Like many people in California, you may consider donating to one or more charities within your estate plan. Some charitable institutions offer charitable gift annuities. These financial instruments allow you to earn a lifetime income from the investment of your donation. Your original donation is tax deductible, but charitable gift annuities have two issues you must consider.
Inflation erodes income
Unlike regular annuities, annuities tied to charitable donations offer weak protection from inflation. The financial instrument does not have a mechanism to adjust your payments upward with inflation. As a result, your annuity earnings will provide reduced spending power as inflation continues year after year.
Risk of loss
Institutions that offer charitable gift annuities run these programs in partnership with financial service companies. In this arrangement, the charitable institution holds your donation as its investment. If the institution encounters financial trouble and unravels or closes for whatever reason, then your annuity ceases to exist, and payments will stop.
For this reason, you would want to investigate the long-term viability of the organization you wish to donate to. Conducting due diligence with the support of a financial adviser could warn you about issues that may point to an institution with a shaky future.
Timing affects payment size
With an annuity, your actuarial life expectancy influences the amount of your annuity payments. Setting up an annuity early in life means you will likely receive more payments. This situation requires that the payments be small. The reverse is true for people who buy an annuity later in life. Their payments will be larger because the annuity will pay recipients for shorter periods of time.
