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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4 comments

  1. Good post–not looking forward to our next periodic review by the NYS folks, but would note that the regulation does make our program more conservative/stable and thus appealing to donors as they perceive it as “safe.” But the hoops we jump through can be daunting……

  2. Your title seems a little misleading, either take out the word totally or place “not” before it.

    With that said, I appreciate your thoughts.

    On the Estate Note part, I don’t see this as viable option. First the principal of the gift is from the charity so how would a portion be tax free and the deduction is all but eliminated. Beyond that, my rule of thumb is that I only consider offering a CGA to donor(s) that have the disposable income to make such a gift. Almost as if they are investing in the market. CGA’s should be offered to folks who have this extra pot of money and they don’t depend on it but they’re also not quite comfortable parting with it yet as they are still planning for foreseen circumstances. Usually those circumstances never occur and either more CGA’s are taken from the donor or they gift their distribution back as an outright gift each year.

    The one nice marketable thing about CGA’s is that they are a simple (usually) one or two page agreement. When real estate and other docs are involved it confuses the whole intent of this great vehicle.

    I much prefer the ideas from PG Today of donors taking out a traditional CGA, authorize the Charity to retain annuity payments (not a DCGA) to fund a current project and at any time they want to take the distribution themselves they do, and they can choose to go back and for the. They would be treated as receiving payments and contributing outright equivalent amount.

    A different variation of DCGA but still formalizing it so the charity knows what years to expect payment. Projects can be suspended and the residuum can be placed in the fund at their death to continue their project perhaps in perpetuity.

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