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Giving Home > Professional Advisor Resources > Article of the Month > Testamentary Gift Annuities, Part 2

Testamentary Gift Annuities, Part 2

Published July 1, 2026

Charitable gift annuities (CGA) have long been a trusted option for donors who want to make a meaningful gift while receiving reliable, fixed payments. With a CGA arrangement, the donor contributes cash or appreciated assets to a charity and in return receives guaranteed fixed payments for life. The structure is straightforward, the payments are predictable and a portion of the transfer typically qualifies for an immediate charitable income tax deduction. For many donors, the combination of simplicity, security and philanthropic impact makes the charitable gift annuity an appealing planning tool. For similar reasons, donors may want to consider including a charitable gift annuity as part of an inheritance plan for loved ones.

This article explores the foundations of testamentary charitable gift annuities (TCGA). Part 1 of this article series examined the basics and benefits of creating a TCGA. Part 2 will discuss funding a TCGA with traditional tax-deferred retirement plan assets.

Retirement Asset Basics

A testamentary charitable gift annuity can serve as a tax-efficient substitute for transferring retirement assets. Traditional IRAs, 401(k)s, 403(b)s and other qualified retirement plans are categorized as income in respect of a decedent (IRD), meaning the asset remains taxable to the decedent’s estate or beneficiaries. Rather than leaving retirement assets such as 401(k)s, 403(b)s and IRAs directly to individual beneficiaries and depleting the account value through substantial income tax, retirement assets can instead be directed to fund a TCGA. The charity receives the full value of the retirement asset, and the beneficiary receives lifetime payments, often resulting in a more efficient overall outcome than a direct distribution.

Individuals with traditional IRAs must take required minimum distributions (RMDs) when they reach 73 (or 75 in 2033) which increase modestly each year. An RMD represents the minimum amount that an IRA owner must withdraw based on the account balance at the end of the distribution year and the distribution period or life expectancy taken from the applicable table. Based on the current RMD tables, account investment returns may outpace the RMD for many years. If an IRA owner withdraws only the RMD amount each year, retirement accounts may continue to grow even during retirement. Assuming a 6% rate of return, the RMDs will not start to reduce the IRA principal until more than 10 years after the RMDs start. Thus, IRAs may continue to grow and remain substantial assets in estates.

Because IRA owners may have significant balances in their IRAs, thought and care should be put into how the IRA will complement the estate plan. Generally, a will or trust does not control IRA distributions to heirs. An IRA is distributed according to the beneficiary designation form on file at the time of death. When it comes to the ultimate distribution of IRAs, advisors can provide guidance to clients to help them meet their philanthropic goals and provide tax-advantaged inheritance for loved ones.

Inheriting Retirement Assets

IRD assets represent untaxed ordinary income and are governed by Internal Revenue Code Sec. 691. IRD assets are included in the estate of the decedent and may also be subject to estate tax if the estate exceeds $15 million in 2026. Under Sec. 691(c), there is an offsetting income tax deduction for estate tax paid on IRD assets. An IRA and other assets are included in the estate as an asset of the owner under Sections 2031 and 2033. Thus, 100% of the value of the IRA upon the date of death will be reported on the IRA owner's estate tax return.

IRA distributions are subject to tax at the heir’s top income tax rate. For example, if a family member inherits a $500,000 traditional IRA and the heir has a top bracket of 35%, the income tax may be $175,000 on the IRA. This tax may reduce the net value of the IRA from $500,000 to $325,000. However, a nonprofit that receives an IRA or similar retirement asset receives the asset in full, with no income tax due.

Generally, the value held in an IRD asset has not been taxed. Thus, this asset comes with the guarantee of an income tax bill. In addition to being included in the decedent’s estate, IRD assets are subject to tax at ordinary income rates when distributed to heirs. Most IRD assets have a zero basis or a very low basis. Other appreciated assets, such as stocks and real estate, receive a stepped-up basis upon the owner’s death. The step-up in basis essentially allows the asset to be sold by the beneficiary with measurably lower tax consequences.

One common suggestion from experienced financial planners is to transfer IRD assets to qualified charities and appreciated assets that receive a step up in basis to heirs. This strategy has multiple benefits for the IRA owner’s heirs. The charity can receive IRD assets tax free and use the entire proceeds for charitable purposes. The heirs will avoid the large income tax consequences that result from inheriting an IRD asset and will instead receive an inheritance from other assets with a stepped-up basis. This plan works particularly well if there are other assets in the estate that equal or exceed the IRD asset’s value.

Most estates will not be subject to the estate tax because the lifetime exemption shields estates up to $15 million per decedent in 2026 and is indexed for inflation. Because the gift and estate tax exemption is very large, not many estates will be taxable. But for those individuals who are concerned with estate tax consequences, charitable solutions can help reduce estate tax and may alleviate some of the income tax burden on heirs.

Following the SECURE Act of 2019, most non-spouse beneficiaries must fully distribute retirement accounts within 10 years of the account owner’s passing. A beneficiary may be required to also take RMDs during that 10-year timeframe as well. Retirement accounts can be directed to a testamentary charitable gift annuity for the benefit of a loved one. If a retirement account owner creates a TCGA for the benefit of a loved one, the retirement account can fund payments for a lifetime rather than the SECURE Act’s 10-year distribution schedule. The payments from the TCGA funded with a retirement account will be 100% ordinary income to the annuitant.

Testamentary CGA Private Letter Ruling

In PLR 200230018, the Internal Revenue Service (IRS) ruled favorably on an IRA owner's request to fund a testamentary charitable gift annuity with an IRA. While a private letter ruling does not establish precedent, it is a useful indication of the tax analysis of the Service with respect to a particular issue.

In the approved structure from PLR 200230018, an IRA owner entered into a gift annuity contract with the charity during lifetime. This arrangement enabled the IRA owner to select the payout frequency, but the payout rate would depend upon the standard rate paid by the charity based on the nearest age of the beneficiary at the time of the IRA owner’s death. The remaining account value is transferred from the IRA custodian to the charity.

The IRS held that the arrangement would not adversely impact the nonprofit’s tax exempt status. The nonprofit will not be required to recognize unrelated business taxable income (UBTI) from the IRA in exchange for the charitable gift annuity. The IRA will be included in the estate’s value, but the estate will receive a partial estate tax deduction for the present value of the residuum of the TCGA. However, the estate will not be taxed on the ordinary income from the IRA.

Designated Beneficiary Language

For a TCGA, the account owner will need to update the designated beneficiary form to reflect his or her intent. It is mandatory that the beneficiary designation form is completed with the correct information to create a TCGA. The donor may want to work with a professional advisor or custodian to accomplish this with the custodian’s standard forms. Because many standard forms do not have additional space to include more than the name of the beneficiary, it may be challenging to complete the forms online with the required language.

For the purpose of creating a TCGA, the designated beneficiary should be the nonprofit organization. If the form only has a beneficiary name section, the donor should name the nonprofit organization as the beneficiary and include a note to see additional instructions attached. It may be best to complete the beneficiary designation form in hard copy, because an online portal may not permit additional detailed instructions.

For example, it may be best to list the beneficiary’s name as “[Favorite Charity] see attached instructions” with the instructions for the TCGA attached to the beneficiary designation form. The attached additional instructions could read as follows:

“It is my intention to fund a non-assignable charitable gift annuity payable quarterly for one life to [Beneficiary Name], with payout at the standard rate [Favorite Charity] pays to annuitants at the nearest age of [Beneficiary Name] as of the date of my death. If [Beneficiary Name] of City, State shall not survive me, then the Designated Beneficiary is [Favorite Charity] of City, State as an outright beneficiary of the IRA.”

The intent can also be noted in the will or trust, but it will not be dispositive, so it is of the highest importance to change the beneficiary designation form. Since this is a testamentary provision, the TCGA will be created after the donor has passed away and will pay the standard rate as of the date of the donor's death. The rate will also reflect the annuitant’s age rounded to the nearest half year at that time. Most charities follow the recommended rates of the American Council on Gift Annuities (ACGA). Since the ACGA periodically updates their rates, the applicable rates will be based on the rate schedule in effect when the donor passes away. Finally, in accordance with the language of PLR 200230018, the annuity contract should not permit modification or commutation of annuity payouts.

Coordinating with Charity

If a TCGA is created on a beneficiary designation form, it is recommended that a copy of the beneficiary designation form and additional instructions be provided to the charity. The nonprofit will likely want to execute a standalone gift agreement, memorandum of understanding or a draft of the charitable gift annuity contract to formalize the intent. The nonprofit process may differ, but a formalized standalone document aside from the beneficiary designation form should exist for the TCGA to allow the nonprofit advance notice of the gift. The notice to the nonprofit should include the name and address of the IRA owner and the name, address and birth date of the future annuitant. This may assist with more quickly advancing this gift upon the IRA owner’s passing. 

In some cases, a financial institution may contact a nonprofit and alert the organization regarding a beneficiary designation, but it will require the nonprofit to provide an account number, social security number or other information related to the deceased account owner before being able to move forward with receiving the account. This can create unnecessary delays for the annuitant’s TCGA to begin. There are resources available online to help nonprofits receive IRA funds without unnecessary delay. 

IRA to Testamentary Gift Annuity

In addition to the income planning benefits of a TCGA as covered in Part 1, the testamentary charitable gift annuity can serve as a thoughtful strategy for the disposition of tax-deferred assets. If an IRD asset is left to an individual beneficiary, it is generally subject to income tax upon distribution and must be distributed fully within 10 years, which can significantly reduce the value. By contrast, funding a testamentary charitable gift annuity with retirement assets provides the beneficiary with fixed lifetime payments based on the total value of the asset, often resulting in a more efficient overall outcome. This approach enables donors to strategically use retirement assets to support both family and charitable goals while preserving other assets for outright bequests.

An IRA may be transferred to a charitable gift annuity for the benefit of the account owner’s loved one. Since beneficiaries are often from a younger generation, the fixed rate may be less than what the account owner was targeting for the inheritance value. A testamentary gift annuity with an immediate payout would lock in the rate at the annuitant’s nearest age as of the account owner’s death. For example, if the beneficiary is under age 58, the gift annuity rate would be under 5%.

The testamentary deferred payment gift annuity creates an additional planning opportunity. A deferred gift annuity can target a specific age for the annuitant, perhaps commencing at age 65 or 70. This type of deferred payment gift annuity would have two advantages. First, there would be a higher payout at the time the beneficiary receives payments. Second, there would be a larger charitable estate tax deduction.

Example: Testamentary Gift Annuity for Son and Daughter

Hannah has two children, a daughter Linda, age 60, and son Brent, age 65. She has a $7 million estate, including $2 million in an IRA account.

Hannah would like to provide Linda and Brent with fixed payments for their lifetime and an additional inheritance. She and her attorney decide to transfer the IRA to a favorite charity to fund a testamentary gift annuity for Linda and for Brent. Hannah can fund a $1 million annuity for each of her children with the IRA. At current rates, the annuity would provide a 5.2% payout for Linda and a 5.7% payout for Brent.

Since the annuities are testamentary gift annuities funded by Hannah’s IRA when she passes away, it is likely that Linda and Brent will be more senior and would, therefore, receive even higher payouts. Based on Brent and Linda’s ages and current payout rates, the annuities are estimated to pay Brent and Linda a total lifetime distribution of $2,387,500.

Hannah is pleased with this plan. Without the two TCGAs, her IRA would be fully distributed within 10 years of her death. Because Brent and Linda have adequate resources, the TCGA for each of them will create added security as an inheritance. Because the gift annuity is funded with an IRA, the payments will all be taxed as ordinary income. However, Linda and Brent will not be required to pay tax on the IRA until the payments are received from the TCGA.

Conclusion

Using a TCGA to extend the distribution of retirement assets is a great gift for many beneficiaries. It facilitates economic security while granting fixed payments to the beneficiary for life. With a testamentary charitable gift annuity, the donor’s goals of providing for heirs, spreading the tax impact of retirement assets and leaving a charitable legacy can be fulfilled. As a result, many individuals may choose to implement this strategy when it is presented.