Charitable Gift Annuities Are Back in Fashion – Should You Issue Them?
When I first started working in gift planning 20 years ago, Charitable Gift Annuities were all the rage. Charities were issuing them right and left, because they provided such attractive benefits to donors. Both payout rates and charitable income tax deductions were high. In the midst of the dot-com boom, it was like another gold rush. Since that time, we’ve learned a thing or two about the risks associated with CGAs and as a result – payout rates have come down to a more moderate level. Charitable deductions have come down as well as a result of global economic conditions.
Believe it or not, Charitable Gift Annuities have been around for nearly two hundred years. The first one was issued by Yale College in 1830! They are pretty simple creatures, consisting of a contract between the donor and a charity. The donor agrees to make a gift and in return the charity agrees to make lifetime payments of a fixed dollar amount to them or someone they name. Only public charities can issue charitable gift annuities. They are NOT a commercial product, but rather a charitable giving technique.
Over the past several years, the popularity of gift annuities has diminished, but as with many things – what was old is new again. There are two concrete reasons why they have come swinging back.
First, the charitable income tax deduction for gift annuities is going up. The deduction is determined by an elaborate calculation found in the Internal Revenue Code. One of the factors in that calculation is called the “AFR” or “IRS Discount Rate”. It is a rate that fluctuates up and down depending on the time-value of money. The higher the AFR, the higher the charitable income tax deduction for life income gifts, such as Gift Annuities and Charitable Remainder Trusts. The AFR is loosely tied to interest rates, so when we see interest rates rise we will inevitably see charitable deductions for these kinds of gifts rise as well.
Second, donors can now fund a Charitable Gift Annuity or Charitable Remainder Trust with a Qualified Charitable Distribution from their IRAs. While this sounds like a great thing, there is much fine print and restriction to be aware of. (See my earlier article for a rundown of the fine print.) As a result, funding a CGA with a QCD will only make sense for donors in a very specific and limited set of circumstances. PGCalc created a very useful decision tree to help determine when it makes sense and when it doesn’t.
Should You Be Issuing Gift Annuities?
While charitable gift annuities are simple creatures, the underlying administration and regulation are anything but simple. Charities should not take them lightly. As Yoda said, “Do or do not. There is no try”. A charitable gift annuity program is nothing to dabble in. You must be all in, market well, issue them regularly, and manage the money very very carefully.
Consider the Size of Your Program: Many charities I’ve worked with have been operating under the false assumption that it’s less risky to issue only a few gift annuities. Believe it or not – a larger gift annuity pool is often less risky than a smaller one. Think about it – if there are more gift annuities in the “pool”, risk can be spread more widely. If you have only a few gift annuities and one of those donors lives to a very old age – the payments to that one donor could cause a significant drain on the overall size of the pool of invested gift annuity dollars.
To Spend or Not to Spend: Some charities have been tempted by their gift annuity investment pool and dipped into it to support other expenses or programs. Spending the gift annuity pool before an annuitant has passed away can be quite risky. The American Council on Gift Annuities (ACGA) recommends that charities keep at least 100% of their gift annuity pool in reserve and only spend the remainder after the annuitant has passed away. Some charities have even gone out of business after spending their gift annuity pool and not being able to meet their payment obligations to annuitants.
Payout Rates: Today, the vast majority of charities use rates recommended by the American Council on Gift Annuities (ACGA). The ACGA rates are determined with sophisticated actuarial calculations and are designed so that – on average – 50% of the original gift annuity amount is left for the issuing charity at the annuitant’s passing. In the past, some charities have tried to lure more CGAs to their door by offering higher rates, but that is also a very risky business. The higher the rates, the more financial risk is placed upon the charity.
Regulation: Additionally, Charitable Gift Annuities are regulated by the individual state departments of insurance where the donor lives – not where the charity is located. Every state regulates CGAs differently. Some enforce a high level of regulation. Some don’t regulate at all. To issue a CGA to a donor in a specific state, a charity must follow all the regulations of that state. The ACGA publishes extensive regulatory information on their website – acga-web.org.
The decision to offer a Charitable Gift Annuity program is not one to be taken lightly. The considerations I’ve outlined above are just a handful of the things a charity should evaluate before deciding to offer CGAs. The ACGA offers an excellent guide to the many things to investigate before offering your own program.
What if you want to issue CGAs, but don’t feel your charity has the bandwidth to manage a program?
Don’t despair! There are organizations out there who will issue CGAs for you. You could work with your local community foundation. Many of them offer Charitable Gift Annuities and are able to issue them to your donors with some/all of the residuum coming to you upon the annuitant’s passing. You could also consider working with the National Gift Annuity Foundation. They are an independent gift annuity program that allows charities to outsource their CGA program for donors nationwide.