though, as it can accept almost any type of asset, including assets that might otherwise be difficult to sell or donate. (Property that cannot be easily valued or sold is problematic for a CRAT, though, as it must make regular fixed payments.)
A qualified charitable distribution (QCD) from an IRA can be used to create either a CGA or a CRT, up to annual limits. Income payments may only go to the IRA owner and/or the owner’s spouse. Spouses may combine their QCDs into a joint-life CGA or a single CRT. Note that different rules apply to CGAs and CRTs funded from an IRA.
Is the donor older and interested in creating a steady income?
Because the payout rate for a CGA increases with the age of the annuitant, an older donor may be able to lock in higher income payments with a CGA than with a CRAT.
