How to Calculate Annuities With Gifts

A gift annuity is one way to ensure your financial security while giving to a worthy cause.

A gift annuity is a great way to give to your preferred charity of choice while ensuring your financial security. In addition, the IRS considers a portion of the payments you receive a partial tax-free return of your gift to the charity. The IRS determines the annuitant's life expectancy, splitting part of the annuity as tax-free income and the remainder as ordinary income. The most common asset to use to fund gift annuities is cash but you may use other assets such as equities or other types of financial assets.

Instructions

1. Decide how much you can afford to gift to the charity and whether you plan to use cash or securities. You may also use real estate as a gift but this complicates matters, which is why most charities only accept cash or stock gifts.

2. Obtain the fixed rate given under this specific annuity used to calculate the annuity payments. The American Council on Gift Annuities determines the fixed rate. The council usually reviews the fixed rate once a year and adjusts it accordingly based on economic conditions. Your age determines the annuity interest rate. The older the annuitant, the higher the rate.

3. Decide on the payment schedule for the annuity payments. You may receive quarterly or monthly payments. You also have a choice of receiving a deferred annuity payment in which you must wait one year before the annuity payments begin.

4. Gather the gift amount, interest rate and number of periods or the life expectancy to calculate the annuity payments. For example, assume that at age 40 you gave a cash gift to a charity in the amount of $50,000. Your IRS determined life expectancy is 82 and the interest rate is 5 percent. You expect to receive monthly payments. Using a financial calculator, determine payouts in this manner:

   PV (present value) = $50,000
   N (periods) = 504 ((82-40) x 12 months)
   i (interest) = 0.417 percent (5 percent divided by 12)

   Based on that calculation, expect to receive a monthly payment of $237.55.

Tips & Warnings

• Research the charitable organization before investing in a gift annuity. If the charity files for bankruptcy, you may no longer receive your annuity payment. Issues such as management of donations, regulatory compliance and who is in charge of managing and monitoring the charity's investment decisions are paramount.

References

• "The Wall Street Journal"; Donors Find Gift Annuities Stop Gving; Mike Spector and Shelly Banjo; May 2009
• American Council on Gift Annuities: About Gift Annuities
• ChristianPF: What Are Charitable Gift Annuities and How Do They Work?

Resources

• Albright College: Gift Annuity Calculator
• IRS.gov: 2011 Instructions for Forms 1099-R and 5498