Charitable Gift Annuities Are 0n The Rise

Move over, charitable trusts. Make way for the charitable gift annuity.

Typically viewed as entry-level gifting methods thanks to low minimum contribution amounts, low cost, and simplicity, charitable gift annuities have had a spike in inflows from wealthy donors lately. According to a BNY Mellon Wealth Management study, in 2019, assets in gift annuities were up 21% over the prior year, and the average gift was 56% larger. Assets continued to flow into charitable trusts, but at only a slightly higher level than in 2018.

The surge in popularity in gift annuities is likely a result of people’s desire for a guaranteed lifetime annuity at a time when yields are at historic lows in the fixed-income market, and a hesitation to sock money into a charitable remainder annuity trust (CRAT).

A CRAT is the gift annuity’s equivalent in the trust world, and typically a popular tool. But ultralow interest rates and high valuations in the stock market make for a lousy environment for CRATs, says Crystal Thompkins, national director of gift planning services at BNY Mellon Wealth Management, who expects gift annuities’ popularity to extend through this year.

As winds shift in the economy, the markets, and regulatory environment, it’s not uncommon for the popularity of different charitable planning tools to rise and fall. Given the surge in popularity of gift annuities, it’s worth a look at how they size up these days relative to their closest charitable trust cousin.

Charitable Gift Annuities

A charitable gift annuity is a simple contract guaranteeing that if you give a nonprofit organisation a lump sum, it will pay you a fixed, lifetime annuity based on actuarial factors—a host of market factors combined with your life expectancy. Minimum donations are around $2,000 and, unlike a trust, no attorney is required to set one up (hence no attorney fees).

Even if you live beyond your life expectancy, after your lump-sum equivalent has been paid out, you continue to receive the annuity. Depending on the contract, the annuity can continue to pay out to a surviving spouse. If you and your spouse die before your lump sum has been paid out, the charity keeps the balance in its coffers.

Payments can be deferred, which increases the amount paid out in the future annuity. A partial donation for the gift can be taken upfront. Capital gains taxes on the growth of underlying assets are spread over the annuity payments. When interest rates are low, the future capital gains’ bite out of annuity payments is lower, leaving more intact as income, Thompkins says.

Nonprofit groups that offer charitable annuities have large infrastructures, such as museums and universities. “We’re talking those with hundreds of millions in assets that are segregated to support their annuity programs,” Thompkins says. “These are diverse pools designed to absorb potential risk. It’s like managing a pension.”

The downside is that not all nonprofits offer gift annuities, and they aren’t customised, says Pam Lucina, chief fiduciary officer at Northern Trust.

Charitable Remainder Trusts

In contrast, trusts can pay out to a number of different charities, over a specified period of time instead of a lifetime, and can be used to transfer assets to heirs. The CRAT is the most similar to a gift annuity: It turns a lump sum into an annuity, and what’s left at the end goes to charity—at least 10% of assets transferred to the trust is required to be left as a gift.

But the CRAT has lost its luster lately, Thompkins says. The annuity and future gift are dependent on the high probability of the underlying invested assets performing within certain parameters. With stock market valuations high, and the economy in ragged shape due to Covid-19, there’s good reason for concern that the market could enter a sustained bear market.

“In 2008 and 2009, there were trusts that were exhausted with no benefit to either the charity or the donor,” Thompkins says. “Many people are leery now.”

Superannuation is the first thought when it comes to self-funding retirement. Yet it is hardly the only option for doing so.

Just as we have a choice in how and where we work to earn a living, many people also have a choice in how to fund their retirement.

It is possible and sometimes preferable to leave your superannuation untouched, allowing it to continue growing. Some or all of your income can come from alternative sources instead.

Here are some alternatives you can consider.

1. Downsize your home

For many who own their own homes, the equity accrued over decades can eclipse the funds in superannuation. However, it’s theoretical money only until it is unlocked.

Selling up the family home and downsizing – or rightsizing – for retirement allows you to pocket those gains tax-free and simultaneously relocate to a more suitable home with lower upkeep costs.

Up to $300,000 from the proceeds can be contributed by a downsizer to boost your super, and the remainder can be used to fund living expenses or actively invested.

Remember that while the sale proceeds of your home are tax-free, any future profits or interest earned from that money will be taxable.

2. Part-time work

Semi-retirement allows you to gradually step into retirement. You continue earning income and super while working part-time, keeping a foot in the workforce while testing the waters of your new found free time.

Doing so also offers scope to move into different roles, such as passing on your skills to future generations by teaching/training others in your field of expertise, or taking employment in a new area that interests you and is closer to home.

3. Self-employment

Retirement from a full-time position presents a good opportunity to pursue self-employment. With more time and fewer commitments on your hands, you have greater scope to turn your hobby into a business or leverage your professional skills and reputation as an external consultant.

Also, for the self-employed and those with a family business, director’s loan repayments from the company are typically tax-free, offering a potentially lucrative source of

income and a means of extracting previous investments into the business without selling your ownership stake.

4. Investments

Rental property income (from residential or commercial properties) can supplement or even provide a generous source of income. The same applies to dividends from shares.

These are likely to be more profitable if you own them well before retirement.

Income that is surplus to your everyday needs can be reinvested using tax-effective strategies to grow your future returns.

5. Family trust

A family trust could be used to house investments for yourself and other relatives, building intergenerational wealth.

Trusts allow funds to be allocated to beneficiaries to manage marginal tax rates and stretch the money further, you have control over how income is split between different family members and have flexibility for changing circumstances.

6. Selling collectables

You may not realise the value of items you have collected over the years, such as wine, artwork, jewellery, vintage cars, and antiques.

Rather than have them collect dust or pay to store them, they could be sold to fund your living costs or new investments.

Where possible, avoid selling growth assets in a depressed market – wait until you can extract maximum value.

7. Obtaining a part-pension

Part-pensions are not only possible but valuable in making your superannuation stretch further. They still entitle you to a concession card with benefits in healthcare, transport, and more.

Take these savings even further by requesting pensioner discounts with other companies, on everything from utilities to travel and insurance to eating out.

Also, don’t overestimate the value of your assets as part of the means test. It’s a common mistake that can wrongly deny you a full or part-pension.

Plan ahead

However, you ultimately fund your retirement, planning is crucial. Advice would hopefully pay for itself.

Understand your spending and how those habits will change before and during retirement, then look to investments that offer the best fit.

Consider a mixture of strategies to diversify your risk, manage your tax liabilities and ensure ongoing income.

Above all, timing is key. The further ahead you plan, the more time you have to embrace additional opportunities and do things at the right time to maximise their value. You’ve worked hard and now is your chance to enjoy the fruits of your labour!

Helen Baker is a licensed Australian financial adviser and author of the new book, Money For Life: How to build financial security from firm foundations (Major Street Publishing $32.99). Find out more at www.onyourowntwofeet.com.au