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:

1. 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.
2. Whatever you do, don’t offer a commission to anyone to market gift annuities on behalf of your church.
3. 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.
4. 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.

7 Little-Known Gift Annuity Applications

Gift annuities are popular planned giving tools. They have been around for over 100 years. They are easy to understand, simple to set up and don’t have the higher administrative costs associated with other charitable giving techniques.

Most people think the income from a gift annuity is for the life of the donor or for the joint lives of the donor and spouse. There are, however, at least seven other ways a gift annuity can be used. Let’s take a look at the two traditional applications and then summarize the other seven options. Perhaps these will plant a seed for their use in your situation that will also benefit your church.

Your Life Only

This is the most common and straightforward way a gift annuity is structured. You contribute cash or an appreciated asset to your church in exchange for a life income. At your death, the church keeps your contribution for its use.

For as Long as You and Your Spouse Live

You can also set a gift annuity up to pay out for as long as either you or your spouse lives. This is the joint and survivor gift annuity option.

Here are the 7 techniques you may not be familiar with…

1.  For as Long as You and Another Person Live

The other annuitant does not have to be your spouse. For example, a woman could establish a gift annuity for her and her sister.

2.  For the Life of Someone Other Than You

Furthermore, the gift annuity does not have to be for you. You could have a disabled child who requires special care and set up a gift annuity to fund that care for the rest of their life.

3.  The Payments are Deferred for a Number of Years

Most gift annuities are paid out monthly, quarterly, semi-annually or yearly. Normally, the payments begin within the first year. However, it is possible to defer the start of the payments for a number of years.

For example, a person who is age 55 could set up a gift annuity with the idea that the payments would begin at age 65 to supplement their retirement income. Deferred gift annuities have the advantages of a higher payout and an increased charitable deduction.

4.  To Fund Education for a Child or Grandchild

Another example of a deferred gift annuity is funding the education for a child or grandchild. You set up a gift annuity now for your five year old grandson and when he is 18 and off to college, the gift annuity can be triggered to pay out over the next four or five years. There is some risk as the boy is not obligated to use the funds for college. You could be funding his Corvette Z06.

5.  The “Re-insured” Gift Annuity

In my opinion, this technique should be employed more often because it provides cash for the church immediately.

Instead of holding the contribution to a gift annuity, then investing and paying out the promised payment, the church buys a commercial immediate annuity from an insurance company. The insurance company is instructed to send the (i.e. quarterly) payments to the church and a check is cut to the donor.

The cost of the immediate annuity will vary and is dependent on several factors such as the age of the donor and the prevailing interest rate in the economy. Nevertheless, the cost of the immediate annuity is less than the amount received from the donor. This difference is available to the church immediately.

6.  Exchanging a Charitable Remainder Unitrust for a Gift Annuity

If you are the income beneficiary of a charitable remainder unitrust (CRUT), you can exchange this interest for a gift annuity. This move can satisfy many objectives.

This gives you another charitable income tax deduction for the new gift annuity. The advantage to the charity is that is frees up money immediately that may be needed for a building campaign.

7.  Creating a Gift Annuity at Death With an IRA

All, or a portion of, your IRA can be exchanged for a gift annuity at your death. This would be a way to establish  a safe, consistent income for your surviving spouse for as long as he/she lives with the funds ultimately going to the church you both desire it would go to anyway.

Your estate would get a charitable deduction for the charitable portion of the gift annuity. However, the IRA proceeds would still be income in respect of a decedent and subject to ordinary income taxes just as if you had left the IRA directly to your spouse.

Summary

These explanations of the various uses for a gift annuity only represent the tip of the iceberg. If one or more apply in your situation, you’ll need to consult a qualified tax professional. Each technique has positive and negative income and gift tax results.

How Your Church Can Raise 6 Figures In 90 Days

I am a participant in a forum composed of planned giving officers, attorneys, CPAs and other professionals working in the charitable giving field.

Recently there was a question, followed by a series of posts, which asked how best to fund a charitable trust designed to pay out income when the amount was $150,000 or less.

You can learn a lot from just what briefly follows. If you are a church leader, I’m going to show you how you can potentially put 6 figures in your bank account in the next 90 days.

First, the discussion and the problems that surfaced…

The initial post outlined a tentative plan to fund a $100,000 to $150,000 gift using a charitable remainder trust (CRT). These trusts pay out a percentage of the trust assets for the life of an individual, or multiple individuals, and then pass the value of the trust to a charity.

The first response was from a CPA who indicated that the cost to file the myriad of forms required was not warranted unless the trust was funded with at least $100,000.

The second suggested using a single premium immediate annuity (SPIA) to fund a charitable gift annuity. Gift annuities are simple to set up, have low administration costs, and are best suited for elderly donors. The donor gets an immediate tax deduction and a guaranteed life income. Since a high percentage (70%+, depending on age) of the payout is excluded from tax, the effective yield can be twice that of a CD. Like a CRT, the gift annuity passes to the charity at the donor’s death.

The discussion that followed on the forum surrounded using the SPIA to “re-insure” the charity’s obligation. The quirk about gift annuities is that they are regulated by each state. If an organization has been in existence for less than 20 years and has assets of less than 2 million specifically designated to back gift annuity agreements, some states require re-insurance.

All this discussion was interesting and informative. However, I thought everyone was missing the boat. In my experience, the main reason for using a SPIA to fund a charitable gift annuity is to provide the charity immediate access to a portion of the gift.

Important!

I have done what I am going to describe next. However, before you put a plan like this in motion in your church, you need to consult with your attorney, have him or her research the charitable gift annuity regulations and reserve requirements for your state.

Let’s take a 75-year-old woman who wants to give $100,000 to her church in exchange for a life income. When she dies, whatever is left over after funding her income will go to the church.

I won’t go into why she may want to do this or the problems she has that this arrangement will solve. Furthermore, we’ll assume that a charitable gift annuity is the solution of choice.

A “normal” gift annuity that is sponsored by your national church would take the $100,000, set aside the required reserve, invest conservatively and pay out the annual rate suggested for her age by the American Council on Gift Annuities of 6.3%. These rates are actuarially calculated to leave about half of the initial gift to the charity at the life expectancy of the donor.

The church will have to wait until this woman dies to receive any benefit. Plus, I would check and see if the money goes to your national church or to your parish.

How can we provide the same income stream and an immediate benefit to your local church? Here are the numbers…

The cost to buy a SPIA on a 75-year-old female that would pay $6,300 a year as of the date of this post is $64,116. For the analyticals out there, this is a life only, no certain period annuity. That means the church can put $35,884 in the bank or endowment fund and use it in any manner desired.

One astute forum participant pointed out that some insurance companies will medically underwrite annuities. If the person has health problems and their assumed life expectancy is reduced as a result, the cost of the annuity is less.

I had a case several years ago where we were trying to fund a $3,000 a month life income on a woman age 88. The best bid for a traditional SPIA was $215,000. However, this lady had health problems. When I went to a carrier that medically underwrote the case, the bid dropped to $130,000, 40% less!

Every situation will be different. If I apply this 40% discount to my original example, the cost to the church to fund $6,300 a year for life via a SPIA drops to $38,470 and allows $61,530 to available for  immediate use.

Now let’s set up a plan at your church to put 6 figures in your bank account in the next 90 days.

First, check with your attorney to make sure this will work in your state.

Next, publicize the project. I would suggest having a specific goal in mind that has an emotional appeal to the congregation.

Let’s assume that this idea only applies to 2% of your membership. After all, it works best for donors over age 70. If you have a 500 member church, that’s just 10 people.

Using the non-medically reviewed SPIA example and cutting the donation in half to $50,000, each charitable gift annuity/SPIA transaction would raise about $18,000.

Ten donors times $18,000 is $180,000. And, hey, all you are looking for is 10 folks with a $50,000 CD with a crummy (and taxable) interest rate that would be interested in doubling their income and helping the church.

I realize this is all very sketchy, but there’s your 6 figures. Moreover, this all can be done in 90 days. I devote an entire lesson to this topic in The Smart Giver.

Christian Money Management: The Silver Lining In The Current Bad Economy

Every cloud has a silver lining. There are two sides to every coin. The knife cuts both ways.

The dire state of the economy has given rise to some of the best opportunities to make a gift to your church seen in decades.

Many gifts in the planned giving arena use the IRS’s current “Section 7520″ rate, commonly referred to as the AFR, in the calculation of the income tax deduction you receive as a result of your gift.

Just to give you some historical perspective, a couple of years ago, in March  2007, the AFR was 5.8%. A year later, in March of 2008, it had dropped to 3.6%. In February, 2009, it hit the lowest it has ever been since Sec. 7520 was put into effect in 1989: 2.0%. As I write this, March 2009, it is 2.4%.

What does this have to do with me you say? Let me give you a couple of examples.

Let’s say you are age 75 and have a $50,000 CD down at the bank paying 4%. This only spins off $2,000 a year in interest and the interest is taxable. If you are in the 15% tax bracket, that leaves you with $1,700 to take to the store and buy groceries.

You need more income. Hey, have you noticed the price of bread and milk today? You would not be opposed to increasing your income and helping your church at the same time. In meeting with your financial planner, she suggests you look at a charitable gift annuity. CGAs are pretty plain vanilla—they have been around for over 100 years.

Here is a quick summary of the benefits of using a CGA.

1. Your income will increase from $2,000 a year to $3,150.
2. The rules say you can use the February AFR of 2.0 even though you make your gift in March of 2009. This means that 78.7% of the $3,150 is not subject to tax. Bottom line: More money for groceries.
3. When you die, your church receives $50,000.

Let’s change the assumptions a little. Let’s say you were age 75 in March of 2000 and set up the same CGA when the Sec. 7520 rate was 8.0%. The amount excluded from tax would have been only 53.7%. 

Translation: With today’s low AFR, you pay less income tax and have more money for groceries.

 Another example on the other end of the spectrum. Let’s say you are a multimillionaire and are looking for ways to pass your estate on to your children with the least tax impact possible.

One option may be to use a charitable lead trust. The way this works is:

1. You contribute (generally income-producing) property to a charitable lead trust that your attorney drafts for you.
2. Your church (or another qualified charity) receives income from the trust for your life or a certain number of years.
3. When you die, or when the number of years has expired, the property is distributed to your children.

In a nutshell, given the current AFR, the payout percentage chosen and the number of years the payout will last allows the property to pass to the children at a lower tax transfer cost or even no cost at all.

There’s a lot more to it than that, but for our discussion let’s see how the current low Sec. 7520 rate makes the charitable lead trust more attractive than ever before.

Assume you funded the lead trust with $1,000,000 and set it up to pay 7% ($70,000) a year to your church for 15 years at which time the trust would end and the property dispersed to your kids.

If the AFR was 8% (as it was in Feb. 2000), after doing the math the taxable gift resulting in transferring $1,000,00 to the next generation is $295,040. That is a substantial savings.

However, if the AFR was 2%, the taxable gift would only be $100,549!

In fairness, I should point out that other planned giving vehicles, a lower AFR produces worse results.

I hope the take-a-way from this is that if you are a person who is interested in increasing your income, reducing your taxes, preserving your estate from undo taxation while simultaneously helping your church, it would be prudent to examine the various planning giving techniques which may apply to your situation.

If you represent a church and are interested in raising more money for your ministries and/or building an endowment fund so that eventually your church can finance its operations from the interest on the investments in your endowment fund instead of primarily relying on pledges, it would be wise to communicate and publicize the planned giving techniques that currently have high value due to the low AFR.

This is no small potato. During a planned giving seminar I attended in June of 2008, the attorney from the software company that I use to crunch the numbers indicated that the average lead trust that they consulted on in 2008 was $5,000,000.

If you are a church, I’ll leave you with this thought: A $5,000,000 lead trust that paid out 6% for 15 years would generate an annual income to your church of $300,000. Over the 15 years, it would add up to $4,500,000. If the $300,000 were put in your endowment fund and earned 6% for 15 years, it would grow to $7,400,000 (and change). $7,400,000 at 6% would spin off $444,000 a year forever.

What ministries do you have that could benefit?