Introduction to charitable gift annuities

Charitable Gift Annuities
Professor Russell James
Texas Tech University

Part 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
1/1/2017
Donor 4,000
FourThousandandno/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

Part 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)
or
run 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

Part 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 requirements
NONE: 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
None
Actuarial Liability
Actuarial Liability +
Other

…
2016
IRS 990s show
charity’s
financial health
w w w. g u i d e st 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

Part 4: Special CGA types

2017 2018 2019(death 1) 2020 2021 … death #2
…
2016
Charitable gift
annuity for
two lives
$5,000
$5,000
$5,000
$5,000
$5,000

Example donor ages
and ratesAug, 2016, American Council on Gift Annuities
Younger Older
Age Age Rate
30 30+ 2.3
40 40+ 2.6
50 54+ 3.3
60 60 3.9
60 71+ 4.2
70 79+ 4.9
80 83 6.0
85 87 7.0
89 90 8.0
95+ 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

Part 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
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1.5
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5.5
7.5
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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
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B
I
G
$
B
I
G
$
$ $ $

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
Wheredofundscomefromforthosewith
longliveswhoexhausttheirinitialgift?

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

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Introduction to charitable gift annuities

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