I was skeptical at first. A colleague introduced me to a strategy that removes all risk to the nonprofit organization (NPO) when writing a charitable gift annuity (CGA), and reduces significantly the risk of default to the donor. This is especially true for smaller NPOs and younger donors. Larger NPOs can tolerate more risk regarding fulfilling payments to the donor and administering the tax filings and monitoring distributions. For donors, they feel it is more likely that a large NPO is more to be around in 20-30 years and will be able to pay them.
The strategy here is to write the CGA with a third party commercial entity. Generally speaking, the rate of return paid to the donor through a typical CGA assumes there will be roughly 50% of the original face value of the CGA left at the time of the donor’s death, using standard mortality tables. As a result the rate of return from CGA’s is less than commercial annuities which typically pay 2% – 3% more than CGAs all things being equal.
Cutting to the chase, here are the pros and cons for the NPO and the donor when the CGA is written using a commercial entity:
· Has insured its financial obligation to the donor.
· Has no net liability on the balance sheet which makes the CFO happy.
· Gets immediate cash from the CGA.
· Avoids or greatly reduces any financial requirements by the NPO’s home state. Most states have requirements ranging from special registrations to having dedicated financial reserves.
For these benefits, the NPO gets 30%-35% of the CGA face value immediately, rather than waiting until the donor’s death to get 50% of the CGA face value.
Using an example of a $100,000 CGA from a 75 year old donor, the payout to the donor will be 5.8% (American Council on Gift Annuities 10/1/2015). Let’s assume a life expectancy of 12 years. At the donor’s death the NPO still may have (or may not have) $50,000 from the original $100,000 CGA gift.
Using a commercial entity at current rates, the NPO would receive at least $31,765 immediately. That $31,765 if invested by the NPO at a net rate of return of 5% would exceed $50,000 at the end of 10 years, all the while adding strength to the NPO balance sheet which helps with other fundraising efforts. This is especially important for smaller NPOs.
· Can be assured, not matter what happens to the NPO, like merger, financial hard times or dissolution, their $5,800 annual payments will not be in jeopardy.
· Receives the same immediate tax deduction as they would with a typical CGA.
· Can feel good about the fact that their gift will be immediately put to use by the NPO in support of its mission or special purpose or put into reserves.
· Receive all the recognition your NPO would normally provide to a $100,000 CGA donor.
· Is at much less risk because the chances the commercial entity goes out of business is far more remote than for the NPO. Most states have guaranty funds to help pay the claims of financially impaired insurance companies. State laws specify the lines of insurance covered by these funds and the dollar limits payable. In Massachusetts the amount is $250,000 per carrier per policy owner.
I am generally skeptical of commercially based instruments as an alternative to outright giving to NPOs. But there are donors for whom CGA’s make sense and it is the only way the NPO will receive a gift.
Copley Raff has nothing to gain financially from bringing this instrument to your attention. I feel it represents a genuine opportunity, especially for smaller NPOs to benefit and to provide donors with added value for their generosity. We can recommend financial professionals to assist you in further vetting this opportunity.
1. Do not let a volatile stock market prevent you from using CGA’s as part of your planned giving offerings.
2. The real “cost of money” and value of immediate cash should weigh into your thinking when considering deferred giving instruments.
3. Be open to exploring the opportunities the financial market place has to offer.
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