Introduction to charitable gift annuities
-
Upload
russell-james -
Category
Government & Nonprofit
-
view
154 -
download
1
description
Transcript of Introduction to charitable gift annuities
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