Suggested Maximum Gift Annuity Rates, Quality Training Opportunties, and Consumer Protection Advocacy

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White Papers

Managing the Financial Liability of a Charitable Gift Annuity Program

In furtherance of its mission to promote responsible philanthropy through actuarially sound charitable gift annuity rate recommendations, quality training opportunities, and consumer protection, the American Council on Gift Annuities presents the white paper, Managing the Financial Liability of a Charitable Gift Annuity Program.  Authored at the request of the ACGA by Frank Minton, the paper is intended to serve as a resource for development and finance staff, as well as board members, and provide a basis for the discussion of best practices in managing the financial liability of charitable gift annuity programs. 

The ACGA will hosted a free webinar led by Frank Minton with more in-depth information about the topics covered in the white paper on Tuesday, June 9, 2015, at 1:00 pm EDT. 

Any questions regarding the white paper should be directed to responsiblecga @ acga-web.org.

Cynthia Halverson
ACGA Communications Committee



 

FRANK & EMIL'S RESPONSES TO ACGA WEBINAR QUESTIONS

Question 1

Do you see the trend of state registrations becoming more regulated or less? 
More like California or New York or like Wisconsin, less regulated now? 


Answer:

In recent years, there have been more instances of reducing regulations than increasing regulations.  However, this doesn’t necessarily indicate a trend.

In the mid-1990s, the National Association of Insurance Commissioners (NAIC) was prepared to circulate among its state members a model act that would have imposed significant regulations on the issuance of gift annuities.  Representatives of the ACGA met with them and succeeded in having them circulate not only this model act but also one that exempted gift annuities charities from regulation except for some basic requirements.  Through the efforts of the charitable community, some version of this model “light” regulatory act was adopted by many states, and what could have been a movement towards greater regulation was halted. The ACGA continues to monitor the situation and to advocate for a reasonable level of regulation that protects donors without making the operation of a gift annuity program onerous for charities.

Question 2

If assets from one CGA are exhausted, and it's not appropriate to invade the funds of a different annuity account, how does having a larger pool of annuitants reduce risk?  Keep in mind, we are a Foundation in which the remainder values are designated/restricted for various programs.  Thus, the unrestricted operating fund of the organization receives no benefit from larger remainder values (the restricted programs do), yet the unrestricted operating fund of the organization is liable for payments even if an annuity's assets were exhausted.

Answer:

If all of your annuities are for a restricted purpose, your Foundation might have to cover the payments of an exhausted annuity with its general funds, even if the program as a whole is quite profitable.  Therefore, you should take steps to generate a fund from which these payments can be made without having to tap your general assets.  You might do this by charging the reserves for each annuity a modest annual fee (50 basis points, for instance) and/or requiring that a certain percentage of the residuum be for the unrestricted purposes of the foundation.  When talking to donors about the purposes of their gifts, you would say that whatever portion of the annuity contribution remains, after deducting certain modest expenses for the expenses of the foundation, will be used for the designated purpose.

Question 3

With a charity with a small CGA pool or interested in starting one, would you recommend a firm like Bryan Clontz which charges fees for administration but returns 100% of the remaining annuity to the charity.   An advantage to the charity is that the company is registered in most states so that we, the charity, do not have that problem.  Is this worth our consideration? 


Answer:

If a charity anticipates that it will have a relatively small number of gift annuities, it might be a good idea to have them issued by a national organization like the Dechomai Foundation created by Bryan Clontz.  There may be other such organizations as well, so you may want to compare their services and fees.  A community foundation is probably not an option for you because it is unlikely to be registered in the various states where your alumni reside.   Keep two things in mind:  First, you will have to explain to donors why, if they want to support Morningside College, they must make their gift to “x” foundation.  Second, if you already have issued gift annuities, you must continue to make payments on them and do the necessary reporting, unless you are able to transfer the liability to the national organization you select.

 Question 4

Our organization self-insures all of our gift annuities.  We hold on to the entire balance for investments and payouts and track each CGA separately.  We are a foundation so we run the program with other charities as the beneficiaries.  We instituted a reserve fund that we only tap into if the balance of the CGA goes below $0 on an individual CGA.  We originally set this up because we were paying out all positive CGAs to other beneficiaries and having to cover with operations all CGAs that were negative.  All the down side and none of the upside.    Currently this reserve is at 23% on the total balance of our gift annuities market value and 51% of our Annuity Payment Liability.  Do have a recommendation on how large this pool should be?  We currently add .5% of the CGA market value to this reserve annually through a fee charged to the CGAs. 


 Answer:

You are already doing what we would recommend for foundation that issues gift annuities for the benefit of other charities.  You have created a separate fund from which you can make payments on gift annuities that have negative reserve balances, and any amounts not needed for that purpose can compensate the foundation for the time it invests and the risk it assumes.  Adding .5% to this fund with an annual fee seems reasonable.  Without analyzing your book of annuities, it would seem that the balance of your special reserve fund is more than adequate.

Question 5

Emil mentioned that the “law of the land” is that “where the person resides” is the key for determining which state’s laws/regulations apply.  When referring to “the person,” does this mean the donor or the annuitant?

Answer:

With one known exception, the residence of the donor determines whether the charity must comply with the laws of the state.  If the donor lives in Indiana, but the annuitant lives in the State of Washington, the charity would not have to be registered in Washington.  The exception is the State of California, which takes the position that if either the donor or the annuitant resides in that state, then registration in California is necessary.

Electronic files for download:
Download this file (ACGA-ManagingFinancialLiabilityofCGAWhitePaper-Final_042015.pdf)Managing the Financial Liability of a Charitable Gift Annuity Program (Paper)[Login to download]610 kB
Download this file (ACGA-WebinarPresentation-Final_060915.pdf)Webinar Presentation[Login to download]14362 kB

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