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By Robin Ganzert
Charitable gift annuity programs have experienced tremendous growth during the past few years. This growth is due in part to the donor’s affinity for a guaranteed life income gift in a volatile marketplace, and to the donor’s ease with the actual gift transaction. As interest in charitable gift annuity programs grows, so does the necessity for a best practices framework for the management of an institution’s program. It all begins with a basic understanding of how a charitable gift annuity works, and how this planned gift can benefit and steward your donor base.
The Basics: Introduction to Charitable Gift Annuities
Charitable gift annuities are contracts between donors and the issuing charity. The donor transfers property for a fixed payment for life, typically using cash or appreciated securities. Donors can choose immediate payments, or defer payments for a length of time. The donor can name him/her self as the sole annuitant, or can designate another annuitant concurrently or consecutively. Charitable gift annuities cannot be set up for a specific length of time, and cannot have more than two people as annuitants. Charitable gift annuities are in essence part gift and part bargain sale. The sale portion is the present value of the annuity, and the gift portion is the value of the property transferred by the donor after subtracting the present value of the annuity. They are attractive planned gifts for donors due to the fact that the payments are partly a return of the original principal, which is tax-free.
Charitable gift annuities are the legal obligation or debt of the charity. If the charity declares bankruptcy, the annuitants remain as creditors. If the charity chooses to reinsure the gift annuities, the charity remains liable for the payments if the life insurance company declares bankruptcy. Charities need to disclose the liability on the financial statements as required by FASB 116 and 117.
Best Practices for Effective Management
Best practices, as described in this summary, are comprised of recommendations from the American Council on Gift Annuities, statutory requirements in several states, and experience in the management of programs as a third-party planned giving consultant. The following best practices serve as a framework for mitigating risks with an institution’s charitable gift annuity program:
1. Use the American Council on Gift Annuity (ACGA) rates for contracts.
The ACGA establishes gift annuity rates based on recent mortality tables (Annuity 2000 tables) and the charitable residuum at 50%. The rates take into account annual expenses for investment of reserves and administration. The rates assume that the total return on gift annuity reserves is 6.0% (5.0% net of fees) for the life of the contract. The ACGA rates often relieve charities of the risk of overspending the gift annuity assets, and provide for a level playing field in marketing gift annuities to prospective donors. Generally, offering rates that do not exceed ACGA rates helps to avoid the treatment of charitable annuities as commercial insurance products.
2. Register in applicable states and file annual reports.
Since the issuance of charitable gift annuities is a state regulated industry, an understanding of the state registration requirements and state reporting requirements is essential. Charitable gift annuity contracts are governed under state contract law in both the situs state of the charity and the residence state of the donor. The applicable regulations must be adhered to or penalties may arise to include cease and desist orders, or steep fines per contract issued without a permit.
3. Segregate all gift annuity pool assets from other investments.
Segregation of gift annuity pool assets from other investments is required in several restricted states, and is a best practice in unrestricted states. Segregation of assets ensures that the fiduciary monitoring of the investment pool takes into account the reserves and surplus portions, as well as the appropriate time horizon and objectives, of the planned giving investments. Charitable gift annuity reserve assets should be invested prudently to ensure annuitant payouts, and should comply with applicable state restrictions.
4. Prepare market-value fund accounting on each annuitant.
Market-value fund accounting provides for accurate dollar amounts per contract upon the termination of the agreement (or rather, the death of the annuitant). Fund accounting provides for severance amounts on a contract-by-contract basis, taking into account the payments and the earnings over the contract’s life cycle.
5. Prepare gift annuity contracts with applicable disclosure language.
Gift annuity contracts should include a Philanthropy Protection Act of 1995 disclosure, which is federally mandated. State disclosure statements are required in at least 29 states. The PPA disclosure does not need a signature since it serves as a notification; however, the state disclosures are included in the contracts and must be signed by both the charity and the donor.
6. Keep accurate and up-to-date files on donors and annuitants, to include recent W-9s.
Accurate files, to include W-9s, are essential for insurance department audits, accurate payment processing, and effective donor stewardship. The fiduciary agent responsible for making annuity payments and preparing Form 1099R is required by the Internal Revenue Service to document Form W-9 on any beneficiary. Increasing scrutiny has occurred in this area since September 11, 2001.
7. Book charitable gift annuity liability as required by FASB.
Charitable gift annuity liability must be recorded on the institution’s balance sheet since it is a contractual obligation of the organization.
8. Establish gift acceptance policy which indicates minimum age, minimum gift, type of assets accepted, and establish the use of the annuity severance.
The gift acceptance policy is critical in establishing a charitable gift annuity program since it serves as the overarching policy with the program parameters. Minimum ages and gift amounts drive the operating efficiency of the program. Establishing the use of the annuity severance funds as a program policy ensures that the remainder funds are well-stewarded in advance of the gift (i.e. for endowment growth or other agreed upon purpose).
Benefits of a well-managed gift annuity program exist for the charity, as well as for the donor. Donors who lack either significant resources or sufficient confidence in their financial condition are able to carry out their charitable objectives through charitable gift annuities, while also adding to their own financial security. The charity benefits from a charitable gift annuity program because it allows current donors to increase the size of their donations while also broadening the universe of potential donors. A gift annuity program provides for a highly efficient way to administer a large number of smaller denominated gifts, while satisfying the donor’s need for simplicity in a complicated world of tax mitigation and philanthropy. The bottom line is that best practices in managing charitable gift annuity programs truly ensure th
at the donative intent is met and that the charity has additional resources to achieve its own mission and vision.
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Robin R. Ganzert, Ph.D.
Senior Vice President, Managing Director
Wachovia National Center for Planned Giving Wachovia Trust