Is It Worth Starting a Charitable Gift Annuity Program? A Decision-Tree Approach

Charities of all types and sizes offer a charitable gift annuity program to their donors.  The lure of such a program is undeniable.  Donors like charitable gift annuities, and tend to like the charities that offer them.  Having these vehicles on the major gift menu is a good way to establish an ongoing relationship of communication and trust with valued supporters.

Moreover, it is good business when a check or deposit with the charity’s name on it shows up in the donor’s mailbox or bank account every 3, 6, or 12 months.  And, in most cases, a charitable gift annuity can have a beneficial effect on a charity’s assets.  Monies in excess of a required reserve amount can be put to work immediately.  The “residuum” (any amount left in reserve at the donor’s death) also belongs to the charity, functioning almost as a mini-bequest, but with no probate complications.

Speaking of bequests, there is some evidence that a charitable gift annuity arrangement with a donor is a harbinger of an eventual bequest.  There is evidence against that view as well, but there is no question that charitable gift annuities tend to cement relationships with supporters and may encourage testamentary gifts.

So why not offer charitable gift annuities?  This posting presents – necessarily in schematic form – a “decision tree” for reaching a tentative answer to the charitable gift annuity question.  If you get “yesses” all the way down, your charity may be a good candidate for such a program.  If you hit a “no,” it may be time to get some additional professional advice.  Either way, don’t make your decision solely on the basis of this tree, but consider it food for thought.

Is Your Charity Willing to Go Full-Bore Into The Charitable Gift Annuity Market?

A charity should be “in” or “out” of the charitable gift annuity market.  This is definitely not a dip-your-toe-in-the-water proposition.  There are legal and financial undertakings involved whether a charity issues one CGA or one hundred.  More to the point, as a matter of economic vitality, it is important to have a constant flow of money into and out of any annuity reserve account.  The logic of that should be obvious.

Suppose that a donor purchases a large annuity when annuity payout rates are high.  The payments to the annuitant remain the same for life.  If the one large annuity represents a disproportionate share of the reserve account (or, God forbid, the whole account), the Charitable Gift Annuity could quickly turn into a losing proposition if the investment market takes an extended downturn.  Even if the reserve account is losing money, the annuity payments are still required.

A Charitable Gift Annuity program must be a long-term commitment.  Certainly, anyone can imagine a situation where a major donor seeks charitable gift annuity from a charity that doesn’t issue annuity contracts.   It is possible to “outsource” annuity issuance.  While this may not be a perfect solution, it is far preferable to the alternatives of issuing a single annuity or, even worse, rejecting an important supporter.  This outsourcing may also be an alternative for charities that decide to stay out of the CGA business.  CCK is not involved in the outsourcing process, but we can advise you on how it works and possibly direct you to potential providers.

Do You Have A Substantial, Reliable Roster of Donors of the Right Age?

In our experience, the best candidates for a successful charitable gift annuity program are charities with an established and substantial base of regular annual donors.  It is also important that the age demographic of those donors be diverse.  Generally speaking, CGAs are appropriate only for persons aged 60 and above.

Do Your Donors Tend To Be Geographically Clustered?

CGAs are regulated by both federal and state governments.  Some states impose requirements that are quite burdensome.  Others have less stringent rules and some have no specific Charitable Gift Annuity regulations.  If a charity’s donors tend to all be in one or a few states, the regulatory issues may be minimized, depending upon the particular states.  Launching a nationwide Charitable Gift Annuity program is a big undertaking, appropriate only for larger, well-established and financially secure organizations.

Are You Ready For The Regulatory Burdens?

Even though charitable gift annuities are charitable gift instruments, they resemble commercial annuities and other financial products.  It is therefore predictable that they are the subject of extensive regulation.  There are federal laws that deal primarily with donor disclosure as well as the tax implications of CGAs both for the donor and the charity.  In addition, there is extensive state regulation of CGAs.  Depending upon the state, these laws cover multiple topics and often require expert advice to ensure compliance.

Common subjects of state regulation include:

• Disclosures to annuitants, most of which are in the consumer protection area;
• The precise form and content of annuity contracts;
• The possible filing of annuity contracts with the state;
• The application for a permit to issue charitable gift annuities;
• Investment vehicles chosen for annuity monies; and
• Annual financial reports on annuity activity.

Are You Ready For the Financial Burdens of a Charitable Gift Annuity?

The regulatory burdens outlined above come with a cost, whether through the use of internal charitable personnel or the engagement of outside professionals.  In addition, there is the matter of living up to the charity’s part of the bargain by tracking and making the periodic annuity payments.  Many donors count on charitable gift annuities for living expenses and expect – rightly – prompt and accurate payments.

One of the worst donor relations mistakes any charity can possibly make is to take a haphazard approach to charitable gift annuity payments.   If the charity does not have sufficient in-house resources to deal with the payment side of the charitable gift annuity relationship, it is essential to engage qualified outside professionals to ensure that this gets done.

As if the enumerated expenses weren’t enough, it is also worth noting that some states’ annual reporting requirements may involve the hiring of an actuary to assess the health of the mandatory annuity reserve account.  Where applicable, this is an annual, and not a one-time, expense.

Are You Ready to Play By The Rules?

Charities sometimes are inclined to “bend the rules.”  The motivations behind this are almost always admirable.  Usually, it’s to save money that can be redirected to charitable programs. Sometimes, it is to please and/or cultivate a donor.  Nowhere in the world of exempt organizations can the tendency to rule-bend have more disastrous consequences than in the charitable gift annuity arena.  An upcoming blog post will highlight some of the most dangerous possibilities and shine a bright light on Charitable Gift Annuity Pitfalls.