Charitable Gift Annuities Funded with Highly Appreciated Stock: A Tax-Smart Strategy with Community Impact
By John H. Robinson, Financial Planner (May 2025)
Charitable gift annuities (CGAs) offer a unique opportunity to support philanthropic causes while securing lifetime income and optimizing tax outcomes-especially when funded with highly appreciated stock. By partnering with community foundations, donors can amplify their impact locally while navigating complex financial benefits.
How Charitable Gift Annuities Work
A CGA is a contract between a donor and a charity (often a community foundation) where the donor transfers assets-such as cash, securities, or real estate-in exchange for fixed annual payments for life. Upon the donor’s death, the remaining assets support the charity’s mission.
Key Benefits of Funding a CGA with Appreciated Stock:
Avoid Capital Gains Tax: Donating highly appreciated stock directly to a CGA bypasses capital gains taxes that would apply if the stock were sold. For example, gifting stock purchased for $10,000 now worth $50,000 eliminates taxes on the $40,000 gain[1].
Tax-Deductible Contribution: Donors receive an immediate partial income tax deduction based on the present value of the charity’s remainder interest[2][3].
Stable Lifetime Income: Payments are fixed and guaranteed by the charity, regardless of market performance[2][4].
The Role of Community Foundations
Community foundations are public charities focused on improving specific geographic regions. They excel in administering CGAs due to their local expertise and commitment to long-term impact:
Local Knowledge: They identify pressing community needs and connect donors to vetted nonprofits, ensuring gifts address critical issues like education, healthcare, or disaster relief[5][6].
Tax Efficiency: Contributions to community foundations qualify for federal deductions up to 30% of adjusted gross income (AGI) for noncash gifts, with excess deductions carry forward for five years[3][4].
Flexible Giving: Donors can designate funds to specific causes or allow the foundation to allocate resources where most needed[7].
Example: A 75-year-old donor funds a $25,000 CGA with appreciated stock through a community foundation. They receive $1,750 annually (7% rate), avoid capital gains tax, and support local environmental initiatives after their lifetime[8][4].
Community Foundations vs. Commercial Alternatives
Feature | Community Foundation | Commercial Provider |
Fees | Retained by the institution | |
Local Impact | Deep ties to regional needs and nonprofits[6] | Limited community engagement |
Donor Support | Personalized service and philanthropic guidance | Transaction-focused |
Tax Deduction Limits | 30% AGI for securities, 60% AGI for cash[3] | Same limits, but no local reinvestment |
Tax Considerations
Income Tax: A portion of CGA payments is tax-free return of principal initially, with the remainder taxed as ordinary income[3].
Capital Gains: Appreciated assets donated to a CGA trigger partial capital gains tax upfront, but the liability is often offset by the charitable deduction[2][1].
Medicare/IRMAA: CGAs do not count toward Medicare’s Income-Related Monthly Adjustment Amount (IRMAA), helping retirees manage healthcare costs[3].
Conclusion
Funding a charitable gift annuity with highly appreciated stock through a community foundation merges financial savvy with philanthropic purpose. Donors secure lifetime income, minimize taxes, and leave a legacy that strengthens their community. For those prioritizing local impact and personalized service, community foundations offer distinct advantages over commercial alternatives. Here are links to the two community foundations that I have interacted with on behalf of clients over my career – Hawaii Community Foundation and Berkshire Taconic Community Foundation.
John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software maker Nest Egg Guru and the new personal finance website NestEggPF.com.
