So, how can a retiree replace the interest income from a "matured" certificate of deposit paying more than 5% when the rate on a new CD is 1.3%? One solution: Donate the principal to a nonprofit in the form of a "charitable gift annuity" in exchange for a lifetime of fixed annuity payments.
Remember the good old days, you know, when you could invest in a certificate of deposit (CD) and the bank would actually pay you something called "interest" on your deposit? No, really, I kid you not. Banks really did that.
Obviously, I am being a bit factitious, but you get the point. It is hard enough to make money these days, let alone accumulate wealth.
Let's say you are retired and are looking for a place to put your money to work. And, you need more of a return on that money than the banks are paying on their CDs. Also, you are intending to leave a bequest from your estate to support your favorite charity (but you don't want to run out of cash flow and become a "client" client of the charity yourself). Here is a win-win idea to consider, especially if you are charitably-inclined – invest in a charitable gift annuity. Recently, none other than The Wall Street Journal ran an article on this very subject, entitled "Earning income by Making a Gift."
Here is how it works: Give the money to your favorite charity… instead of to your favorite bank. However, you may "give and receive" when you make the gift to the charity in exchange for a charitable gift annuity. Ultimately, you'll be giving what remains of that charitable gift to the charity at the time of your death. However, in the interim, you'll receive a fixed and predictable stream of income over your lifetime. The most important detail is that the "annuity rate" is determined by your age, rather than by national interest rates. That means a couple at age 65 would receive around a 4.7% yield and a couple at age 75 would get 5.7% (individuals at age 65 and 75, respectively, would receive even higher yields at 5.3% and 6.5%). Further, the money is tax friendly. The yield is largely tax-free and the initial chartable donation offers a potentially sizable upfront tax deduction.
Note: In case you think your heirs may be a few fries short of a Happy Meal when the charity inherits the remainder, consider some savvy life insurance planning to replace for your heirs the value of the funds contributed to the annuity. How? With the increased return on your money via the charitable gift annuity, you may find enough left over to pay the life insurance premiums.
A charitable gift annuity can help you support yourself, provide for your heirs (via the life insurance "wealth replacement"), and your favorite charity, all in one fell swoop. That noted, however, it can be a little tricky.
Ensure that your charity can support a charitable gift annuity. Not all can. Look before you leap is good advice here. Check out The American Council on Gift Annuities website (acga-web.org.), but remember two important caveats. For starters, a charitable gift annuity locks you into that initial annuity rate for your lifetime. So, what is competitive now may not be should national interest rates rise and the yield will no longer be as competitive. Some regard this as unlikely, especially in the short term (i.e., Ben Bernanke, Chairman of the Federal Reserve Bank has said interest rates will be suppressed for another two years). Second, should the charity itself suffer economic hardship, it may be unable to meet its annuity obligations and cease payments. This is a real possibility, especially in this economy.
Remember: Charitable gift annuities are not backed by the government like CDs. Clearly, if a charitable gift annuity is right for you, then it will take some research and proper planning to pull it off successfully.
You would be wise to seek appropriate legal counsel to help you analyze the appropriateness of a charitable gift annuity in the context of your overall estate planning.
Reference: The Wall Street Journal (September 17, 2011) "Earning income by Making a Gift"