Charitable Gift Annuities

Professor Russell JamesTexas Tech University

Charitable Gift AnnuitiesPart 1: Introduction

…

An initial gift is exchanged for lifetime

income

2016

2017 2018 2019 2020 2021 … Death

Example donor ages & rates

July, 2016, American Council on Gift Annuities

30 2.6%40 3.0%45 3.3%50 3.7%55 4.0%60 4.4%65 4.7%70 5.1%75 5.8%80 6.8%85 7.8%90+ 9.0%

Age 55 donor gives $100,000 in stock and the charity pays $4,000 per year for life

Initial Gift

Annual Payments

1/1/2021

1/1/2020

1/1/2019

1/1/2018

1/1/2017Donor 4,000

Four Thousand and no/100

Charity

2017 2018 2019 2020 2021 … Death

…2016

ACGA suggested rates leave about half of initial gift

for charity at death

…

2016

IRS requires present value of charitable share >10%

2017 2018 2019 2020 2021 … Death

Charitable gift annuity measurements

App. $15 billion total

Avg. annuitant age 78

Avg. duration 14 years

Avg. size $60,000

Min. size $5,000-$10,000

Clontz, Bryan (2010) Managing risks in CGA programs, American Council on Gift Annuities 29th Conference on Gift Annuities, April 28-30, New Orleans, LA

Charitable Gift AnnuitiesPart 1: Introduction

Charitable Gift AnnuitiesPart 2: Uses for donors

I want to make a large gift, but I am afraid I will outlive my assets and be left with no income

2017 2018 2019 2020 2021 … Death

…2016

Lifetime income

prevents the donor from giving “too

much”

I am leaving an estate gift, but would like an immediate tax deduction and income

2017 2018 2019 2020 2021 … Death

…2016

If estate gift is already

desired, CGA adds current deduction &

income

I want income that won’t

change(CRUT or PIF)

orrun out (CRAT)

…

Payments are a fixed

obligation of the charity,

regardless of market events

2016

2017 2018 2019 2020 2021 … Death

Large charitable gift annuity use increased following market volatility

A charitable gift annuity backed by all assets of a large

charitable institution

A charitable remainder annuity

trust backed by donor’s initial

investment

I want a simple way to give a small amount but still get income and a tax deduction

Charitable Remainder Trust

Flexible & Expensive

• $4,000-$12,000 setup with $1,000-$5,000 annual administration

• Minimum feasible investment amount $50,000 - $100,000

Charitable Gift Annuity

Simple & Cheap

• No donor costs for setup or administration

• Minimum investment amount $5,000 or $10,000

I want to make a gift and get income, but I want to see the impact of my gift while I am alive

…

Some charities immediately use the net gift [gift -value of expected

payments]

- =Net Gift

2016

2017 2018 2019 2020 2021 … Death

Charitable Gift AnnuitiesPart 2: Uses for donors

Charitable Gift AnnuitiesPart 3: Risks for donors

…

The income payments are a

general obligation of the charity

2016

2017 2018 2019 2020 2021 … Death

…2016

If the charity dies, the donor payments may

cease

2017 2018 2019 2020 2021 … Death

Aug, 2016: See information at http://www.acga-web.org

Charitable Gift Annuity Reserve Requirements

Operational requirementsNONE: AL, IN, KS, KY, LA, MA, MI, MN, ND, OH, TN, UT 3 years + $100,000: ID, MO, MT, NC, OK, PA, TX, VA3 years + $300,000: AK, AZ, CN, GA, IA, MS, NV, NH, NM, VT, WV, WA(+$500,000), NE(+$0), WI(+$0), CO (+$0)5 years: AR (+$50,000 in CGA reserve fund), FL, ME, SC, OR (+$300,000)10 years: CA, NJ, NY, MD (in state), SD (+$500,000), HI (in state + $200,000), IL (20 years +$2MM)*Dollar figures refer to minimum unrestricted cash or publicly traded securities held by organization

NoneActuarial LiabilityActuarial Liability + Other

…2016

IRS 990s show charity’s

financial health

w w w. g u i d e s t a r. o r g

2017 2018 2019 2020 2021 … Death

…2016

The payments are for life, not

for term of years

2017 2018 2019 2020 2021 … Death

2017 Death 2018 2019 2020 2021

…2016

No refunds for early death

Charitable Gift AnnuitiesPart 3: Risks for donors

Charitable Gift AnnuitiesPart 4: Special CGA types

2017 2018 2019(death 1) 2020 2021 … death #2

…

2016

Charitable gift annuity for two lives

$5,0

00

$5,0

00

$5,0

00

$5,0

00

$5,0

00

Example donor ages and rates

Aug, 2016, American Council on Gift Annuities

Younger Older Age Age Rate

30 30+ 2.340 40+ 2.650 54+ 3.3 60 60 3.960 71+ 4.2 70 79+ 4.980 83 6.085 87 7.089 90 8.095+ 95+ 8.8

…2016

Deferred gift annuity: Each year the donor waits,

the remaining payment size

increases

2017 2018 2019 2020 2021 … Death

…2016

ACGA suggests 3.25% compound annual increase in

remaining payment size

(August, 2016)

2017 2018 2019 2020 2021 … Death

…2016

Donor could leave all to charity but

always keep emergency right to

income by perpetual deferral

2017 2018 2019 2020 2021 … Death

2017 2018 2019 2020 2021

2016

Donor could gift remaining annuity if

income was no longer needed

Rights to all future

payments

2017 2018 2019 2020 2021 … Death of annuitant

…2016

Donor can name a

different person as the

annuitant

2026 2027 2028 2029 2030 … Death

…2016

Donor can name grandchild as life annuitant with

first payment to start at age 18

(+ option to trade for lump

sum tuition payment)

PLR 200233023

Charitable Gift AnnuitiesPart 4: Special CGA types

Charitable Gift AnnuitiesPart 5: Risks for charities

The annuitant might live too long

One person living too long in a large pool of similar sized annuities is not a problem,

because others will probably die early

-24

.5

-22

.5

-20

.5

-18

.5

-16

.5

-14

.5

-12

.5

-10

.5

-8.5

-6.5

-4.5

-2.5

-0.5

1.5

3.5

5.5

7.5

9.5

11

.5

13

.5

15

.5

17

.5

19

.5

21

.5

23

.5

Many charities have a small pool or a pool with a few very large annuities, creating a

greater risk of an overall imbalance

-24

.5

-22

.5

-20

.5

-18

.5

-16

.5

-14

.5

-12

.5

-10

.5

-8.5

-6.5

-4.5

-2.5

-0.5

1.5

3.5

5.5

7.5

9.5

11

.5

13

.5

15

.5

17

.5

19

.5

21

.5

23

.5

BIG

$

BIG

$$ $ $

Risk Question

Why is an annuity for an 80 year old riskier for the charity than one for a 40 year old?

What is the chance the charity could make twice as many payments as

expected?

80 year old female payout is based upon life expectancy of about 9 years.

40 year old female payout is based upon a life

expectancy of about 42 years.

Risky practices: Using actuarial value

of gift up front

•No room for error in annuitant longevity

• Standard IRS tables do not consider self-selection. (I.e., sick people do not buy annuities; poor people do not buy annuities.)

Risky practices: Issuing a gift annuity in exchange for difficult to value/sell contributions

• Appraised value allows the donor to take the tax deduction

• But, if charity cannot sell for appraised value the charity may lose money

• If sale takes substantial time, charity would have to make annuity payments from its general operating funds

Risky practices: Giving all to a restricted account at death

Where do funds come from for those with long lives who exhaust their initial gift?

As charities move away from secure, fixed income investments of appropriate duration, investment risk increases

Reinsurance exactly matches income to liability

Payments Payments

Charity Insurance CompanyDonor

Charities can reinsure all or selectively offset the risk of very large annuities

Financial advisors and gift annuities

• Managing gift annuity asset pools for nonprofit organizations

• Selling commercial annuities as reinsurance

• Giving advice to current clients or a nonprofit’s donors

CGA

Charitable gift annuities are exempt from securities regulation except• If sales commissions

paid

• Where marketed primarily as investment, e.g., comparing “yields” or “returns” with CDs and other investments

http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf

Charitable Gift AnnuitiesPart 5: Risks for charities

Help me

HERE

convince my bosses that continuing to build and post these slide sets is not a waste of time. If you work for a nonprofit or advise clients and you reviewed these slides, please let me know by clicking

All slides are taken from the

book Visual Planned Giving

Available from Amazon.com

Charitable Gift Annuities

Professor Russell JamesTexas Tech University