I’ve Always Loved Charitable Gift Annuities

I’ve Always Loved Charitable Gift Annuities

For those of you who aren’t already familiar with how gift annuities work, here is a very basic explanation:

A charitable gift annuity is a contractual agreement between a donor and a charity wherein the donor contributes a stated sum in return for a lifetime fixed income. Since the appropriate annuity rate (based on annuitant’s age) is determined by actuaries, many charities (though not all) base their annuity programs’ rates on the recommendations of the American Council on Gift Annuities (ACGA).

The annuity payments are guaranteed by the issuing charity and backed by all of its assets. Once the income is no longer payable, the remainder (called residuum) goes to the charity for the contractually stipulated purpose (hopefully endowment). This method the donor is also entitled to a charitable deduction for a portion of the funds contributed.

I love charitable gift annuities! Donors can considerably enhance their own financial situation with increased income and tax advantages, and charities end up receiving more assets than might otherwise have been donated to them. This financial improvement in the lives of supporters often creates stronger relationships and greater loyalty between contributors and the issuing organizations; it can rule to bigger gifts to the charity’s other fundraising campaigns, and more volunteerism. Gift annuities already have varying versions such as deferred and flexible, which further assist contributors with their financial planning. And charities know that at some unknown point, they will have a stream of income.

Look at these sample ACGA recommended* rates as of February 1, 2009:

Single Life Rates

Age – Rate
60 – 5.0%
65 – 5.3%
70 – 5.7%
75 – 6.3%
80 – 7.1%
85 – 8.1%
90+ – 9.5%

Who wouldn’t want to get these rates (and help a charity to boot) instead of the 2% that is currently obtainable for a CD?

Who wouldn’t feel good knowing that the income is guaranteed for the rest of their life (secured by a professionally managed save fund and all the assets of the charity)?

Who wouldn’t think: THIS IS GREAT!

I know I did. In fact, several years ago, I contributed money into a deferred charitable gift annuity with my favorite charity as a way to supplement my future retirement income (and I sure wish I had contributed more back then, based on where my retirement plan is today).

Each of our 50 states sets its own regulations regarding charitable gifts, so the appropriate state agency establishes (or doesn’t) the requirements for nonprofits to offer charitable gift annuities. Some states, like New York and New Jersey, have fairly stiff rules such as creating surplus save fund accounts for charitable gift annuities, restricting the types of investments in these funds, and may require a permit or “exemption” be issued before a nonprofit can offer a charitable gift annuity to a donor.

Some development professionals find all of this very complicated. truly, it’s very good because these rules all work for the protection of both the donor and the charity.

BUT, here’s something to think about that hasn’t generally been an issue in the 10+ years that I’ve been working with annuities: while gift annuities may have more allurement than ever to donors, we professionals must be more cognizant about whether the security behind these gifts has been weakened. The surplus save funds, endowments and other assets of some issuing charities are taking a real hit thanks to the drastic drop in stock prices and interest rates. Not only are assets that back gift annuities dramatically reduced, but some nonprofits are being called upon by state regulators to come up with additional money to replenish the save funds that have fallen below required levels.

So, do I love charitable gift annuities a little less? NO! But everyone has to be more conscientious and aware that this situation may exist. I’m not a fan of re-insurance because little if anything is left for the charity after the premium payments. Some states don’t already allow re-insurance for this very reason. But, where allowable, some uncompletely reinsurance might be prudent.

Preferably, I think nonprofits have to take a look at their gift acceptance policies. Review the terms presently established for accepting contributions for charitable gift annuities. It may be wise to raise the minimum age requirement or change the minimum gift size. Follow the investment of the save funds closely to be sure they are being maintained. And continue to grow your annuity program because the bigger and more different the program, the stronger.

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