Commercial Annuity Option in lieau of CGA

New Planned Giving Option (at least for me)

A few weeks ago, an old friend emailed me a chart comparing a charitable gift annuity versus the donor buying a single premium immediate annuity (i.e. commercial annuity) and donating the savings to your organization.

The chart was startling. It compared a $1 million CGA for a 74 year old, 6.1% ACGA rate, against the same donor buying an immediate lifetime annuity to obtain the same $61,000 annuity. It said that the donor could buy the $61,000 annuity for $435,000, leaving over $565,000 for an immediate gift to the charity.

On its face, everything seemed to make sense and in fact, it made me wonder if the ACGA rates were so low that it didn’t pay for donors do CGAs anymore!!!!! (just do this deal).

This was another one of those moments when I am wondering if planned giving will be a viable career in the future for me!

My response to the friend was that it seemed legitimate but let me obtain some independent quotes to verify the numbers they were talking about.

And, today, I just happened to receive the quote on this scenario and was also speaking to Bryan Clontz (http://www.charitablesolutionsllc.com/index.html), probably the top expert in CGA risk and reinsurance. Both the independent quote and Bryan confirmed that the chart was flat-out wrong in the quote it was using.

The cost buying a $61,000 lifetime annuity for a 74 year old was not $435,000, it was more like $565,000 or more. There goes the dream gift scenario.

Couple lessons learned.

#1 – Something that is too good to be true, is really too good to be true (i.e. it’s false!). Keep digging and you’ll figure it out what the catch is.

#2 – Always, always get quotes from independent sources.

#3 – Despite the false quote and misleading chart, the option of having a donor purchase a commercial annuity directly from a commercial annuity provider and then the donor gifting the difference (between what the donor might have given for the CGA and the actual cost of the commercial annuity) is a REAL GIFT PLANNING OPTION!

I like to say that I have worked on almost every possible gift arrangement out there but apparently not this one!

When would this be appropriate? According to Bryan Clontz, this option is used in limited circumstances like when the donor is from a state where the charity does not want to deal with their licensing requirement (like California or New York). Maybe when reinsurance is not an option and the gift is very large.

Bryan mentioned one important point – which tipped me off that the chart I had was just wrong. He said that the swapping of a commercial annuity instead of a CGA generally gave the donor a slightly less deduction. On the chart given to me, the donor’s deduction was over $100,000 greater with the commercial annuity option. That is how I figured out that whoever created the chart I was looking at had probably switched the cost of the commercial annuity with the left over charitable gift amount.

But, the good news is that there is another option out there to look at depending on the situation. I would only use this option very sparingly since it could leave the charity out in the cold if the donor loves the deal he/she is getting from the commercial annuity, so much so that he/she forgets the charitable gift part!

Here is link to Bryan Clontz’s article on the Planned Giving Design Center which includes discussion of this “new” gift planning option (option #4 in the article):

http://www.pgdc.com/pgdc/charitable-gift-annuity-reinsurance-part-ii-the-top-10-creative-solutions-turbulent-times

The article is very good but if you follow the link to Bryan Clontz’s website (see above) and check out his library of articles, you will find even more in-depth material on this gift option and more.