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Lindsay L. Lapole CFRE Senior Consultant,
Lindsay Lapole & Associates. Inc. ********
President and Chairman of the Board American Council on Gift Annuities
! CONSIDER THREE AVAILABLE OPTIONS:
◦ “SELF-INSURE” THE RESERVE
◦ “REINSURE” ALL OR PART OF THE RESERVE
◦ “UNBUNDELING”---PRIVATE ANNUITY OPTION
! Current practice
! Tax Implications
! Regulatory Requirements
! Advantages
! Disadvantages
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! IRC Sec. 514(c)(5) ◦ The payment obligation is the sole consideration for the
contribution.
◦ The present value of the annuity interest is less than 90% of the value of property transferred. (10% rule)
◦ Annuity is payable for the life of one individual or for the lives of two individuals, not for a term of years.
◦ Annuity contract does not guarantee a minimum number of payments, specify a maximum number of payments or provide for an adjustment in payments
! Charitable Donation Antitrust Immunity Act of 1997.
◦ Allows charities to offer similar annuity rates by
stating that antitrust laws do not apply to Charitable Gift Annuities.
! Philanthropy Protection Act of 1995 ◦ Comingled CRT and CGA investment are exempt from
securities regulations.
◦ Salaried fundraising representatives are exempt from registration as brokers and dealers.
◦ The exemption does not apply if a commission is paid based on the value of the donation received.
◦ The exemption also requires the providing of a disclosure letter to all prospective donors.
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Charitable Gift Annuity Program
! Traditional approach-Description
◦ Charity cultivates the prospect, accepts the gift and issues the annuity.
◦ Charity invests the gift in a separate reserve account with a responsible income producing asset allocation.
(40%-55%-5%)
◦ Charity makes the payments to annuitants.
◦ Charity does the tax reporting, maintains the relationship and accepts additional gifts.
! In Practice
◦ According to the 2013 Charitable Gift Annuity Survey conducted by ACGA, ninety-one percent
(91%) of participating organizations reported that they self-insure all of their gift annuities.
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! Income Tax Implications
! Charitable Income Tax Deduction calculated using the:
• Age/ages of annuitants, • Annuity rate,
• Deferred or immediate pay • Federal 7520 monthly rate • Number of annuitants
! Income Tax Implications
◦ Cash: Deductible as an Itemized Deduction up to 50% of Adjusted Gross Income (AGI)
◦ Appreciated Property: Deductible as an Itemized Deduction up to 30% of Adjusted Gross Income
(AGI)
! Capital Gains Tax Implications
◦ A portion of the capital gain is allocated to both the charitable interest and the income interest of the
Charitable Gift Annuity.
◦ The portion allocated to the charitable interest is not taxable.
◦ Generally the portion allocated to the income interest can be reported ratably over the life
expectancy of donor/annuitants.
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! State Regulations
◦ Most states have some level of regulatory requirements.
◦ Range from full registration and annual reporting to a certification by letter that certain minimum requirements
have been met by the charity. (Years of operation and minimum value of unrestricted assets.
◦ May also require a specific restricted reserve for CGA assets
! Advantages of Self-Insuring
◦ Simplicity of gift development, marketing. ◦ Easily understood by the prospective donor. ◦ All communication is with and from the issuing
charity. ◦ Donor stewardship is the responsibility of the
issuing charity. ◦ Provides an opportunity for additional gifts and
referrals.
! Disadvantages of Self-Insuring
◦ Economic risk based on the timing of the gift and the size of the overall program.
◦ Additional in-house administration.
◦ Need of knowledgeable in-house staff.
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! Administrative Options for Self-Insuring
◦ All administration and investment in-house.
◦ Outsource both administration and investment to same financial institution.
◦ Outsource investment with administration being done in-house.
! Administrative Options for Self-Insuring
◦ Outsource investment and administration to different specialty institutions.
◦ HYBRID Partnering with a Foundation to issue gift
annuities on behalf of the Charity. (Gift ownership and allocation issues should be
carefully considered with this option.)
Charitable Gift Annuity Program
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! Description:
◦ Charity issues the gift annuity as in the Self-insured model.
◦ Charity makes an investment decision to use a portion of the gift to purchase a commercial annuity sufficient to provide the required income to the annuitant.
◦ Insurance company makes payments either to the charity or directly to the annuitants.
! Description:
◦ Charity is usually not relieved of the annuity liability to the annuitant.
◦ The contractual obligation remains with the charity.
◦ Payment of commission to the insurance agent or broker is not a violation of the Philanthropy Protection Act of 1995. The agent/brokers has no contact with or influence upon the amount of the gift.
! Practice
◦ According to the 2013 Charitable Gift Annuity Survey nine(9%) of charities indicated they reinsured annuities.
◦ This would indicate that 9% ofcharities reinsured some or all of the annuities. It is common for charities to reinsure annuities that meet certain criteria established by the charity.
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! Charitable Income Tax Implications
◦ Assuming the charity is under no contractual obligation to reinsure a particular annuity, the income tax implications match the self-insured model.
(Be careful of “exclusive” relationships with board members or other “volunteers”.)
! Charitable Income Tax Implications
◦ Should the annuity contract require reinsurance and names the company, or
◦ If the charity has an existing agreement in place to reinsure with a particular company, then
◦ The income tax deduction will be for the amount retained by the charity.
! State Regulations
◦ The charity is issuing the annuity, therefore the state regulatory requirements are the same as in self-insurance model.
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! Advantages of Reinsuring
◦ Financial risk to charity is “essentially” eliminated.
◦ A portion of the gift is available immediately for use by the charity.
◦ Donors may feel more secure with their income secured by an insurance company.
! Disadvantages of Reinsurance
◦ A properly managed and invested, a “self-insurance” reserve will generally generate a greater future value than the amount retained by the charity in the case of reinsurance.
◦ Marketing reinsured annuities is more complicated because of the injecting a third party into the transaction.
! Disadvantages of Reinsurance
◦ Donors may be disappointed to learn that a major portion of their gift to charity has actually gone to an insurance company. This is usually between 75% and 80%.
◦ Reinsurance may dampen enthusiasm for future gifts and referrals of other possible donors.
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“Gift Annuity” Program
! Description
◦ Offered by financial services professionals-not charities
◦ The traditional gift annuity is “unbundled” into its component interests. The income interest is separated from the charitable residuum interest.
◦ A commercial annuity fulfills the income interest and the donor makes a outright charitable gift to the charity.
! Intended Gift ! Annuity Payout ! Commercial Annuity
Cost ($5,800.00 annually)
! Outright to Charity
$100,000 5,800
$71,340
$28,660
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Intended Gift $100,000
Annuity Payout $5,800
Charitable Deduction $44,262 (PV of residuum value)
Exclusion Ratio 77.4%
Tax Free Payments $4,495
Unbundled “Gift Annuities”
! Practice
◦ At this point there is no survey information available regarding the number of organizations using or considering this approach.
! Tax Implications
◦ Charitable Deduction only for the gift to charity, when and if it is made.
◦ No deduction for the Commercial annuity purchase.
◦ No preferential treatment on capital gain on annuity purchased with appreciated property.
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! State Regulations
◦ Since the charity is not a party to the issuance of the annuity, there are no current regulatory requirements to be met.
! Advantages (as sited by the promoters)
◦ Charity has money for its immediate use.
◦ The charity has no financial risk as it not a party to the annuity transaction.
◦ The charity is not subject of state regulations
◦ May appeal to a charity with a single donor in a state where the donor base does not justify registration.
! Disadvantages of the “Unbundled” approach
◦ The tax implications of this approach may not be attractive to the donor base.
◦ A donor wishing to fund their annuity with appreciated property will pay capital gain tax on the amount allocated to the premium cost.
◦ With this approach, the charitable gift may not happen.
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! Disadvantages (continued)
◦ The charity is out of the loop, so any hope for future gifts may be lost.
◦ The value the charity receives for a self-insured gift annuity is likely to be larger than the outright gift of a portion of the intended gift.
◦ Because no charitable gift annuity is involved, this transaction is not technically a violation of the Philanthropy Protection Act of 1995. However the involvement of the charity in promoting this approach could lead to registration and licensing requirements.
! Charities should not represent the “unbundled approach” as a gift annuity and not participate in
the sale of commercial annuities.
◦ State and federal law issues may exist if a charities employees promote the sale of commercial annuities, as
neither they nor their employers are licensed to do so.
◦ The unbundled approach does not offer the same tax benefits as a charitable gift annuity.
◦ The economic value may be less than a charity would realize through a self-insured annuity
program.
◦ The widespread use of this approach could jeopardize traditional gift annuities.
◦ Acceptable transactions may occur when the referral comes from the financial services
professional or where there is a single donor in a state where registration may present a roadblock.
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! ACGA takes no position on the use of reinsurance for some or all of a charities gift annuities. It advises that the charities’ Board
make the decision based on its individual circumstances and facts available on the
ACGA web site.
! ACGA recommends that charities self-insure gift annuities,
! Not exceed the rates suggested by ACGA,
! Comply with all state regulations,
! And follow ACGA Best Practices in the areas of investment and administration.
1260 Winchester Parkway SE Suite 205
Smyrna, Georgia 30080 (770) 874-3355
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