On the ladder of planned giving instruments, gift annuities are riskier for a nonprofit than a simple bequest program. For those organizations that want to take the next step and provide the infrastructure to support them, gift annuities may be an option.
Gift annuities are contracts that the nonprofit makes with a donor whereby the donor contributes money, and the nonprofit agrees to pay that donor an annual income for life.
The donor gets a tax deduction and cash flow for life, while the charity receives the rest of the amount donated when the donor dies.
Gift-annuity contributions are pooled and invested. The nonprofit will need to understand investing, and be able to provide tax reports to the donors.
A nonprofit can operate a gift-annuity program itself, or it can be contracted out to a financial services provider. Community Foundations can also work with a charity to provide gift annuities to its donors.
Gift-annuity programs can be risky for the charity. If investment performance is sub-par, the income promised the donor must be delivered anyway. 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.
Related:
What Is a Charitable Gift Annuity? A Primer for Donors
Deferred Charitable Gift Annuity
