Charitable Gift Annuity: How it Works

While executing a CGA may be a relatively straightforward endeavor, there are a number of considerations that must be clarified and understood up-front by all parties involved. In terms of defining the specifics, here's what you need to know:

  1. ACGA is a contract to pay a fixed amount to one or two annuitants. The amount of the annuity is fixed at the time of the gift and cannot be changed.
  2. There cannot be more than two annuitants.
  3. The charitable deduction is for just a portion of the face amount—the benefactor retains rights to the portion that will be paid out, so the full amount transferred is not considered a gift.
  4. The older the donor and the lower the annuity rate, the larger the charitable tax deduction the donor may take, and the greater the portion of the annual payments that will be tax free.
  5. Any combination of higher age(s), fewer annuitants, and lower annuity rates will increase the charitable deduction available to the benefactor.
  6. Conversely, the younger the annuitant(s), and the higher the annuity rate, the less the tax benefits that are available.
  7. A CGA is an irrevocable commitment—a contract between the benefactor and the organization.
  8. The annuity rate is determined as a fixed payment amount at the time the contract is signed and it cannot be adjusted.
  9. Some portion of the annuity payment will likely be tax free for the life expectancy of the annuitant(s).

Here are some other key variables to help your potential benefactor comprehend the specifics of setting up a CGA:

  1. Most organizations that issue CGAs follow the suggested rate issued by the American Council on Gift Annuities (the ACGA changed the wording from recommended to suggested following a lawsuit some years ago).
  2. Occasionally an organization may agree to a rate below the suggested rate, but it would be a very unusual situation for an organization to agree to an annuity rate above that suggested by the ACGA.
  3. The ACGA reviews the rates and the market continuously and changes the suggested rates as required—you should always make sure that you are using the most current information. 
  4. Rates are set to the nearest birthday of the annuitant(s)—6 months prior to 6 months following. For example, if the annuitant was born on May 16, 1950, he/she is considered to be 60 as of Dec 17, 2009. 
  5. Don’t overlook the opportunities of deferred payment gift annuities—especially Flexible Deferred Payment Gift Annuities. Deferring just one year for someone considering a straight annuity may significantly increase their charitable deduction, annuity rate and/OR THE tax free portion of the annuity amount.
  6. Often, no legal costs are incurred by the benefactor as the contract is both simple and brief, but the benefactor must always be encouraged to seek review by their own legal counsel.


  • Annuity rate: The calculation for this rate is primarily based on the age and number (between one and two) of beneficiaries.
  • Annuity payment: This is the amount distributed on a regular basis to the annuitant (generally on a quarterly basis). Payments must be made at least annually.
  • Contract: The formal CGA agreement is a simple contract (1+ pages) between the charitable institution and the benefactor
  • Irrevocable: Once the gift has been made and the contract is established it cannot be changed (although it is possible for the benefactor to give up all rights described in the contract as a way to make an additional gift).
  • Fixed: The payments do not and cannot change and are made for the life of the annuitant(s).
  • Investment in contract: is determined by a set calculation.
  • Capital gains: The amount determined by calculation that accounts for the appreciated portion of the non-cash asset that funded the contract.
  • Tax-free: The portion of the annuity payment that is the assumed return of principal.
  • Life expectancy: The life expectancy of the benefactor/annuitant is determined through actuarial calculations (annuity payments made after the annuitant's life expectancy will be fully taxed as ordinary income).
  • Suggested rate: The American Council on Gift annuities (ACGA) ditched recommended rate in favor of suggested rate following a ’95 lawsuit over price fixing.
  • Disclosure statement: A document required to be shared with the benefactor before they enter into a CGA contract.


  • Investment: Rather than an investment, a CGA is a gift that allows for receiving annuity payments while making a charitable donation.
  • Yield: A portion of the annuity payment is the assumed return of principal, so yield doesn't apply.
  • Rate of Return: As with yield, doesn't apply because a portion of the annuity payment is the assumed return of principal.
  • Guarantee: CGA's are a general obligation of the nonprofit and, in a worst-case scenario for the nonprofit, the odds of the money remaining available are pretty negligible. Technically the CGA funds are guaranteed but, in the case of extremely dire financial straits, the line of claimants for payment ahead of the annuitant is long.
  • Tax-free Income: Because a portion of the payment is assumed to be a portion of the original gift, it's not accurate to refer to the annuity payment as income.
  • Rates suggested: This is the inverse of the term. Rather than "Rates suggested by the ACGA", the appropriate term is suggested rate.