Charitable Gift Annuities: A win-win-win

If you are a senior-aged donor looking to leave a legacy to the Jewish Federation of Greater MetroWest NJ — or another organization in Greater MetroWest — consider a Charitable Gift Annuity (CGA) from our local Jewish Community Foundation of Greater MetroWest NJ. The CGA is a gift vehicle that my wife and I have used in our estate planning since we neared our seventies and continue to use.

A CGA is a contract between you and JCF. In this contract, you transfer cash or property (e.g., appreciated common stock) to JCF. In exchange, JCF reinvests the proceeds and promises to pay you a guaranteed quarterly income for the rest of your and/or your spouse’s life.

At the time of your death (and/or your spouse’s death, as stipulated by you in the contract), the remaining value of the CGA is distributed to either JCF or another related charity in Greater MetroWest. You stipulate this in the contract.

You can choose for JCF to receive the remainder, or designate in your contract that the remainder go to another organization (usually a synagogue or affiliated Greater MetroWest organization). If you choose another charity, JCF will retain 10 percent of the remainder and transfer 90 percent to your named charity.

Here are the main benefits of CGAs:

• The income you will receive is likely to be much higher than the rate you can get on CDs, money market funds, or other fixed-income securities. The exact rate will depend on your age and/or your spouse’s age. JCF uses rates from the American Council on Gift Annuities. (Visit acga-web.org for current rates.)

• If you transfer appreciated stock or other assets to open the CGA, you will avoid federal capital gains tax on those appreciated assets. This benefit would not be available to you or your heirs if you simply leave the stock to charity in your will.

• A substantial portion of the amount used to open the CGA is a charitable deduction when calculating federal income tax.

• A substantial portion of the annual payments you will receive for life is considered return of capital and, hence, is not taxable as regular income.

My wife and I opened several CGAs with JCF in recent years. The amount that our charitable beneficiaries ultimately receive will depend on how long we live and the earnings achieved by JCF on its investment of our CGAs. (Note: I am 80 and my wife is seven months younger.)

Example #1: When I was 69 years old, and my wife was 68, we opened a “joint and survivor” CGA, which means that the income will be paid until both of us are deceased. At the end of our lifetimes, the balance will go to JCF to help its grant making and other community programs. The annuity rate is 6 percent. We happen to have used cash to fund this annuity. Eighteen percent of the amount used to fund the CGA was a tax deduction, and 63 percent of the income has been free of income tax.

Example #2: When we were both 72, my wife and I each opened individual CGAs with JCF, but this time we designated the Golda Och Academy as the ultimate beneficiary. We used appreciated stock to fund these CGAs. The annual annuity rate is 6.7 percent; 46 percent of the market value of the stock transferred to JCF for the annuity was considered a charitable tax deduction; and 58 percent of the income is tax-free. (The tax-free feature in our circumstances lasts for 15 years after purchase.)

Example #3: Last year, when I was 79 and my wife 78, we opened a CGA for the ultimate benefit of a related organization, using appreciated stock. In this case, as with the CGAs for Golda Och, the stock used to create the CGAs was not subjected to capital gains tax. The annuity rate for this CGA, also a joint and survivor, is 5.5 percent. Forty percent of the amount we used to open the CGA was a tax deduction, and 47 percent of the income is tax-free.

As these personal examples make clear, CGAs offer a very tax-efficient method of leaving your charitable legacies. Furthermore, when your CGA is with JCF you will receive a high degree of very competent advice from specialists who will treat you as a treasured member of the Jewish community, instead of “just another client.” Frosting on the cake is the knowledge that the fees embedded in the contract will benefit our local Jewish community.

I think of CGAs from JCF to be a “win-win-win” proposition.

• Win #1 — You benefit from lifetime income at a higher rate than you are likely to otherwise earn on your money, with substantial tax advantages to boot.

• Win #2 — You leave handsome legacies to your favorite charities.

• Win #3 — You help JCF to do good deeds in the Greater MetroWest NJ community.