With the increasing competition for fundraising dollars, nonprofit institutions are searching for gifting alternatives that attract potential donors. Today’s donors demand a choice in gifting vehicles. By offering a more robust slate of giving opportunities, nonprofits are able to provide the potential donor with philanthropic alternatives that are more conducive to the donor’s unique financial situation. As a result of the competition for fundraising dollars and the spotlight on attracting donors to the nonprofit, interest in the field of planned giving has seen a significant increase. Planned giving vehicles can offer simple solutions for tax mitigation and life income streams at rates that are higher than some fixed income assets. In particular, the planned giving vehicles allow for donors of all income levels to make gifts, perhaps even larger gifts than possible through annual giving programs. Planned giving programs include bequests, charitable remainder and lead trusts, pooled income funds, and charitable gift annuities.Charitable gift annuity programs have experienced tremendous growth during the past few years, and as a result, many nonprofits have started new programmatic initiatives. The growth in popularity of charitable gift annuity programs 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 grow, so does the necessity for an institutional organizational framework that mitigates risks and enhances the rewards of such an endeavor.
Charitable gift annuities are actual contracts between donors and the issuing nonprofit whereby a donor irrevocably transfers money and/or property in exchange for the nonprofit’s promise to pay an annuity for the life of one or two annuitants. As such, the nonprofit has a legal obligation to make the gift annuity payment. The gift annuity assets are backed by the full assets of the issuing nonprofit, which emphasize the obligation of the nonprofit to continue paying annuitants – regardless of existence or condition of the organization’s charitable gift annuity reserves.
Charitable gift annuities are regulated by state law in the nonprofit’s situs state and in the donor’s residence state. The matrix of regulations and the concept of lifetime annuity payouts call for a careful risk management approach for charitable gift annuity programs.
The following best practices serve as a framework for development and management of an institution’s charitable gift annuity program:
- Educate the nonprofit board, and enact a board resolution for the institution’s charitable gift annuity program.
Since the charitable gift annuity program is a long-term legal obligation of the nonprofit, the board should be involved in the inception of the program, to include the appropriate resolutions. Ongoing reports on the status of the charitable gift annuity program, to include cash flow analysis, investment performance and asset allocation, should be presented to the board on at least an annual basis, and documented in the board minutes.
- Enact institutional policies and guidelines, to include a gift acceptance policy and investment policy statement.
The gift acceptance policy is critical in establishing a charitable gift annuity program since it serves as the overarching programmatic parameters. Minimum ages and gift amounts drive the operating efficiency of the program, and protect the nonprofit from accepting an unattractive gift. The assets accepted by the program should be determined and detailed in the gift acceptance policy, to include cash, appreciated securities, life insurance, real estate and other unique assets. 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). The development of an investment policy statement is essential as a good fiduciary of charitable assets. The investment policy statement should include the scope of the planned giving program, the asset classes, investment horizon, allowable and prohibited investments, state reserve restrictions, and asset allocation.
- Educate the development staff on planned giving alternatives, to include the charitable gift annuity.
Charitable gift annuities are not a one-size-fits-all solution for donors, but should be offered as a choice in a comprehensive planned giving program. Development and planned giving staff need to be well versed to the clues provided by the prospective donor, and provide the appropriate solution based on the donor’s needs and situation. Overall, professional development staff should be educated on the basics in planned giving in order to continue and elevate the philanthropic dialogue with individuals regarding their donative intent. Offering educational workshops and seminars will provide the entire development staff with the opportunity to facilitate a deferred gift when questions arise in donor cultivation. Engaging the entire development staff on role-playing in planned giving conversations broadens the appeal and helps to ensure the program’s success.
- Use the American Council on Gift Annuity (ACGA) rates for contracts.
The ACGA establishes gift annuity rates based on recent mortality tables and the charitable residuum at 50%. The summary of assumptions include:
- The residuum realized by the charity upon termination is 50%.
- Life expectancies are based on the Annuity 2000 mortality table for female lives with a two-year setback in ages.
- Annual expenses for investment and administration are 1% of the fair market value of the gift annuity reserves.
- The total annual return on gift annuity reserves is 6.25%.
- The rates for the oldest and youngest ages are somewhat lower than the rates that would follow the first assumptions.
The ACGA rates often relieve nonprofit organizations 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.
- 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 nonprofit 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. Registration in the applicable states is not an alternative for a charitable gift annuity pr
ogram; it is a necessity to ensure compliance and to avoid reputation risk issues. Several states simply require notification that a nonprofit has a charitable gift annuity program, while other states require more lengthy applications. For more information on the state registration and compliance requirements, please visit http://www.acga-web.org/.
- Segregate all gift annuity pool assets from other investments, and invest reserves according to applicable state restrictions or through prudent approach. Invest 100% of the charitable gift annuity contract in the pool.
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, payouts 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.
- Prepare market-value fund accounting on each annuitant.
Market-value fund accounting provides for the determination of 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. By ensuring that the accounting is correct per contract, the funds can be accurately severed from a gift annuity pool to fulfill donative intent.
- 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 nonprofit and the donor. Review of the contracts by the nonprofit’s legal counsel is essential.
- Establish good record keeping and database management system for donor cultivation, stewardship and reporting.
Accurate files, to include annuitant Form W-9s, are essential for insurance department audits, accurate payment processing, effective donor cultivation, marketing, and donor stewardship. The nonprofit’s database system must be able to accurately track gifts, donors and prospects to ensure that a solid donor cultivation and stewardship program is in place. Good records can assist in launching an effective marketing campaign, both by being able to reach the prospect but also by being able to reach the proper prospect as determined by age and other factors.
- Disclose charitable gift annuity liability on financial statements.
Charitable gift annuity liability must be recorded on the institution’s balance sheet since it is a contractual obligation of the organization. Full disclosure of the program is required under FASB standards.
- Develop marketing materials and overall strategy, and monitor the effectiveness.
Donors need to understand and have buy-in to a nonprofit’s mission and vision before committing to a legacy gift. Marketing materials need to convey the mission and vision, be simple and be actionable. Being overly technical does not close a planned gift; the mission and programs do. Construct a marketing campaign that reaches to targeted donors, and convey the message in a simple and easy-to-understand format. As part of the overall marketing strategy, the nonprofit is well advised to enlist partners who serve as advisors to prospective donors. Partners include financial planners, trust officers, insurance brokers and fiduciary representatives. A cohesive and well-run marketing effort needs to be monitored for effectiveness over time, as well as in media outlet selections and message design.
Benefits of a well-managed gift annuity program exist for the nonprofit, 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 philanthropic objectives through charitable gift annuities, while also adding to their own financial security. The nonprofit 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 risk mitigation for charitable gift annuity programs truly ensures that the donative intent is met and that the nonprofit has additional resources to meet its own mission and vision.
This communication is not a covered opinion as defined by Circular 230 and is not intended or written to be used, and cannot be used, or relied on, by the taxpayer, for the purpose of avoiding federal tax. This communication was written to support the promotion or marketing of the transaction(s) or matter(s) addressed in the written communication; and the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
Robin R. Ganzert, Ph.D. is the Senior Vice President, National Director Wachovia Nonprofit and Philanthropic Services.