You've seen the ads from AARP, Consumer's Report; gotten mailings from your alma mater and the nonprofit you donate to each year. They advertise charitable (or gift) annuities as a way to benefit an organization whose work you want to support, and as a way to invest safely with a predictable return.
How they work:
You give a gift of cash, securities or other assets to a charity. It goes into an annuity that pays out a guaranteed interest rate of around 5-9% per year to the beneficiary (you and/or your spouse usually). At your death the nonprofit gets to keep whatever is left of the original sum.
The American Council on Gift Annuities sets the rates that guide annuity payments. These are set so that the nonprofit ends up with about half of the donor's initial contribution.
Charitable annuities commonly pay out at a certain age, usually 60 and above. A portion of the annuity payments are tax-free and you can take an upfront income tax deduction on the gift. You can also pay taxable gains on appreciated stocks or property over your life expectancy rather than paying capital gains tax immediately the way you would if you sold that property for other purposes.
Things to watch out for:
Gift annuities involve an irrevocable transfer of assets. You can't get your gift back once you fund an annuity. You are also stuck with the rate of interest when you fund the annuity. It won't go up when interest rates or inflation rise. On the other hand, the interest rate won't go down either, and you get to support a favorite institution or cause.
Donors can receive payments immediately (although many nonprofits don't allow payments until you are over 60) or defer payments until a later date. The older you are, the higher the rate.
Gift annuities are usually funded with a gift of at least $10,000. Charitable gift annuities usually do not pay a well as commercial annuities.
Annuities are backed by the charity's assets, so you should thoroughly vet the institution's financial strength before funding an annuity. Ask organizations about their total asset levels and for records of any defaulted annuities. Gift annuity defaults, due to insolvency, are rare, however.
You should consult your financial adviser, accountant, or attorney to make sure a gift annuity works best for you.