The Fundamentals of a Successful Charitable Gift Annuity Program
A. Gift Annuity Risks and Rewards
Charitable gift annuities are among the most popular planned gifts. While bequests form the largest segment of planned gifts in terms of volume, charitable gift annuities continue to gain momentum.
Gift annuities have actually been around for over 100 years. And there are good reasons why they continue to be popular among donors. Gift annuities provide a number of benefits to donors including:
A gift to the charity of the donor’s choice;
- A charitable gift annuity contract that is easy to understand and complete;
- An income stream to the donor/donor’s spouse;
- An income tax charitable deduction (for those who itemize their deductions);
- Typically, some tax free income; and
- Often a method of actually increasing income.
Similarly, there are good reasons that charitable gift annuities are popular with charities:
- The charitable gift annuity contract is easy to understand and create;
- The charitable gift annuity is easy to explain to donors and advisors;
- Charitable gift annuities are sought after by donors
- A charitable gift annuity program will promote long-term relationships with important donors; and
- A gift annuity program will add to your organization’s asset base.
During our lifetimes, we tend to seek out concepts and activities that offer balanced results. We are not afraid to take some risk if the reward seems in proportion to the risk. Our approach to charitable giving is no different. As donors, it is wonderful if there is a way we can support the mission of our favorite charitable organization while receiving tax benefits and income payments to ourselves. As charities, it is even better if there is a way that we can offer donors tax-advantaged and income producing charitable vehicles as incentives to support us.
However, gift annuities do carry a component of risk for the charity that other charitable giving methods do not. This is because the agreed upon income payment from the charity to the donor is a legal and financial obligation on the books of the charity. Therefore, whether we are considering starting a charitable gift annuity program or in the midst of operating a charitable gift annuity program, we must be aware of the risks of the program, as well as the rewards.
B. Definition of Charitable Gift Annuity
Before we begin the discussion of how to start a gift annuity program, let’s take one last look at how we are defining a charitable gift annuity. It is this definition that spells out very clearly both the risks and rewards of a charitable gift annuity program.
A charitable gift annuity is a contractual agreement between one or two donors (typically husband and wife) and a charity. The donor(s) transfers assets as a gift to the charity and in return, the charity promises (read “is obligated”) to pay a fixed annuity to one or two annuitants, of the donor(s)’ choosing, for life the donor(s).
It is the promised income that makes the gift so attractive to donors. It is the anticipated gift after the annuitants’ lifetime that makes the gift so attractive to charities.
This guide is focused on providing the structure that will enable donors and charities to successfully utilize the charitable gift annuity to its fullest potential.
II. Starting a Charitable Gift Annuity Program
A. The Importance of History and Stability
1. Financial Stability
There are certain characteristics that point to a successful gift annuity program. Here are some important financialquestions your prospective donors may be asking:
- What is your investment history?
- Do you have an investment committee or group charged with overseeing your investments?
- Do you have an endowment?
- Have you been successful at hitting financial targets?
- What is your history of fiduciary responsibilities and performance?
- What is your history of financial stewardship?
- Has your organization ever missed an annuity payment?
Many states have definite financial requirements in order for charities to issue gift annuities. These requirements can include the length of existence for your organization, a minimum unrestricted financial surplus and annual reporting requirements. These requirements form a minimum list of financial necessities when determining whether or not to issue gift annuities. While they are necessary, they may not be sufficient for you and your financial professionals to be comfortable in issuing charitable gift annuities.
Here is a brief checklist to assist you in determining whether or not your organization is financially prepared to issue charitable gift annuities:
- Determine the states in which you are interested in issuing gift annuities and then obtain a list of any special financial or reporting requirements for those states. The website for the American Council on Gift Annuities has information on state regulations at www.acga-web.org.
- Once you have reviewed the regulations for the various states, determine whether or not your organization satisfies state minimum requirements. This may limit the geographic area in which you decide to issue gift annuities.
- A gift annuity program will generate future income and likely little or no current income for some years. So, with the cost of marketing, issuing agreements and making the annuity payments, there will be immediate costs with no offsetting income in the early years. Your cost will be in staff time, investment fees and generally some outside legal fees.
- Most states require that a separate annuity reserve fund be created and that the initial gift amount is placed into this investment account. Payments to annuitants can come from this account, but care must be taken so that there are sufficient investment returns to assist in making the payments. Some charities place only a portion of the initial gift into the reserve account. Beginning programs with no history on which to base investment returns should be cautious about using that approach. If an annuitant lives significantly longer than their actuarial life expectancy, the continuing annuity payments may use up a major portion of the gift and the income from the underlying investment. And, if one gift represents a major portion of the total annuity pool, that may present financial problems if the annuitant lives beyond their life expectancy.
- There are generally three methods charities choose when investing charitable gift annuity assets:
- Invest the entire gift amount and make the income payments from the investment earnings; (ACGA Best Practices recommendation)
- Invest an amount equal to the present value of the future income stream to the donor and spend the rest; or
- Spend the entire gift amount and make payments from other sources.
2. Organizational Mission
If you are like most charitable organizations, you have a mission or set of underlying principles to guide your work. Here are some important mission-related questions your prospective donors may be asking:
- Are you successfully addressing your mission? Because a charitable gift annuity represents a long-term investment in your organization, your donors are going to want to know that you are committed to accomplishing your mission. After all, it is the mission that is attracting
the donor in the first place.
- Is your mission strategic and long-term? Again, because a gift annuity establishes a long-term relationship between you and the donor, the donor will want to feel comfortable that your cause will be as appropriate tomorrow as it is today.
- Does your mission focus on perpetual issues that transcend generations of donors? Your donor will want to know that your plans are visionary enough to attract new generations, perhaps the original donor’s children, as the years go by.
- What is your strategic long-term plan? It is not enough to have vision. Your gift annuity donors will want to see the plan to achieve your vision.
- How long have you been in existence? It will be difficult for your program to attract long-term donors if you have been in existence for five or less years. In fact, some state laws will prohibit you from offering gift annuities until you have been in existence for at least three or more years.
- Is there significant staff turnover? This is an important question because unreasonable staff turnover implies possible organizational stress and long-term donors prefer organizations that both attract and retain top talent.
3. Culture and Governance
Your board helps set the culture and governance for your organization. As you are beginning your gift annuity program you will need to assess if your board is interested in and knowledgeable about planned gifts and gift annuities in particular. Here are some questions to ask about your board and its involvement in the gift annuity process:
- Does the board understand both the fiduciary and deferred nature of planned gifts like charitable gift annuities?
- Does the board support long-term financial and program goals? Have members of the board made planned gifts?
- Does your organization have a financially savvy board that can endorse gift acceptance policies?
If you are issuing gift annuities, you will need to create a gift acceptance policy or revise your existing policy to include gift annuities. Gift acceptance policies are important for several reasons:
- They establish the conditions under which all gifts, including gift annuities will be accepted;
- They ensure that all donors are being treated equally;
- They ensure that the board understands and has endorsed the gifts that the charity will accept; and
- They provide a roadmap and security for development officers.
A sample gift acceptance policy for gift annuities is provided as an addendum to this guide. This sample document provides basic guidelines for the issuance of gift annuities and may be helpful to you in drafting your own policy. Keep in mind that your gift acceptance policy should be reviewed by qualified legal counsel.
B. Gift Annuity Administration
Finally, you need to consider how you will manage or administer your gift annuity program. Do you have the structure and resources to invest reserve funds, manage accounts, make annuitant payments and meet state and federal reporting requirements on your own or will you need the assistance of an outside party? There are a number of issues for you to consider as you develop your administration policy:
1. Administrative Staffing
Are there staff people in your organizations with the expertise to operate a gift annuity program and with sufficient time to devote to the effort? Generally a planned giving software program will be purchased to do the calculations necessary to issue gift annuities. There is a degree of sophistication and training needed to run such programs. Also, payments must be made, agreements written, and IRS filings made. If your organization has a finance department, then this should be no problem. However, if you run a small shop, then this is a significant addition in work load and you may need to hire additional staff.
2. Investment Policy
Do you already have an investment policy in place that provides for safety and a reasonable return on charitable funds and investments? Your board needs to consider where annuities will be issued and what assets might be accepted. If illiquid, non-income producing assets such as real estate and limited partnerships are accepted as gifts the organization will have to use its own funds to make annuity payments. Due to this, a beginning program should strongly consider prohibiting receipt of illiquid assets for gift annuities. All of this should be spelled out in your gift acceptance policy.
3. Gift Annuity Reinsurance
It is possible to reinsure gift annuities. When you reinsure, you purchase insurance from an insurance company to cover your organization's annuity payment obligation using a portion of the initial gift. In exchange, the insurance company agrees to make payments to the annuitants. Not every state permits reinsurance. If reinsurance is permitted, the charity must investigate how reinsuring contracts impacts the charity’s state reserve requirements.
There are many factors that go into starting an effective gift annuity program. While organizations vary by mission and size, there are commonalities among those that issue gift annuities.
Here are some practical questions you should be asking you organization before it issues its first gift annuity:
- How big is your donor and prospective donor pool?
- How many annual donors do you have?
- How many of your donors are 60+ in age?
- How many have incomes or asset bases that can support a major gift?
- What is the capability of your team to invest and administer a life-income gift program?
Your answer to these questions will determine whether your organization is ready to get started with gift annuities. If you are, we wish you the best of success with your program and encourage you to become a sponsor of the American Council on Gift Annuities. By becoming a sponsor, you can gain access to valuable resources that will help you build a solid foundation for your gift annuity program.
Addendum: Sample Gift Annuity Acceptance Policy
1. The Charitable Gift Annuity
The charitable gift annuity is a contract between Charity and the donor. Charity agrees to pay the donor and/or one other person named by the donor a lifetime annuity in return for a gift of cash, securities, or other property. The payment may continue for the life of a second individual, such as a spouse. The annual payment is a fixed sum, the amount of which is based on the size of the gift and the number and ages of the beneficiaries.
Rates of return under a charitable gift annuity are lower than the rates offered by commercial insurance companies so that a significant residuum will remain for Charity. Written notice of this fact will be documented for the donor in two documents. First, the donor will be notified in writing during the gift negotiation stage. Second, the gift annuity contract cover letter will also contain this information for the donor.
Gift annuities issued in [insert state of Donor’s residence] shall comply with [insert state of Donor’s residence] state law and meet the disclosure requirements under the Philanthropy Protection Act of 1995.
- The preliminary minimum amount for an annuity agreement is $10,000.00.
- For new contracts, Charity will be guided, although not bound, by the suggested rates recommended by the American Council on Gift Annuities.
- Agreements shall be limited to two lives, and ordinarily the minimum age for the annuitants shall be 60 for immediate annuities and 50, with the initial payment at 60, for deferred annuities. Exceptions may be made subject to the prior approval of the Board.
- Gift annuities may be managed by Charity, and Charity may employ agents and advisors to assist with the administration and investment of gift annuity assets.
- Gift annuities must meet individual state laws governing gift annuities in each state.
- Charity prefers to provide quarterly payments to gift annuity donors.