Gift Annuity Advertising: Cautions & Recommendations
The summer of 2009 brought gift annuities into the limelight, but not under the best of circumstances. A Ninth Circuit Court of Appeals case, Warfield v. Bestgen, found that gift annuities are subject to securities law. The appeal came from financial planners who were paid commissions (a no-no) to place gift annuities for the Mid-America Foundation.
Actually, there was much more behind this case. Long story short: The President of Mid-America misused $55 million of funds from 400 people, which was to fund their gift annuities. Mid-American went bankrupt and the receiver went about collecting the commissions paid to the planners as part of the recovery process for the 400 gift annuitants. Hence, the lawsuit referenced.
This case and an article published on the Forbes.com web site, Charities Use Dubious Annuity Pitch, brought attention to the manner in which gift annuities are marketed. The rub was using a picture of a donor that was not a picture of the real donor, but rather a picture of a younger looking person and what amounts to a testimonial that was not an actual testimonial, but one meant to be representative of results of actual donors.
In my blog, and on my video podcast site, I have examples of gift annuities that in very clear language indicate a gift annuity is meant for an older person (I suggest at least age 70) and that the older a person is the higher the payout rate.
Apparently, the challenge arose because some gift annuity literature used an 8% gift annuity payout rate alongside a donor who obviously was not old enough to buy a gift annuity paying 8%. Using the AFR for October 2009, and assuming a gift annuity payout begins 11/1/09, a person would have to be 85 years old to qualify for an 8.1% payout rate.
My take on all this is as follows:
- Don’t let one bad apple in the Mid-America Foundation bankruptcy discourage or prevent you and your church from promoting gift annuities. They provide a valuable benefit to the donor and the church. Like anything else, they just have to be applied to the proper situation.
- Whatever you do, don’t offer a commission to anyone to market gift annuities on behalf of your church.
- I am a big proponent of re-insuring gift annuities anyway. Most churches don’t have a formal gift annuity program. Simply re-insuring by buying a commercial single premium annuity from an insurance company simplifies the entire transaction and gives the donor the peace of mind knowing that his or her gift annuity payments are backed by a multi-billion dollar insurance company. So I would suggest taking a close look at re-insuring all gift annuities unless your national church has a gift annuity program.
- Columnists are under great pressure to produce content for their publications. I think that in some cases a resulting story comes from nit picking a situation beyond what I would consider reasonable bounds. If you work with a competent financial professional – CPA, attorney, financial planner, insurance agent, gift planner—you probably will be given accurate information based on your circumstances and, most likely, the pros and cons of moving forward with any financial decision, such as a gift annuity. Who cares if the picture of the person in the brochure that prompted you to explore a gift annuity in the first place looked 20 years younger than the numerical example? Maybe he or she has taken great care of themselves, exercised and even was lucky enough to have good genes. Where’s the foul?
If you are over 70, want to increase the yield on an asset, set up a guaranteed income that you cannot outlive, have a very large percentage of that income excluded from tax, could use a tax deduction and have no objection to ultimately benefiting your church, I would suggest that you get with a financial professional, tell them about your situation and what you are trying to accomplish and have them throw a gift annuity into the mix of your alternatives.