How Charitable Gift Annuities Work

A charitable gift annuity (CGA) is a lifelong contract between a donor and a 501(c)(3) qualified public charity. When you make a donation, the organization invests the gift and pays you a fixed income for life, based on your age, life expectancy, and whether there are one or two beneficiaries. At the end of your life—or your spouse's if you're giving as a couple—the charity is entitled to the remainder of the gift.

Let's look at how to include a CGA in your estate plan and charitable giving strategy.

Funding a CGA is much like giving to your favorite charities. In addition to cash gifts, you can donate appreciated stock and other assets or make a grant through a donor-advised fund account if it allows.

Individuals ages 70½ and older can also make a once-in-a-lifetime distribution directly from their IRA to one or more CGAs (up to $55,000 in 2026), which will be treated as a qualified charitable distribution (QCD) and will count against your 2026 QCD limit of $111,000. This distribution is excluded from your taxable income, and you may use it to satisfy all or part of the IRS-mandated required minimum distributions (RMDs) that begin at age 73 or 75, depending on your birth year).

Despite these advantages, CGAs have nuances that may or may not meet your needs. Here's what to consider before you donate.

• Although payment rates vary from charity to charity and are determined by the donor's age (or donors' ages if making a joint gift), most organizations follow the recommendations set by the American Council on Gift Annuities (ACGA).
• Some charities may offer higher payout rates for donors who agree to wait several years before receiving regular payments, possibly delaying income needed for retirement. (CGAs funded with QCDs must begin payouts immediately.)
• CGAs typically pay lower interest rates than regular annuities because they're "split-interest" gifts—meaning part of the gift is designed to benefit the charity the rest is paid back to you or set aside for beneficiaries.

Age and minimum investment requirements vary by organization, so make sure to discuss the details with your preferred charity, which can also give you estimates of the potential charitable deduction, the annual payout, and the gift to charity at the end of the contract.

There are also potential tax benefits—and ramifications—depending on whether you fund the CGA with after-tax assets or directly from your IRA as a QCD:

As a split-interest gift, the portion that goes to the charity may be eligible for a charitable income tax deduction (if you itemize), up to annual IRS limits based on the type of asset and only to the extent the contribution exceeds 0.5% of your adjusted gross income (AGI), which is your total income minus certain adjustments. Noncash gifts, such as securities, are deductible up to 30% while cash gifts are deductible up to 60% of your AGI. You can carry forward any excess contributions above the AGI limit up to five additional tax years so long as the amount exceeds the 0.5% AGI floor.

High-earners—those in the 37% income tax bracket—may also be subject to what is known as the 2/37 rule, which limits the value of the deduction to 35 cents for every dollar of itemized deductions. (This rule doesn't apply to the lower tax brackets.)

For example, say your AGI for 2026 is $1,000,000 and $20,000 of your cash gift goes to charity. After subtracting 0.5% of your AGI ($5,000) from your gift and applying the 2/37 rule ($15,000 x .35), only $5,250 of your contribution would be tax deductible. Of the remaining $14,750, you can deduct the amount above the AGI threshold over the next five tax years.

Once you begin receiving income from the CGA—which you can elect to take place immediately or at a future date—a portion of the payouts will be treated as a tax-free return of your principal until the cost of the annuity is fully recovered when you reach the life expectancy (or life expectancies) stipulated in the contract. The remainder will be treated as earnings subject to federal and state income tax. (IRS rules determine what's taxable and what's not.)

You'll owe ordinary income tax from the taxable payments from an annuity funded with cash. If you funded the annuity with appreciated securities or real estate owned longer than a year, you'll owe ordinary income tax as well as any capital gains tax on a portion of your payouts over the life expectancy period. The charity will send you a Form 1099-R each year to specify how your payments should be reported for income tax purposes.

Unlike CGAs funded with after-tax assets, the income payments from an IRA-funded CGA must begin immediately and are fully taxable as ordinary income. The donated amount doesn't qualify for a charitable deduction; however, a CGA does effectively reduce your overall RMDs for the year in which it's made—and therefore reduces your potential taxable income.

Before making a gift, you should consult your tax advisor to determine the best funding method for your situation.

Beyond their tax treatment, it's important to understand that CGAs:

• Are irrevocable: Once you transfer your money, there's no turning back (as opposed to standard annuities, which may allow you to terminate your contract for a lump sum, minus fees and other charges).
• Are a one-time opportunity for those funded directly from an IRA: You can fund more than one CGA, but they must all be completed in the same tax year and collectively cannot exceed a total of $55,000 in 2026.
• Are only as safe as the charity is sound: If the organization goes belly up, your payments will disappear with no real recourse, other than to get in line with any other claimants to the charity's remaining assets.

If you believe a CGA could be a good fit for your charitable pursuits, be sure to fully understand the annuity's terms before you commit, including a breakdown of income payments and an explanation of the tax benefits depending on the types of assets you intend to donate.

Ultimately, a CGA is just one way to give to charity and should always be considered in the context of your overall wealth and estate plan. Whatever you decide, I applaud your commitment to charitable giving and your interest in maximizing your impact.