Charitable Gift Annuities

What Ever Happened to College Annuities?

I remember one of the leading planned giving directors at one of the largest, most successful planned giving programs in the country showing me how “College Annuities” were going to revolutionize grandparent giving to day schools and/or for college tuitions.

So exciting.  The day school plan was this: grandparent creates a commuted payment gift annuity that pays term annuity to child (used for tuition) and then at the end of the child’s stay in the day school, the remainder stays with the school’s endowment.  At the time, our quandary was the “kiddie tax” – that the children were likely to pay income tax at their parents’ rates.  The kiddie tax certainly put a damper on the plans as well as questions like “what if the kid leaves the school?”  In truth, the NY State Dept. of Insurance hadn’t yet approved these commuted payment annuities so we were just getting ready for what we assumed was an imminent change  (Ironically, NY never did approve them, as far as I know).

What happened to these revolutionary CGAs?  Any planned giving professional can tell you stories about grandparents and parents wanting to do something for their offspring – this seemed to be a great solution to that problem.

Well, in preparing to give an advanced class on CGAs, I thought to expose the audience to the commuted payment annuity concept.  Outside of NY, they can be done and I have done some with donors (just none with the day school or college tuition plan).  So, I entered into PGCalc a 13 year old annuitant who would start receiving payments in 5 years for 5 years (college now take 5 years, if you hadn’t heard).

Lo and behold (to my own ignorance on this issue), PGCalc warned me of an unintended consequence of doing a commuted payment annuity with a “life” under age 59 1/2.

WARNING: THIS COMMUTED PAYMENT GIFT ANNUITY MAY BE SUBJECT TO INTERNAL REVENUE CODE SECTION 72(Q), WHICH IMPOSES A 10% PENALTY TAX ON PREMATURE DISTRIBUTIONS FROM ANNUITY CONTRACT TO ANNUITANTS UNDER AGE 59 1/2.

In my own quick research, I found a legal memo online that said that while the IRS did approve commuted payment CGAs over a series of Private Letter Rulings (Ltr. Ruls. 9527033, 9407008, 9108021, and 9042043), a negative consequence came to light in those rulings – that any commuting of annuity payments to someone under age 59 1/2 would be subject to the 10% early withdrawal penalty applicable to annuities under Section 72(q).

Ouch.  Let’s forget there was ever such a thing as College Annuities.  Outside of NY, we still have commuted payment CGAs but only for those older than age 59 1/2.

Next idea?

Cool but tricky gift annuity ideas

Welcome new subscribers to the Planned Giving Blog – thank  you for joining our 800 subscribers!  This week though I came across some interesting gift annuity issues that I think are important to think about.

Flexible deferred gift annuities are totally OK if you are licensed in NY (to issues CGAs)

That is the good news but there are some serious caveats.  If you were wondering, the flexible CGA is a deferred CGA in which the donor can choose when payments are to start (with at least a one year deferral to start). Each year the donor delays, his/her potential payment jumps to reflect an additional deferral year.  A really cool option for many reasons, besides the fact that it is a great way for a donor to “wait and see” as their right to income increases dramatically each year they don’t activate the CGA.  I have pitched these where the donor is not sure he/she will even need the income or they want some sort of hedge to see if the nonprofit does what it says it will do.  In other words, the donors may choose never to take the payments! Also, the contract itself lays out what the new payment plan would be each year, avoiding potential conflicts with your donors in the future.

Here is what makes them tricky if you are licensed in NY.  The NY guide on CGAs from their Dept. of Insurance states that Flexible Deferred are ok if the contract is for up to 20 years of payment options.   Beyond a 20 year schedule, you need approval from them for your contract.  What a headache and who knows how long they will take and how much nit-picking they will do over the language of your contracts.  NY Dept. of Insurance attorneys are known for ridiculous scrutiny over every punctuation mark and even reject previously approved language.  To make matters worse, NY expects you to only use pre-approved agreements, in general.  Have you gotten your Flexible Deferred CGA agreements approved?  Have you gotten the language of your other contracts approved!

One client of mine ran into some trouble with the NY Dept. of Insurance, apparently ignored their demand letters, and received a cease and desist letter from issuing new CGAs until they dealt with whatever the issue was.  This issue of contract language had become a big problem for them and they had to return a really large amount of money to a recent annuitant to undo their CGA since it happened during the suspension period.  Yikes.  You can guess that a consultant (me) was needed in the absence of the fired planned giving director (lesson for anyone in charge of planned giving programs – don’t ignore those legal letters!).

All of this reminds me how annoyingly complex running national CGA program can be.  Basically, your program better bring in enough CGAs to justify significant staff time overseeing the program’s legal/registration issues or maybe it’s time to think twice about issuing CGAs in every state (particularly NY and CA).

CGA funded with an Estate Note?

This idea come up yesterday with a client.  What is the difference between an irrevocable estate note (irrevocable pledge) and a life estate?  Life estates offers donors a charitable deduction and a charity in theory can accept a life estate for a CGA.  A legally binding pledge/note against your estate doesn’t offer a deduction but who is to say it isn’t any riskier than a life estate in real estate.  Why not allow a donor to sign a legally binding commitment to an amount out of his/her estate and the charity gives him/her a gift annuity for the present value of the committed amount.

Now, you have ask the obvious – why in the world would the nonprofit commit to paying a lifetime annuity when all they have is a pledge agreement?  Yes, there has to be assets at the nonprofit (whether given by this donor or not) which they can park in their CGA pool to replace the present value figure to rely on to cover the payments.  Assume that is the case.  Any other issues with this plan? Am I treading in S. Prestley Bake territory (for the legal nerds out there) – the namesake for my law school (which happens to be considering a change to The Lois Lerner Law Center :)

Stay tuned as I work on this one…..

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