As planned giving continues to become a more significant component in the repertoire of most charities, it is now more important than ever that financial planners become better versed in this important financial issue-which affects both estate planning and retirement planning. In some cases, the assets involved in these scenarios will be held away from the advisor. But if the situation is handled deftly by the advisor and he or she can helps clients make an informed decision to support a cause that is near and dear to their hearts, it may offer an opportunity to get closer to those clients.

At its core, planned giving is a way to help philanthropic individuals achieve their charitable goals while also reaping both tax and financial benefits. Within the realm of planned giving there is a variety of gift types. Some of the more common are direct bequests, charitable remainder trusts and charitable gift annuities (CGAs).

For the financial advisor, CGAs are the planned giving vehicle that will most often appear on your radar. As baby boomers race toward retirement, CGAs are increasing in popularity because they fulfill the boomers' desire for supplemental income as well as their desire to support a worthy-and often personal-cause.

Coinciding with the increase in dedicated planned giving programs is a rise in the number of fundraisers who are experienced and knowledgeable about the intricacies of CGAs. The American Council on Gift Annuities (ACGA), whose mission is to actively promote responsible philanthropy, maintains a list of recommended annuity best practices, one of which is that all "prospects are encouraged to consult with their own legal and financial advisors."

When your clients do call, being knowledgeable and objective can go a long way towards enhancing your relationship with them. The amount of money allocated to a CGA might only be a small percentage of your client's assets, but there is often a high level of enthusiasm and emotional attachment for the chosen charity.

What is a CGA?

A charitable gift annuity is a contract between a donor (your client) and a charitable organization. Your client agrees to make an irrevocable gift to the charity and in return the charity agrees to pay a fixed income to one or two individuals (annuitants) named by your client for the remainder of their lives. Like annuities that people buy from insurance companies, charitable gift annuities can also be designed several ways: a single-life annuity (payments made to one person for their lifetime); a joint annuity (payments made to two people simultaneously throughout the lifetime of the survivor); and a survivorship annuity (pays income throughout the lifetime of the annuitant and then continues payments to a second named person).

Your client also can select whether the annuity payments will begin right away (Immediate Gift Annuity), or at a future date chosen by your client (Deferred Gift Annuity). The gift that funds the annuity is given irrevocably to the charity and the payments are a contractual obligation of the charity. In fact, the CGA is backed by the charity's entire assets, and not merely by the funds contributed. The rates for CGAs are usually based on rates suggested by the American Council of Gift Annuities.

Tax Benefits

There are several advantages associated with a CGA. Among them are: an immediate federal income tax deduction; a portion of the income earned is tax-free; and if the CGA is funded with appreciated securities, capital gains can be deferred.

As an example, consider a 65-year-old man who establishes a $50,000 CGA with his favorite charity. His annuity rate is 5.5% and he can expect a payment of $2,750 each year for the rest of his life. According to the current actuarial tables used by the ACGA, that annuitant has a life expectancy of about 20 years. The expected return (sum of all payments during his life expectancy) would be $54,450 and his immediate charitable deduction would be $14,665.

In addition, of the $2,750 annual payment he would get, $1,776 would be tax-free for the first 20 years. After the annuitant dies, the charity keeps the remainder.

CGAs funded by appreciated securities that have been held long-term may be an ideal vehicle for turning those assets into a cash-producing vehicle that may reduce capital gains taxes while also netting your client a charitable tax deduction.

How to Best Help Clients

First and foremost, you should know that CGAs are backed by the charity. This means that your client's benefits rest solely with the financial health of the charity.

Examine the financial strength the charity, and ensure that the charity has a separate annuity reserve fund. In a few states, like New York, New Jersey and California, gift annuities are highly regulated, and although due diligence is still recommended, you can at least breathe a little easier.