Who is the ideal candidate for a charitable gift annuity? What are the benefits of donating a gift in this way? These are some of the pertinent questions that Daniel Frajman, BCom’86, BCL/LLB’90, aims to shed light on.
Frajman is an attorney and partner at the Spiegel Sohmer legal firm in Montreal, and a member of McGill’s new Strategic Giving Council. He specializes in trusts and wills, as well as corporate law, commercial law, and tax and corporate aspects of non-profits and charities.
While a bequest in a will is the most common way of leaving a legacy gift to McGill, a charitable gift annuity offers donors unique benefits.
“There’s so much that can be said about charitable gift annuities, but the information below touches on the most relevant factors,” says Frajman. “I hope it can be of some use.”
Not offering any advice
Through this “Leaving a legacy: Charitable Gift Annuities” article, McGill University, along with the presenter concerned, offer general information (the “Information”) only. The Information is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the Information presented here is believed to be factual and current, it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect those of the individual presenter concerned and are subject to change. Opinions expressed in this article are those of the interviewee and do not necessarily reflect those of McGill University or its members. The general information below applies to Canadian residents. Upon request, McGill can advise whether it may issue an annuity for a donor residing in a jurisdiction outside of Canada.
How would you describe a charitable gift annuity (CGA) in layperson’s terms?
A charitable gift annuity is an arrangement under which a donor transfers an amount of money to a charitable organization such as McGill in exchange for fixed guaranteed payments – often for the life of the donor, and perhaps also for the life of another person.
What are the benefits for the donor of a charitable gift annuity?
The donor receives a tax receipt for a portion of the gift donated to charity. The donor – also called an annuitant – receives guaranteed annual payments which are partially or even all tax-free. The donor can also name a joint annuitant, such as a spouse.
McGill issues its own charitable gift annuities. What are the advantages to this?
By issuing its own annuities, McGill reduces the number of parties involved, which presumably reduces the cost of establishing and administering the annuity.
The charitable gift annuities issued by McGill pay out for life; they are not set for a particular term of years.
Charitable gift annuities issued by McGill provide future support to the University while ensuring a guaranteed income stream for the lifetime of the annuitant or joint annuitants.
Who is the ideal candidate for a charitable gift annuity?
At McGill, the minimum age of the donor is 70 and the minimum asset to be donated is $50,000. For example, one member of a couple could be the donor, and both members of a couple would often set themselves up as co-annuitants, meaning the donor receives payments until passing, upon which time the payments go to the co-annuitant.
The donor is usually a person with some income who can benefit from the tax receipt to lower taxes in the year of the donation or in the five years following, and with the donor also having an interest in receiving a secure income from the annuity for the rest of their life.
For couples: do they have to be married or common law? Do both individuals have to be 70+? Could this option be applied to friends, etc.?
Married or common law couples can set themselves up as the joint annuitants. And indeed, the joint annuitants need not be a couple; they can also be, for example, siblings or friends. Both individuals must be 70 or older when the annuity is established.
Why does the payout rate change depending on your age, gender, the number of annuitants, and the markets?
All of these factors – including the life expectancy of the annuitants – are taken into consideration and subject to actuarial calculations. These calculations will establish how much of the donation must be used to fund the annuity, as well as the annual payout.
Generally speaking, older people may get greater benefits: a larger tax receipt for their donation, or a larger amount of tax-free payout on the annuity. Similarly, women may get slightly better results from a tax point of view, as they tend to have a longer life expectancy than men.
Are the payouts taxable?
Yes, but generally only a portion of the payout is taxable. Most of the payment to the donor is seen as a return of capital that was not needed to purchase the annuity.
How many times a year do you receive payments?
McGill recommends an annual payment, although semi-annual payments are possible.
Are there any pitfalls to be avoided when considering a charitable gift annuity?
The donation to set up a charitable gift annuity is irrevocable – once the gift is made, it cannot be reversed. Therefore, the donor must check with a financial advisor – perhaps even a legal advisor – to ensure that a CGA makes sense from a financial point of view.
What impact does a charitable gift annuity have on McGill?
Funds received by McGill go on to fund all the things the University is involved with, such as scholarships, bursaries, and life-changing research, just to name a few. Donors are encouraged to speak with someone from the Bequests and Planned Giving team to discuss the areas they’re most passionate about and how their gift can have the most impact.
A CGA is actually a deferred gift; McGill does not use the funds until the annuitant(s) pass(es) away.
Can you offer a brief scenario that illustrates the benefits of a CGA to the individual(s) and to McGill?
Bill and Mary are a married couple, both 70 years of age. Bill decides to donate $100,000 to McGill to establish a CGA, under which Bill will receive annual annuity payouts for the rest of his life, following which Mary will receive annual annuity payouts for the rest of her life.
Bill is paying income tax every year on his other investments and on some consulting income that he has, so he’ll be able to use the donation tax receipt from McGill resulting from the $100,000 gift in order to reduce his income tax. Furthermore, Bill and Mary have elected, based on the options presented, to receive a steady 5 per cent annual payout of $5,000 on the original $100,000 amount, and most of that payout is received tax-free.
As an added bonus, Bill’s $100,000 transfer to McGill does not in itself cause Bill to be taxed, given that Bill makes the donation to McGill by transferring $100,000 in cash. As for the actuarial numbers, they tell us currently that Bill receives a donation tax receipt of about $20,000 when making the donation, and only about 30 per cent of Bill and Mary’s annual annuity payments are taxable, so they have the security of receiving a guaranteed annual payment that is subject to a low level of tax.
Local laws
The Information does not constitute an offer or solicitation to buy or sell any currency, investment fund or other product, service or information to anyone in any jurisdiction.
Please be aware of the laws of your country or that otherwise apply to you in relation to any of the matters described in this article. If you choose to access this article, you do so on your own initiative and are responsible for compliance with applicable local, national or international laws.